The Right Game：Use Game Theory to Shape Strategy

TheRightGame:UseGameTheorytoShapeStrategybyAdamM.BrandenburgerandBarryJ.NalebuffReprint95402HarvardBusinessReviewBusinessisahigh-stakesgame.Thewayweap-proachthisgameisreflectedinthelanguageweusetodescribeit.Businesslanguageisfullofexpres-sionsborrowedfromthemilitaryandfromsports.Someofthemaredangerouslymisleading.Unlikewarandsports,businessisnotaboutwinningandlosing.Norisitabouthowwellyouplaythegame.Companiescansucceedspectacularlywithoutre-quiringotherstofail.Andtheycanfailmiserablynomatterhowwelltheyplayiftheymakethemis-takeofplayingthewronggame.Theessenceofbusinesssuccessliesinmakingsureyou’replayingtherightgame.Howdoyouknowifit’stherightgame?Whatcanyoudoaboutitifit’sthewronggame?Tohelpmanagersanswerthosequestions,we’vedevelopedaframeworkthatdrawsontheinsightsofgametheory.After50yearsasamathematicalconstruct,gametheoryisabouttochangethegameofbusiness.Gametheorycameofagein1994,whenthreepioneersinthefieldwereawardedtheNobelPrize.Itallbeganin1944,whenmathematicsgeniusJohnvonNeumannandeconomistOskarMorgensternpublishedtheirbookTheoryofGamesandEco-nomicBehavior.Immediatelyheraldedasoneofthegreatestscientificachievementsofthecentury,theirworkprovidedasystematicwaytounder-standthebehaviorofplayersinsituationswheretheirfortunesareinterdependent.VonNeumannandMorgensterndistinguishedtwotypesofgames.Inthefirsttype,rule-basedgames,playersinteractaccordingtospecified“rulesofengagement.”Theserulesmightcomefromcontracts,loancovenants,ortradeagreements,forexample.Inthesecondtype,freewheelinggames,playersinteractwithoutanyexternalconstraints.Forexample,buyersandsellersmaycreatevaluebytransactinginanunstructuredfashion.Businessisacomplexmixofbothtypesofgames.PHOTOSBYCHRISTOPHERMAKOSCopyright©1995bythePresidentandFellowsofHarvardCollege.Allrightsreserved.HBRJULY-AUGUST1995TheRightGame:UseGameTheorytoShapeStrategybyAdamM.BrandenburgerandBarryJ.NalebuffAdamM.BrandenburgerisanassociateprofessorattheHarvardBusinessSchoolinBoston,Massachusetts.BarryJ.NalebuffisaprofessorattheYaleSchoolofMan-agementinNewHaven,Connecticut.Theauthors’re-search,teaching,andconsultingfocusongametheoryandbusinessstrategy,andtheirbookonthesubjectwillbepublishedbyCurrency/Doubledayin1996.Forrule-basedgames,gametheoryofferstheprinciple,Toeveryaction,thereisareaction.But,unlikeNewton’sthirdlawofmotion,thereactionisnotprogrammedtobeequalandopposite.Toana-lyzehowotherplayerswillreacttoyourmove,youneedtoplayoutallthereactions(includingyours)totheiractionsasfaraheadaspossible.Youhavetolookforwardfarintothegameandthenreasonbackwardtofigureoutwhichoftoday’sactionswillleadyoutowhereyouwanttoendup.1Forfreewheelinggames,gametheoryofferstheprinciple,Youcannottakeawayfromthegamemorethanyoubringtoit.Inbusiness,whatdoesaparticularplayerbringtothegame?Tofindtheanswer,lookatthevaluecreatedwheneveryoneisinthegame,andthenpluckthatplayeroutandseehowmuchvaluetheremainingplayerscancre-ate.Thedifferenceistheremovedplayer’s“addedvalue.”Inunstructuredinteractions,youcannottakeawaymorethanyouraddedvalue.2Underlyingbothprinciplesisashiftinperspec-tive.Manypeopleviewgamesegocentrically–thatis,theyfocusontheirownposition.Theprimaryinsightofgametheoryistheimportanceoffocus-ingonothers–namely,allocentrism.Tolookfor-wardandreasonbackward,youhavetoputyourselfintheshoes–evenintheheads–ofotherplayers.Toassessyouraddedvalue,youhavetoasknotwhatotherplayerscanbringtoyoubutwhatyoucanbringtootherplayers.Managerscanprofitbyusingtheseinsightsfromgametheorytodesignagamethatisrightfortheircompanies.Therewardsthatcancomefromchang-ingagamemaybefargreaterthanthosefrommain-tainingthestatusquo.Forexample,Nintendosuc-ceededbrilliantlyinchangingthevideogamebusinessbytakingcontrolofsoftware.Sega’ssub-sequentsuccessrequiredchangingthegameagain.RupertMurdoch’sNewYorkPostchangedthetabloidgamebyfindingaconvincingwaytodem-onstratethecostofapricewarwithoutactuallylaunchingone.BellSouthmademoneybychangingthetakeovergamebetweenCraigMcCawandLinBroadcasting.Successfulbusinessstrategyisaboutactivelyshapingthegameyouplay,notjustplay-ingthegameyoufind.Wewillexplorehowtheseexamplesandothersworkedinpractice,startingwiththestoryofhowGeneralMotorschangedthegameofsellingcars.FromLose-LosetoWin-WinIntheearly1990s,theU.S.automobileindustrywaslockedintoanall-too-familiarmodeofdestruc-tivecompetition.End-of-yearrebatesanddealerdiscountswereruiningtheindustry’sprofitability.Assoonasonecompanyusedincentivestoclearexcessinventoryatyear-end,othershadtodothesame.Worsestill,consumerscametoexpectthere-bates.Asaresult,theywaitedforthemtobeofferedbeforebuyingacar,forcingmanufacturerstoofferincentivesearlierintheyear.Wasthereawayout?Wouldsomeonefindanalternativetopracticesthatwerehurtingallthecompanies?GeneralMotorsmayhavedonejustthat.InSeptember1992,GeneralMotorsandHouse-holdBankissuedanewcreditcardthatallowedcardholderstoapply5%oftheirchargestowardbuyingorleasinganewGMcar,upto$500peryear,withamaximumof$3,500.TheGMcardhasbeenthemostsuccessfulcredit-cardlaunchinhistory.Onemonthafteritwasintroduced,therewere1.2millionaccounts.Twoyearsl