1. 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.

2. What is a Game?
Chess, poker, sports?

3. Concept 1
Added Value

4. 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

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

6. 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”

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

8. Concept 2
Complementors

9. 5 Forces Buyer power Supplier power Threats from substitutes
Threats from entrants
Inter-firm rivalry

10. 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?

11. The Value Net
CUSTOMERS
COMPETITORS
BUSINESS
COMPLEMENTORS
SUPPLIERS

12. 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.

13. 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.

14. 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

15. 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

16. Who are your complementors?

17. 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

18. Concept 3
Tactics (e.g. bidding)

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

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

21. 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

22. 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

23. 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

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

25. 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?

26. 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?

27. 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?

28. 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?

29. 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?

30. 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

31. 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

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

33. 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)