The Game Theory

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The Right Game: Use Game Theory to Shape Strategy
The Article provided a systematic way to understand players with interdependent fortunes. The
basic idea is that every action does not have an equal but opposite reaction when it comes to
business, and that all moves need to be thought about well in advance before being executed.
What will others do once you move? One needs to analyze the added value of every player
including themselves.
Situations involving competition are often thought of in win-lose terms. But how can a company
change their strategy from win-lose to win-win? Competition is a term created to describe
looking for win-win as well as win-lose opportunities. Companies can get locked into a cycle of
destructive competition, a process in which each company will lower their prices in order to
undercut the other. This could result in a situation much like auto companies saw, such as
customers coming to expect rebates. There are ways around this however. For example, GM
changed the game by offering a discount GM Card. The card replaced previous incentives,
and GM saved money in the long run. Other companies copied the idea and also made money
without stealing customers from GM. GM turned a losing situation for everyone into a winning
situation for everyone without hurting anyone in the process. Win-Win moves have major
advantages such as potential for finding new opportunities, less resistance from competitors, and
turning imitation into a good thing.
The article identifies these players in ones companys value:





The steps in changing the game is first drawing the Value Net for your business and secondly
identify all the elements of the game, which are players, added values, rules, tactics, and scope
(PARTS).One way to start thinking in a competitive way is to take a look at the Value Net for
your company. Value Net is a mapping of the relationships between your suppliers, substitutors,
complementors, and customers. Suppliers and customers are on a vertical axis, and represent the
usually obvious transaction relationships. This is where the PARTS come in. PARTS represent
players, added value, rules, tactics, and scope. According to game theory, success involves
changing one or more of these strategies to create a win-win or possibly even a win-lose
situation. Changing the game involves thinking outside of the box. Sometimes companies or
players are paid to enter the game, in order to have some beneficial effect to the paying
corporation (weather they know it or not). Such was the case when Coke supported a smaller
supplier only to sign with its existing supplier that slashed prices due to the new competition.
Customers
Company
Suppliers
Complementor
s
Substitutors
Ex.: American Airlines and United
Air Lines, though substitutors with
respect to passengers, are
complementors when they decide
to update their fleets.
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Coke knew all along that it would stick with the major supplier, but added a player to the game
in order to reap the benefits. Another tactic involves keeping your business small and capturing
about ten percent of the market share. If the company can hold that level, a bigger corporation
may not bother to slash its prices as it still retains the majority of the market at the original price.
This is another example of a win-win situation.
The Value Net is a map that prompts you to explore all the interdependencies in the game. The
Value Net is a map that prompts you to explore all the interdependencies in the game. Drawing
the Value Net for business, the first step is changing the game. The second step is identifying all
the elements of the game. According to game theory, there are five: players, added values, rules,
tactics, and scope
A. Players:
As we identified in the Value Net, these players are not fixed. Sometimes it is smart to change
the players, even yourself.
Lets see Examples of Holland Sweetener Company (HSC) who entered NutraSweet market
because second supplier of Aspartame was needed in the cola market for Coke and Pepsi.
NutraSweet, a low-calorie sweetener used in soft drinks such as Diet Coke and Diet Pepsi, is a
house- hold name, and its swirl logo is recognized worldwide, in fact, its Monsantos brand
name for the chemical aspartame. Its 70% gross margins making attract other companies to
enter the market. But NutraSweet was protected by patents in Europe until 1987 and in the
United States until 1992. Anticipation of the patent expiration, the Holland Sweetener Company,
built an aspartame plant in Europe in 1985. As HSC attacked in the European market, Monsanto
used deep price cuts and contractual relationships with customers to deny HSC a toehold in the
market. But HSC managed to fend off the initial counterattack by appealing to the courts to
enable it to gain access to customers. At one point, But Dooley the founder of HSC war ended
before it began when Monsanto signed new long-term contracts with Coke and Pepsi just prior to
U.S patent expiration. Look at Monsantos position before and after HSC entered the game.
Before, there was no good substitute for NutraSweet. Cycle-mates had been banned, and
saccharin caused cancer in laboratory rats. NutraSweets added value was its ability to calorie
drink possible. Stir in a patent and things looked very positive for Monsanto When HSC came
along, NutraSweets added value was greatly reduced. What was left was its brand loyalty and its
manufacturing cost advantage HSC entry into the market was worth a lot to Coke and Pepsi. It
would have been quite reasonable for HSC, before entering the market, to demand compensation
or a guaranteed contract. But, once in, with an un-branded product and higher production costs, it
was much more difficult for the company to make money Monsanto did well to create a brand
identity and of entry by a generic brand. Coke and Pepsi did well to change the game by
encouraging the entry of a new player that would reduce their dependence on NutraSweet.
According to HSC, the new contract sled to combined savings of $200 million annually.
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Pay me to play: The cellular phone business was undergoing rapid consolidation in June 1989,
when 39-year-old Craig McCaw made a bid for Lin Broad-casting Corporation. With 50million
POPs (lingo for the population in a coverage area) already under his belt, McCaw saw the
acquisition of Lins 18 million POPs as the best and possibly the only, way to acquire a national
cellular footprint. He bid $120 per share for Lin, which resulted in an immediate jump in Lins
share price from $103.50 to $129.50. Clearly, the market expected more action. But Lins CEO,
Donald Pels, didnt care much for McCaw or his bid. Faced with Lins hostile reaction, McCaw
lowered his offer to$110, and Lin sought other suitors. BellSouth, with28 million POPs, was the
natural alternative, although acquiring Lin wouldnt quite give it a national footprint.
Nevertheless, BellSouth was willing to acquire Lin for the right price. But if it entered the fray,
it would create a bidding war and thus make it un-likely that Lin would be sold for a reasonable
price. Bell South knew that only one bidder could win, and it wanted something in case that
bidder was McCaw. Thus, as a condition for making a bid, Bell-South got Lins promise of a $54
million consolation prize and an additional $15 million toward expenses in the event that it was
outbid. Bell South made an offer generally valued at between $105 and $112 per share. As
expected, BellSouth was out-bid; McCaw responded with an offer valued at $112to $118 per
share. BellSouth then raised its bid to roughly $120 per share. In return, Lin raised Bell-Souths
expense cap to $25 million. McCaw raised his bid to $130 and then added a few dollars more
to$22.5 million to exit the game. At this point in the bidding, Lins CEO recognized that his
stock options were worth $186 million, and the now friendly deal with McCaw was concluded.
So how did the various players make out? Lin got itself an extra billion, which made its $79
million payment to BellSouth look like a bargain. McCaw got the national network he wanted
and subsequently sold out to AT&T, making himself a billionaire. And BellSouth, by getting
paid first to play and then to go away, turned a weak hand into $76.5million plus expenses. That
time BellSouth understood that even if you dont get money the old fashion way you can get paid
to change it
B. Added Values:
There are ways to make yourself a more valuable player: to raise your added value or decrease
the value of others. Lets see Example of TWA Robert Cozzi, TWAs senior vice president of
marketing, proposed removing 5 to 40 seats per more leg room for in their planes. The move
raised TWAs added value; according to J.D. Power and Associates, the company soared to first
place in customer satisfaction for long-haul flights. This was a win for TWA and a loss for other
airlines. But elements of win-win were present as well: With fuller planes, TWA was not about
to start a price war. But what if other carriers copied the strategy? Would that negate TWAs
efforts? No, because as flying empty seats around. Everyone wins.


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C. Rules
Gives the game structure and how the game is played, thereby limiting the possible reactions to
any action. Rules might arise from law, custom, practicality or contracts. Rules can be revised,
new ones established or used to your advantage.
For example, Judo Economics newcomers into market limit their capacities so that the
incumbents (older, more establish) market does not retaliate by matching newcomers lower
prices. Kiwi International Air Lines limit itself to 4 routes per day, Delta leaves it alone. For
commodities such as gas, the meet-the competition clause (MCC) very worth following to keep
competitors from coming in with lower pricing to win business. If not followed, both will lose
because of price war.
D. Tactics: Changing Perception
After changing the players, the added value and the rules, the next thing that needs to be changed
is the perception. There is no guarantee, on which the players are, what their value added are and
what the rules are. No one can clearly estimate the implications of every move or counter move.
Tactics influence the way players perceive the uncertainty and thus mold their behavior
accordingly. Some tactics work by reducing misperception while others work by reducing or
maintaining uncertainty. Talking about New York Fog, New York Post cut their newspaper price
to 25 cents to prove that the New York Times added value was not worth the price difference
because People switched, so Times increase their to 50 cents, which is what the Post wanted the
rates to be in the industry proved their point by unveiling added value of NY Times.
E. Changing the Scope
After players, added value, rules and tactical possibilities, there is nothing left to change within
the existing boundaries of the game. But no game is an island. Games are linked across spaces
and over time. A game in one place can affect games elsewhere and a game today can influence
tomorrow. The scope of the game can be changed, expanded by creating linkage to other games
or shrunk by splitting linkages. Any approach can work for anyones benefit.
For example, Nintendo, which was going very well in 8-bit games, did not try to compete against
Sagas 16-bit games but decided to stick with its 8-bit games. In the example, we find out that
Nintendo made a calculated trade-off by giving up a piece of 16-bit games in order to lengthen
the life span of 8-bit games.
The Traps of Strategy
Changing the game is hard. There are many potential traps. Our mind-set, maps and methods for
changing the game are Competition, the Value Nets and the PARTS. These are built for manager
to recognize and avoid these traps. There are several traps as explained below:
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1. Realizing you can change the game is crucial.
Realizing that one can change the game is very important. There is more work needed to be done
and it is more rewarding to be a game maker than a game taker.
2. Thinking that changing the game must come at the expense of others
Such mind set can lead to an embattled mind-set that causes one to miss on win-win
opportunities. The competition mind-set- looking for both win-win and win-lose strategies is
often more rewarding.
3. Believing that you can find something to do that others cant.
When one comes up with strategy that can change the game, ones action might be imitated. All
actions can be imitated and imitation can be healthy.
4. Failure to see the whole game or picture.
Many people overlook the role of complementors. Drawing the Value Net for ones business
will double the repertoire of strategies for changing the game. Any strategy towards the customer
has a counterpart with the suppliers and any strategy with suppliers has a mirror-image for
complementors.
5. Failure to think methodically for changing the game.
Using PARTS as comprehensive, theory-based sets of levers helps generate strategies, but is not
enough. To understand the effect of any particular strategy, one needs to go beyond ones own
perspective.
Finally, there is no silver bullet for changing the game of business. It is an ongoing process.
Everyone will strive to change the game. Sometimes, the changes will work, sometimes it wont.
Lastly, there is no end to the game of changing the game.