The Right Game: Use The Right Game: Use Game Theory to Shape Game Theory to Shape

StrategyStrategy

The Right Game: Use Game The Right Game: Use Game Theory to Shape StrategyTheory to Shape Strategy

Adam M. Brandenburger, Barry J. NalebuffAdam M. Brandenburger, Barry J. NalebuffHarvard Business Review, July-August, 1995Harvard Business Review, July-August, 1995

“Successful business strategy is about actively shaping the game

you play, not just playing the game you find.”

Game Theory:

• Using game theory allows us to consider “changing the game” WHY is that helpful?

• You can make the game you want…to your advantage. HOW?

• Change the player, added value, rules or tactics.

• PARTS are the levers for moving the world of business ala Archimedes.

Lessons from Game Lessons from Game TheoryTheoryLook at the situation from the perspective

of all others’ involved

Look for win-win, not just win-lose opportunities

Look for opportunities to “change the game” for the better

Game theory gives more complete picture of business relationships

Avoids exclusive focus on competition(win-lose)

““Co-opetition”Co-opetition”

Businesses must both cooperate to create value, even while competing to divide this value among

themselves

•Recognizes that business relationships have more than one aspect

•By identifying all the players and all the interdependencies, game theory expands the repertoire of strategies

Brandenburg and Nalebuff use “Value Net” as their core concept. They identified four types of players that every company faces: 1. CUSTOMERSParties to which the company directs its products and services. In return, money goes from the customers to the company. 2. SUPPLIERSParties who flow resources to the company. In return, money goes from the company to the suppliers.

 3. COMPETITORS

The definition depends on perspective:

Customer perspective: “A player is your competitor if customers value your product less when they have the other player’s product than when they have your product by itself.” Your product behaves as a substitute for a competitor’s product – your increase in market share will directly decrease your competitor’s share. Substitutes can be both direct, e.g. two bakeries competing as well as indirect, e.g. bread versus rice.

Supplier perspective: “A player is your competitor if it is less attractive for a supplier to provide resources to you when it is also supplying the other player than when it is supplying you alone.” Any firm competes for resources in quantity, quality and price with other organizations.

4. COMPLEMENTORS

The definition also depends on perspective.

Customer perspective: “A player is your complementor if customers value your product more when they have the other player’s product than when they have your product by itself.” Complementors are the inverse of a competitor because more demand for their products will lead to more demand for your product.

Supplier perspective: “A player is your complementor if it is more attractive for a supplier to provide resources to you when it is also supplying the other player than when it is supplying you alone.” When a market is small, it is difficult to get resources delivered exactly on spec. When the market increases, suppliers begin to tailor their offering and make the purchasing efforts easier on all acquiring firms.

Competition and Competition and CooperationCooperation

Elements of the GameElements of the GamePlayers

Added Values◦What each player adds to the value

inherent in the total game

Rules

Tactics (Perceptions)

Scope

Changing the PlayersChanging the PlayersPlayers are participants in the Value

Net◦ The Company itself, and its Customers,

Suppliers, Substitutors, Complementors◦ How does the game change as players

come in or out? Canadian Airlines no longer exists in the

Canadian airline industry. • Even if you can’t make money in a game, figure out who stands to gain from your entry and make them pay (Holland Sweetener)

• once you’re in the game try to change who else is in the game; try to bring in customers, suppliers, complementors, competitors (e.g.credit union/auto sales)

Changing Added ValueChanging Added Value What added value does each player bring to the

game?

◦ If a player were not participating at all, how would the value of the overall game be affected?

Bobby Hull joining the Jets gave the WHA instant credibility. With a monopoly its ok to limit the added values of

other players (Nintendo)

In competitive situation, you need to build your own added value, e.g. improve quality at low incremental cost or vice versa

but only way to protect added value is to create relationships with your customers and suppliers…have a loyalty program (Advantage), because it doesn’t disappear even when imitated!

Your added value=

the size of the pie when you are in

the gameminus

the size of the pie when you are out

of the game

Changing the RulesChanging the RulesRules determine how the game is

played

◦Can the rules be changed to make the game more favorable for one, or for all?

Guarantees to match lowest price Funding rules for universities in Manitoba

Usually we think we should charge more to our customers and less to competitors

Changing this rule is possible, e.g., introduction GM card (cash award)and Advantage (in kind award): latter is better because it increase the size of the pie by delivering more value for same price)

Changing PerceptionsChanging PerceptionsPlayers’ perceptions of the game

influences the way they play it.

◦Commitment strategies, (as ploys) Publicly committing to something to make

others perceive you’re serious

Changing the ScopeChanging the ScopeScope is the boundaries of the

game

◦Tying issues together in negotiations Softwood lumber and energy?

◦Opening a “second front” in competition Hezbullah attacking Israel from Lebanon

• Look at the game as part of an even bigger game…change the links between

• added values--price superior product high so you don’t eat away at incumbent’s existing product

• rules--if you have power get long-term contracts with suppliers, or offer package discounts

• tactics--get another player to believe that what you will do in one situation depends on what happens in another.

• To think you have to accept the game you find yourself in.

• To think that changing the game must come at the expense of others.

•To believe that you have to find something to do that others can’t.

• Failing to see the whole game.

• Failing to think methodically about changing the game

•Finally there is no silver bullet for changing the game of business. It is an ongoing process.

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