Co-Opetition - Adam M. Brandenburger [6]
The field of game theory dates back to the early days of World War II, when British naval forces playing cat and mouse with German submarines needed to understand the game better so that they could win it more often.5 They discovered that the right moves weren’t the ones pilots and sea captains were making intuitively. By applying concepts later known as game theory, the British improved their hit rate enormously. Their success against submarines led them to apply game theory to many other war activities. Thus, game theory was proven in practical life-and-death situations before it was actually laid out on paper as a systematic theory.
The classic theoretical formulation came soon after, in 1944, when mathematical genius John von Neumann and economist Oskar Morgenstern published their book Theory of Games and Economic Behavior. This brilliant, but highly abstract, work was immediately heralded as one of the greatest scientific achievements of the century. It led to large numbers of technical papers in the fields of economics, politics, military strategy, law, computer science, and even evolutionary biology. In each of these fields, game theory has resulted in major discoveries. Now game theory is transforming the field of business strategy.
Game theory makes it possible to move beyond overly simple ideas of competition and cooperation to reach a vision of co-opetition more suited to the opportunities of our time. To many, this will come as a surprise. The image game theory often conjures up is business-as-war. That’s to be expected, since the field was born during World War II and grew up during the Cold War. The mentality was one of winners and losers—the zero-sum game, even the zero-sum society.6 But that’s only half the subject. Contemporary game theory applies just as well to positive-sum—or win-win—games. The real value of game theory for business comes when the full theory is put into practice: when game theory is applied to the interplay between competition and cooperation.
What are the essential characteristics of game theory as applied to business? What are its special virtues? How is it different from a host of other management tools?
What Game Theory Has to Offer
Game theory focuses directly on the most pressing issue of all: finding the right strategies and making the right decisions. There are many valuable books on how to create a management environment conducive to making the right decisions. There are also valuable books on how to build organizations effective at carrying out decisions once they’re made. But there’s still a great need for guidance in identifying the right strategy to begin with. This is what game theory provides. It goes right for the crux of things, showing you in strategic terms what is the best thing to do.
Game theory is particularly effective when there are many interdependent factors and no decision can be made in isolation from a host of other decisions. Business today is conducted in a world of bewildering complexity. Factors you might not even think to ask about can determine your success or failure. Even if you identify all the relevant factors, anything that changes one is likely to affect many others. Amid all this complexity, game theory breaks down the game into its key components. It helps you see what’s going on and what to do about it.
Game theory is an especially valuable tool to share with others in your organization. The clear and explicit principles of game theory make it easier to explain the reasoning behind a proposed strategy.