The Right Game: Use Game

Theory to Shape Strategy

The Right Game: Use Game Theory
to Shape Strategy

Adam M. Brandenburger, Barry J. Nalebuff

Harvard Business Review, July-August, 1995

“Successful business strategy is about

actively shaping the game you play, not
just playing the game you find.”
Game Theory:

• Using game theory allows us to consider

“changing the game” WHY is that helpful?

• You can make the game you want…to your

advantage. HOW?

• Change the player, added value, rules or

tactics.

• PARTS are the levers for moving the world

of business ala Archimedes.
Lessons from Game Theory
 Look at the situation from the perspective of all
others’ involved

 Look for win-win, not just win-lose opportunities

 Look for opportunities to “change the game” for

the better

 Game theory gives more complete picture of

business relationships

 Avoids exclusive focus on competition(win-lose)

“Co-opetition”
•Recognizes that business relationships have more than one
aspect

•By identifying all the players and all the interdependencies,

game theory expands the repertoire of strategies

Businesses must both cooperate

to create value, even while
competing to divide this value
among themselves
Brandenburg and Nalebuff use “Value Net” as their
core concept. They identified four types of players
that every company faces:
 
1. CUSTOMERS
Parties to which the company directs its products and services.
In return, money goes from the customers to the company.
 
2. SUPPLIERS
Parties who flow resources to the company. In return, money
goes from the company to the suppliers.
 3. COMPETITORS

The definition depends on perspective:

Customer perspective: “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 by itself.” Your product
behaves as a substitute for a competitor’s product – your increase
in market share will directly decrease your competitor’s share.
Substitutes can be both direct, e.g. two bakeries competing as well
as indirect, e.g. bread versus rice.

Supplier perspective: “A player is your competitor if it is less

attractive for a supplier to provide resources to you when it is also
supplying the other player than when it is supplying you alone.”
Any firm competes for resources in quantity, quality and price
with other organizations.
4. COMPLEMENTORS

The definition also depends on perspective.

Customer perspective: “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 by itself.” Complementors are the
inverse of a competitor because more demand for their products will
lead to more demand for your product.

Supplier perspective: “A player is your complementor if it is more

attractive for a supplier to provide resources to you when it is also
supplying the other player than when it is supplying you alone.”
When a market is small, it is difficult to get resources delivered
exactly on spec. When the market increases, suppliers begin to tailor
their offering and make the purchasing efforts easier on all acquiring
firms.
Competition and Cooperation
Elements of the Game
Players

Added Values
◦ What each player adds to the value inherent in
the total game

Rules

Tactics (Perceptions)

Scope
Changing the Players
Players are participants in the Value Net
◦ The Company itself, and its Customers,
Suppliers, Substitutors, Complementors
◦ How does the game change as players come in or
out?
 Canadian Airlines no longer exists in the Canadian
airline industry.
• Even if you can’t make money in a game, figure out who
stands to gain from your entry and make them pay
(Holland Sweetener)

• once you’re in the game try to change who else is in the

game; try to bring in customers, suppliers, complementors,
competitors (e.g.credit union/auto sales)
Changing Added Value
 What added value does each player bring to the game?

◦ If a player were not participating at all, how would the value

of the overall game be affected?

 Bobby Hull joining the Jets gave the WHA instant credibility.
 With a monopoly its ok to limit the added values of other players
(Nintendo)

 In competitive situation, you need to build your own added

value, e.g. improve quality at low incremental cost or vice versa

 but only way to protect added value is to create relationships

with your customers and suppliers…have a loyalty program
(Advantage), because it doesn’t disappear even when imitated!
Your added value=
the size of the pie
when you are in the
game
minus
the size of the pie
when you are out of
the game
Changing the Rules
Rules determine how the game is played

◦ Can the rules be changed to make the game more

favorable for one, or for all?

 Guarantees to match lowest price

 Funding rules for universities in Manitoba

 Usually we think we should charge more to our customers and less

to competitors

 Changing this rule is possible, e.g., introduction GM card (cash

award)and Advantage (in kind award): latter is better because it
increase the size of the pie by delivering more value for same
price)
Changing Perceptions
Players’ perceptions of the game
influences the way they play it.

◦ Commitment strategies, (as ploys)

 Publicly committing to something to make others
perceive you’re serious
Changing the Scope
Scope is the boundaries of the game

◦ Tying issues together in negotiations

 Softwood lumber and energy?
◦ Opening a “second front” in competition
 Hezbullah attacking Israel from Lebanon
• Look at the game as part of an even bigger game…
change the links between

• added values--price superior product high so you

don’t eat away at incumbent’s existing product

• rules--if you have power get long-term contracts with

suppliers, or offer package discounts

• tactics--get another player to believe that what you

will do in one situation depends on what happens in
another.
 The Traps Of
Strategy :
• To think you have to accept
the game you find yourself
in.
• To think that changing the game must come at the expense of others.

•To believe that you have to find something to do that others can’t.

• Failing to see the whole game.

• Failing to think methodically about changing the game

•Finally there is no silver bullet for changing the game of business. It is an

ongoing process.