The Art of Game Theory
One of the most challenging objectives for any organization is to make the transition from formal strategic planning to informal strategic thinking. Strategic thinking is one of the most powerful forces for creating value. In order to make this transition, we can look at business decisions in terms of playing a game. By applying this “game theory” to decisions, people tend to make strategic decisions in a very natural way.
Game Theory can be invaluable for effective strategic decision-making; answering questions like: What businesses should we compete in, what markets we should go after, should we partner with certain companies to survive, etc. The “game” represents your current strategic situation and “game theory” is the formal structure by which you make decisions within this strategic situation. Game Theory recognizes that decisions you make (as well as your competitor's) impact's the strategic situation.
“Challenged as never before with designing a high-value company game plan, executives often get blindsided by competitors' moves they failed to anticipate. To safeguard against nasty surprises, you must think carefully about what actions competitors might take. Strategic Gaming – a structured, comprehensive approach to putting yourself in your competitors' shoes – enables you not only to play the competitive game more effectively, but also to create one that improves your value prospects by influencing other players' actions.”
- Shaping Winning Business Strategies with Game Theory by Paul Papyoanou, Financial Executive Magazine, March / April 2003
Two opposing approaches to game planning are the Zero Sum Game and the No Zero Sum Game:
1. Zero Sum Game – Two companies are locked in fierce competition and only one company can possibly survive.
2. No Zero Sum Game – Numerous businesses exist and formulate their own unique strategies for market share. Each tends to play by its own set of rules. A decision matrix is sometimes used to plot moves, just like a sports team will plot moves on a play board.
For most companies, game theory resides somewhere between these two extremes. Developing a game plan usually consists of three basic steps:
1. Identify your key competition and map out strategies for those who threaten your market share. Depict the entire game for critical players and evaluate choices for winning against the competition.
2. Assign payoffs to various choices and plot the sequence of events. Determine which of these moves is most likely to occur through hard competitive intelligence.
3. Develop a plan for playing and winning the game that you expect to unfold.
Game Theory provides some interesting lessons in strategic thinking. For example, if you want to win at any game, then you have to have competitive skills. So if you are great at playing tennis, you should not try to compete at football. The same holds true in business – build on your competitive advantages instead of competing on things that are outside your core competencies. Also, game theory takes a “war” like approach to business, which in many cases is much closer to reality than ignoring your competition. Understanding your competition is critical to strategic thinking and game theory organizes the process as part of the planning exercise.
“For many organizations it is a dog-eat-dog world. In every commercial organization, there are talented people planning strategies to increase their business at the expense of the competition. Many noncommercial organizations find themselves under threat from those who provide their funds. The successful organization studies external threats and formulates a strong defense. It adopts this value: Know thine enemy.”
- Unblocking Organizational Value by Dave Francis and Mike Woodcook
Although game theory has been around for years, it didn't receive recognition until it was the subject of a move titled: “A Beautiful Mind.” Therefore, game theory is the art of looking at the strategic landscape in a much different way. Most people will fail to think this way, but game theory can provide a powerful framework for having this “beautiful mind.”
“Game theory is a different way of looking at the world. In game theory, nothing is fixed. The economy is dynamic and evolving. The players create new markets and take multiple roles. They innovate. No one takes products or prices as given. If this sounds like the free-form and rapidly transforming marketplace, that's why game theory may be the kernel of a new economics for the new economy. “
- Co-opetition by Brandenburger & Nalebuff
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756