Shaping winning business strategies with game theory: strategic gaming, based on modeling techniques created by John Nash, can help companies focus on what rivals are thinking and enhance their competitive positions.

AuthorGoldman, Jay
PositionStrategy

Challenged as never before with designing a high-value company game plan, executives often get blindsided by competitors' moves they failed to anticipate. To safeguard against nasty surprises, you must think carefully about what actions competitors might take.

Strategic Gaming -- a structured, comprehensive approach to putting yourself in your competitors' shoes -- enables you not only to play the competitive game more effectively, but also to create one that improves your value prospects by influencing other players' actions.

Based on the developments of game theory pioneered by John Nash, the subject of the movie "A Beautiful Mind," Strategic Gaming can help answer crucial strategic questions. Should we compete? Should we partner with a potential competitor? Cooperate? How? On the compete side, it addresses questions like:

* Should we innovate, and at what cost?

* Should we set prices to maximize profit or to deter potential market entrants?

* What strategy should we adopt for competitive-bidding situations?

These questions often arise in sectors where companies face difficult investment, pricing and bidding decisions that depend on the choices their competitors will make. Other applications include capacity bidding for infrastructure projects where the game lies in creating the downstream options the infrastructure provides.

On the partnering side, companies ask who they should partner with, at what price and on what terms. In partnership negotiations and in other types of negotiations, Strategic Gaming helps you avoid leaving value on the table by helping you understand your bargaining power, define your negotiating position and gain insight into effective negotiating tactics.

In seeking answers to any of these strategic questions, Strategic Gaming enables players to see the entire chessboard and to gain and exploit advantages. To play successfully, you must apply three principles:

* Identify the key players and their choices, then creatively explore their full range of choices. By properly framing the situation, you avoid wasting resources by focusing on too many players or the wrong ones. Considering other players' choices also may help you better understand their opportunities, and yours. You may also realize that players you thought were important actually lack influence.

* Lay out the sequence of moves in the game, and take uncertainty into account. Nothing better aligns your team on the challenges than explicitly identifying what...

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