Game Theory Current Use Began with Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern (1944) Current Use business, politics, political science, economics, biology, etc.

What is a Game? Chess, poker, sports?

Concept 1 Added Value

Added Value YOUR ADDED VALUE = The Size of the Pie When You’re in the Game minus The Size of the Pie When You’re Out of the Game

Added Value Can’t get more than your added value Zero added value means get zero

Ego vs. Allo What happens when you participate in a game? Ego view: What’s in it for you Allo view: How does your play change the game for others? Jimmy Stewart in “It’s a Wonderful Life”

The NFL Today St. Louis Cardinals --> Phoenix LA Rams --> St. Louis Baltimore Colts --> Indianapolis Cleveland Browns --> Baltimore Houston Oilers --> Nashville Phoenix Cardinals --> ?

Concept 2 Complementors

5 Forces Buyer power Supplier power Threats from substitutes Threats from entrants Inter-firm rivalry

The Value Chain CUSTOMERS BUSINESS SUPPLIERS Companies compete to dominate one or more stages of the chain But, what is relationship between Microsoft & Intel? Which of the 5 Forces?

The Value Net CUSTOMERS COMPETITORS BUSINESS COMPLEMENTORS SUPPLIERS

New Language: Complementor Business strategy frameworks often overlook the role of complements No existing word to describe providers of complements customers, suppliers, and complementors can all be partners Not more important --- As important No different than relationship with customers and suppliers. Tension, but you each need each other. Need not be a partner to be a complementor. Intel and Microsoft.

Competitor vs. Complementor 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 alone. 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 alone.

Examples of Complements Pentium II and Windows NT ASDL and Hardware/Software Desktop printers and Digital Cameras (HP/Polaroid) Cars and Roads -- Michelin guide Golf courses (ski mountains) and real estate Carnival cruise and Carnival air Gap and Casual Friday Hallmark/Mazaroff and Valentines Day TV and TV guide Red wine and Dry Cleaners

Flip Side of Complements Your product makes someone else’s more valuable Railroads and land IBM and Microsoft/Intel TV and TV Guide SAP and Windows NT Microsoft needs SAP -- to prove scalability/reliability of NT

Who are your complementors?

Airplane Complements Airports Airspace / Air traffic control Data plane specs., simulator data, flight path, reg. compliance Making time in sky more productive Support Airframe maintenance, pilot training, safety, ... Financing Ground trans. to airport Jet Engines/Jet Fuel Noise regulation

Concept 3 Tactics (e.g. bidding)

What to do if no AV? Becoming a player changes the game--in particular, the added values Examples Holland Sweetener BellSouth

Competition is valuable Pay Me to Play Competition is valuable Don’t give it away Get paid to play

Ways to Get Paid to Play 1. Ask for contributions toward bidding expenses etc. 2. Ask for a guaranteed sales contract 3. Ask for a last-look provision 4. Ask for better access to information 5. Ask to deal with someone who will appreciate what you bring to the table 6. Ask to bid on other pieces of business 7. Ask the customer to quote a price at which he would give you his business Cash is okay, too

8 Hidden Costs of Bidding 1. You’re unlikely to succeed 2. Even if you win, the price is so low you lose money 3. The incumbent can retaliate 4. Your existing customers will now want a better deal 5. New customers will use the low price as a benchmark 6. Competitors will use the low price as a benchmark 7. You give your customers’ competitors a lower cost 8. You destroy your competitors’ glass houses

Perception Games Perceptions are part of the game Texas Shoot-Out One side states price Other side says buy or sell Shooter or Shootee? Different valuations

Texas Shoot-Out If you know the other side’s value, go first If you are uncertain, better to go second

Changing the Game: Players Questions What is your Value Net? What are the opportunities for cooperation and competition? Would you like to change the cast? What new players would you like to bring into the game? Who stand to gain if you enter? Who stands to lose?

Changing the Game: Added Value Questions What is your added value? How can you increase your added value? Can you create loyal customers and suppliers? What are the added values of the other players? Is it in your interest to limit their added values?

Changing the Game: Rules Questions Which rules are helping you and which are hurting you? What rules would you like to have in contracts with your customers and suppliers? Do you have power to make rules? Does someone have the power to overturn them?

Changing the Game: Tactics Questions How do other players perceive the game? How do these perceptions affect the play? Which perceptions would you like to preserve? Which ones would you like to change? Do you want the game to be transparent or opaque?

Changing the Game: Scope Questions What is the current scope of the game Do you want to change it? Do you want to link the current game to others? Do you want to delink the current game from other games?

Mental Traps Seeing only part of the game Failing to think methodically about changing the game Believing that success must come at others’ expense Accepting the game as it is

Summary of Key Concepts Success doesn’t just depend on what you do (customers, competitors, complementors, suppliers) Competition versus cooperation (goes beyond “business as war mindset” – critical to know what mode others are in

War and Peace Cooperation in creating value Competition in dividing it up Simultaneously War and Peace New mindset Coopetition

Game Theory: A Quick and Easy Guide for Managers Identify the other players Put yourself in the shoes of the other players to assess how valuable you are to them. Put yourself in the shoes of the other players to anticipate reactions to your actions (options and payoffs). Put yourself in the shoes of other players to understand how they see the game. Use your dominant strategy or at least determine what others dominant strategy is. Start at the end of the game and reason back. (MFN, MCC)