1. Game Theory

2. The Art of War, Sun Tzu
“Thus, it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements. One who does not know the enemy but knows himself will sometimes be victorious, sometimes meet with defeat. One who knows neither the enemy nor himself will invariably be defeated in every engagement.”

3. Strategy Game Each team starts with 10 armed tanks
The game consists of two 5 move rounds
During each move, a team may choose to arm or disarm 0, 1, or 2 tanks
The teams must negotiate after moves 1 and 3
Teams may request a negotiation after any other move, but the other team must agree
Either team may attack the other team on any move except move 5
The round is over when a team attacks

4. Strategy Game (cont) Objective – Score the most points possible Points
If you attack you get 10 points for every armed tank you have in excess of the other team
At the end of round 5, if no one attacks, both teams get 5 points for each tank they have disarmed

5. Structured Games
The game has a more formal structure: there are rules and a reasonably small set of possible outcomes
The basic rule for structured games is “to look forward to determine the outcomes and then reason backward to determine the best action”

6. Game Theory: payoff matrix
There are two (or more) players, each of whom has a finite number of options
List the choices for each player on one of the axes
Each cell in the matrix represents the payoff (reward to a player) resulting from choosing an option assuming that the other player will choose a particular option
Usually the payoffs for both players are given in the same cell, separated by a diagonal slash or as an ordered pair (row, column)

7. The Prisoner’s Dilemma
The Prisoner’s Dilemma
Two vagrants, Al and Joe, have been arrested for vagrancy. The DA suspects them of complicity in a robbery, but she doesn’t have enough evidence to convict them. (Al and Joe don’t know this for sure.) The DA interrogates each of them separately and offers the following deal:
“If you confess and your friend does not, you will be released and I will throw the book at your friend. I have made the same offer to your friend.” Assume the relevant prison times (in months) are as follows: Al
Joe
Confess
Don’t Confess
(-8, -8)
(0, -15)
(-15, 0)
(-1, -1)
 How will the game turn out?

8. The Rational Pigs
Two pigs, one dominant and one subordinate, are in a pen. There is a lever at one end of the pen which, when pressed, dispenses 6 units of food into a trough at the other end of the pen. Thus, a pig that presses the lever must run to the other end of the pen before it can eat. By the time it gets there, the other pig may have eaten some or most of the food. The dominant pig is able to prevent the subordinate pig from getting any of the food when both are at the trough. Assume it requires energy equivalent to ½ unit of food to run from one end of the pen to the other. Suppose that if both of the pigs press the lever, the subordinate pig is faster than the dominant pig and can eat two units of food before the dominant pig gets to the food. Which pig will press the lever?
Dominant Pig:
Subordinate Pig:
Press
Don’t Press
Press
(1.5, 3.5)
(-0.5, 6)
Don’t Press
(5, 0.5)
(0, 0)

9. Strategic Principles Use Strategic Foresight
Know Yourself as Well as Others
Differentiate Between One-Time and Repeated Interactions
Managers Must Unify Minds to Promote Cooperation

10. Co-opetition Combines Cooperation and Competition
Cooperation affects the size of the pie
Competition affects the market share --size of the slice
Profit is the product of the size of the pie and the market share

11. The Value Net Substitutors Complementors Company Customers Suppliers
Source: Adam Brandenburger and Barry Nalebuff, Co-opetition
(New York: Currency Doubleday, 1996), p. 17

12. The Value Net Customers Firm Substitutors Complementors Suppliers
A player is your substitutor with respect to customers if customers value your product less when they have the other player’s product as well
Customers
Firm
Suppliers
Substitutors
Complementors
A player is your complementor with respect to customers if customers value your product more when they have the other player’s product as well
A player is your complementor with respect to suppliers if it is more attractive for a supplier to provide resources to you when it is also supplying the other player
A player is your substitutor with respect to suppliers if it is less attractive for a supplier to provide resources to you when it is also supplying the other player
See let’s go back to the HBS example
Who’s a competitor on the customer side? Other B-schools (for students), private firms (e.g., McKinsey, for exec ed and talent), other professional schools, popular business press, other publishers (vs. HBSP)
Who’s a competitor on the supplier side? Other B-schools competing for faculty, other professional schools competing for faculty
Who’s a complementor on the customer side? Alumni associations, other B-schools (in legitimizing the MBA), book publishers, journal publishers, popular business press, private firms (as employers who value the HBS degree)
Who’s a complementor on the supply side? Perhaps outside executive education programs. I’m more willing to work for HBS when I also get some involvement in outside programs
Note that HBS has had a hand in creating complements (e.g., alumni associations, B-schools in some parts of the world)
Source: Adam Brandenburger and Barry Nalebuff,
Co-opetition (New York: Currency Doubleday, 1996) 19

13. Expanded Industry Analysis
Threat of New Entry
Rivalry Among Existing Competitors
Bargaining Power
of Customers
Threat of Substitutes
of Suppliers
Availability of Complements
The idea of complements is clearly an important one. Indeed, when Porter discusses the Five Forces these days, he often adds a sixth box

14. Changing the game First: Identify the players and draw the value net
Second: identify the elements of the game (PARTS)
Players, Added values, Rules, Tactics, Scope
Change one or more of these elements
No elements of the game should be considered fixed and unchangeable

15. Boeing, Airbus and the super-jumbo airframe (1991)
(A/B)
Boeing
Develop
Doesn’t Develop
Airbus
(6-8+5=3 /
9-8=1)
(15-3=12/ -6)
Develop
Doesn’t
Develop
(-2/15-8=7)
(-1/12)
Market =$15b, Development Cost=$8b, Airbus subsidy=$5b

16. How Will the Game Turn Out?
It is the rational pig situation: Airbus has a dominant strategy: introduce the super jumbo. Boeing’s strategy depends on what Airbus does. Since Airbus will introduce, Boeing will introduce also
But Boeing’s strongly preferred solution is for neither to introduce the super jumbo so it can continue its 747 monopoly!
Therefore, Boeing must find ways to change the game!!

17. How Boeing Has Changed the Game
Change players: Jan 1993, Boeing invites Deutsche Aerospace to be its partner in super jumbo development (Nearly splits up Airbus) (Great fun in the newspapers!!!)
Change tactics (perceptions) and added values: June 1995, Boeing announces that the market wants a supersonic—not a super jumbo (it builds neither!)
Change rules: (constantly) Petition the WTO and EU to ban subsidies to Airbus
December 1999 Airbus announces it will develop a super jumbo (None has been built, yet!)
Boeing has delayed super jumbo introduction by 9 years (so far). Value of playing the game = $117billion (9 $ [12b-(-1b)]

18. Conclusion
Use of Game Theory Helps Managers Predict Actions of Competitors
Common Framework and Language for Analysis of Competitive Decisions and Interactions

19. Traps of Strategy Not understanding the present game
Believing you must accept the present game
Thinking that change must come at the expense of another player (win-lose)
Believing you must do something unique
Failing to see the whole game
Failing to think methodically
Failing to think dynamically
Not expecting another player will change the game