70 FINANCIAL EXECUTIVE March/April 2003

Challenged as never before withdesigning a high-value compa-ny game plan, executives oftenget blindsided by competitors’

moves they failed to anticipate. Tosafeguard against nasty surprises, youmust think carefully about whatactions competitors might take.

Strategic Gaming — a structured,comprehensive approach to puttingyourself in your competitors’ shoes —enables you not only to play the com-petitive game more effectively, butalso to create one that improves yourvalue prospects by influencing otherplayers’ actions.

Based on the developments ofgame theory pioneered by John Nash,the subject of the movie “A BeautifulMind,” Strategic Gaming can helpanswer crucial strategic questions.Should we compete? Should we part-ner with a potential competitor?Cooperate? How? On the competeside, it addresses questions like:■ Should we innovate, and at whatcost?■ Should we set prices to maximizeprofit or to deter potential marketentrants?■ What strategy should we adopt forcompetitive-bidding situations?

These questions often arise in sec-tors where companies face difficultinvestment, pricing and bidding deci-sions that depend on the choices theircompetitors will make. Other applica-tions include capacity bidding forinfrastructure projects where the gamelies in creating the downstream op-tions the infrastructure provides.

On the partnering side, companiesask who they should partner with, atwhat price and on what terms. Inpartnership negotiations and in othertypes of negotiations, Strategic Gam-ing helps you avoid leaving value on

the table by helping you understandyour bargaining power, define yournegotiating position and gain insightinto effective negotiating tactics.

In seeking answers to any of thesestrategic questions, Strategic Gamingenables players to see the entire chess-board and to gain and exploit advan-tages. To play successfully, you mustapply three principles:■ Identify the key players and theirchoices, then creatively explore theirfull range of choices. By properly fram-ing the situation, you avoid wastingresources by focusing on too manyplayers or the wrong ones. Consider-ing other players’ choices also mayhelp you better understand theiropportunities, and yours.You may alsorealize that players you thought wereimportant actually lack influence.■ Lay out the sequence of moves inthe game, and take uncertainty intoaccount. Nothing better aligns yourteam on the challenges than explicitlyidentifying what each player can do,and when. Clearly identifying andassessing private information, knownonly to some players, and chanceevents prevents your team from run-ning blindly down a path that vitallydepends on a highly unlikely out-come.■ Value the payoffs to each player.In considering competitor choices andmoves, there is no substitute forexplicit valuation of the payoffs toeach player. Too often, executives skipthis step because they deem it toohard to reliably determine how acompetitor values a certain outcome.But time and time again, calculationswith simple assumptions can radical-ly change one’s perspective.

To understand how Strategic Gam-ing works, consider the compete-ver-sus-cooperate dilemma faced by acompany we will call “Nash.” Nashwas about to launch a new technolo-gy, x-factor, which required a $200million investment but could be ablockbuster in a $1 billion market. Butgreat uncertainty remained aboutmarket size and margins because oftwo potential competitors, GeniusTech and Smart Inc. Some of the Nashteam began to question the launchstrategy — perhaps a partnershipwith Genius or Smart might be prefer-able to going it alone.

The dilemma was complicated byunconfirmed reports that Genius Techmight have a similar technology itcould launch at roughly the sametime as Nash’s x-factor. Meanwhile,Smart was working on x-factor-plus,which would likely be superior toNash’s product, given Smart’s techno-logical prowess. However, x-factor-plus was still several years fromlaunch. Partnering with Smart orGenius could reduce Nash’s competi-tive pressures and risks, while en-hancing market power. But it couldalso mean that Nash would leave val-ue on the table by unnecessarily shar-ing upside rewards, and partner“drag” could hurt x-factor’s potential.

Strategic Gaming provided theinsights Nash needed to solve thedilemma, and it helped Nash execu-tives create a “dynamic roadmap.”First, the Nash team mapped outGenius and Smart’s choices, in se-quence, with a “game tree” diagramto represent the structure of the situa-tion. In this process, Nash realizedthat Smart and Genius might indeedcreate a partnership combiningGenius’s commercial power andSmart’s technical prowess — a scary

strategy

Strategic gaming, based on modeling techniques created by John Nash, can help companies focus on what rivals are thinking and enhance their competitive positions.

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Jay Goldman and Paul Papayoanou

Shaping Winning Business

© 2003 Financial Executives International. All rights reserved.

proposition thatNash hadn’t seri-ously consideredbefore.

But did a partner-ship make economic sensefor Genius and Smart? Ana-lyzing uncertainties and payoffsenabled the Nash executives to gaindeeper insights. The team explicitlyevaluated the situation from the per-spective of both Genius and Smart,and arrived at a disturbing answer:They were natural partners, and join-ing forces to compete against Nashappeared to be their best choice,unless Nash could forge an alliancewith one of them. This also revealedthat Nash’s go-it-alone strategy wasworth at least $100 million less thanthe $300 million they had previouslyprojected. Partnering now becamecrucial for Nash.

Most Nash executives saw Geniusas their preferred partner, assumingGenius successfully developed x-fac-tor. After all, Smart’s x-factor-pluswouldn’t hit the shelves for anothertwo years, and there was no guaran-tee that it could achieve technical suc-cess. But a small core of vocal Nashexecutives disagreed. They arguedthat Genius might not have x-factor atall, and if so, “We’d give away thefarm if we make a deal with them!”

Analyzing the payoffs more close-ly, Nash estimated how much itshould take to persuade Genius orSmart to join with Nash, and whenNash should simply give up and go italone. The analysis also considered theprobability of Genius having x-factorand Nash’s expected payoff from adeal with Genius or Smart, or fromgoing it alone.

A key insight emerged: Nash’s bestchoice was to seek a partnership with

S m a r tfirst, unlessNash believedthere was at leastan 80 percent proba-bility that Genius hadx-factor. But Nash didn’tbelieve it. The combination ofSmart’s technology and Nash’s marketpotential promised a huge potentialupside for both Nash and Smart.Unconvinced that Genius had x-factor,Nash decided to go with Smart.

Nash then was able to construct adynamic roadmap to shape and playthe game as it unfolded:■ First, approach Smart with the dealdeveloped in the earlier evaluation.Suggest to Smart that Nash would bewilling to go with Genius, absent adeal with Smart. This could be aneffective tactic because the analysisshowed that Smart should greatly feara Nash-Genius marketing alliance.■ Second, if the deal with Smartbroke down, approach Genius, pro-posing the deal suggested by the eval-uation — but with the key conditionthat Genius prove it has x-factor.Thus, Nash could secure a deal withGenius under the only conditions inwhich such a deal would be desirable.■ Third, if Genius refuses a deal,threaten a bidding war to get an

a l l i a n c ewith Smart, a

war that the an-alysis has shown

that Nash would win.The concessions required

of Nash to win such a battlewould still be smaller than the

expected value of the deal.■ With its strategic roadmap in hand,

Nash was ready to play the game in away likely to secure the best possibleoutcome. In the end, Nash had virtu-ally ensured that it could get the rightdeal at the right price.

How can you adapt this StrategicGaming approach to your company’schallenges? First, frame the problem:map out the key players and theirchoices, in sequence, to view thestructure of the situation. Next, evalu-ate the choices: bring payoffs anduncertainties into the analysis so youcan gain deeper insights into the like-ly actions of each player. Finally,develop an execution plan: construct adynamic roadmap to shape and playthe game as it unfolds. Committing tothis structured approach will ensurethat you deeply understand yourcompetitive position and play thegame to maximum advantage.

Paul Papayoanou (ppapayoanou@sdg.com) is a Senior Consultant and JayGoldman ( jgoldman@sdg.com) is aSenior Engagement Manager in theBoston office of Strategic DecisionsGroup. Papayounou leads SDG’s applica-tions of Strategic Gaming.

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