Playing the Right Game • Business is not about winning and losing. • Business is not about how well you play the game.
Two Types of Games • Rule-based games • players interact according to specified “rules of engagement” • Freewheeling games • players interact without any external constraints
Rule-based games • To every action, there is a reaction • To play, look forward far into the game and then reason backward to figure out which of today’s actions will lead you to where you want to end up.
Freewheeling Games You cannot take away from the game more than you bring to it. • namely, you cannot take away more than your added value.
Insight of Game Theory Focus on others, rather than focus on your own position.
Insight of Game Theory • To look forward and reason backward, you have to put yourself in the shoes of other players. • To assess your added value, you have to ask not what other players can bring to you, but what you can bring to other players.
From Lose-Lose to Win-Win • The GM’s credit card program (1992) • Successful business strategy is about actively shaping the game you play, not just playing the game you find. • Looking for win-win strategies has several advantages.
The Game of Business • The game of business is all about value: creating it and capturing it. • The Value Net framework • a mixture of cooperation and competition
Value Net Framework Customers Company Substitutors Complementors Suppliers
Who is a complementor? Someone whose products make your products more valuable or whose products are made more valuable by yours
Competitor and/or Compelmentor • VCR and Hollywood studios • IBM’s mistake
Changing the Game • Access the Value Net for your business • Identify the PARTS • players, added values, rules, tactics and scope • To change the game, you have to change one or more of these elements.
Changing the Players • It might be smart to change who’s playing the game. That includes yourself. • Example • HSC can offer the value of creating competition to Coke and Pesi. Shouldn’t give it away for free.
Changing the Added Values • Raise your own added value or lower that of others • Example • TWA’s introduction of Comfort Class • Adam and 26 of his MBA students
Changing the Rules • To analyze the effect of a rule, look froward and reason backward. • Example • Kiwi airline’s judo strategy: by staying small, it (a newcomer) turns the incumbent’s larger size to its own benefit.
Tactics: Changing Perceptions • Some tactics work by reducing misperceptions (i.e. lifting the fog), some work by creating or maintaining uncertainty (i.e. thickening the fog) • Example • Daily News vs. New York Post (1994) • Disagreeing to agree
Changing the Scope • A game in one place can affect games elsewhere, and a game today can influence games tomorrow. • Example • Sega turned Nintendo’s 8-bit strength into a 16-bit weakness.
The Traps of Strategy • I have to accept the game I find myself in. • Changing the game must come at the expense of others. • I have to find something to do that others cannot • Failing to see the whole game • Failing to think methodically about changing the game
Buyers Willingness-to-pay Buyer’s Share Price Firms Value Created Firm’s Share Cost Supplier’s share Suppliers Opportunity cost
Example 1 Consider a game between two suppliers, two firms, and one buyer. Each supplier can transact with at most one firm, and vice versa. Each supplier has an opportunity cost of $10 of providing resources to a firm. The buyer has a willingness-to-buy of $100 for the first firm’s product, and a willingness-to-pay of $150 for the second firm’s product.
Example 2 Consider a game between four suppliers, three firms, and two buyers. Each supplier can transact with at most one firm, and vice versa. Similarly, each buyer can transact with at most one firm, and vice versa. Each supplier has an opportunity cost of $10 of providing resources to a firm. Each buyer has a willingness-to-buy of $100 for a firm’s product.
Example 3 Following example 2, suppose each buyer has a willingness-to-buy of $100 for the product of the first or second firm, and a willingness-to-pay of $150 for the product of the third firm.
Value-based Business Strategy Firm Competitors Willingness-to-pay Opportunity cost