Game Theory for Business: Overcoming Rivals and Gaining Advantage

The application of game theory in business is a natural, as it serves to answer the central question “What are my opponents thinking and what is their next move?” Chess masters know how to think a few moves ahead, and put themselves in the shoes of their rival.

The game theory approach in business can give you a clear advantage and position you for growth in highly competitive markets. In this one-hour webinar, you’ll learn to:

  • Get inside the motivations and strategies of your rivals
  • Exploit their weaknesses and bring more value to your business proposition
  • Identify concepts for maximizing the size of the piece of the pie you grab in business dealings

This discussion is tailored for CEOs, execs, VPs, upper-level management and anyone involved in competitive analysis and overall business strategy.

Wednesday, April 23, 2014 1:00 PM – 2:00 PM EST

Join Cornell Prof. Justin Johnson for a free webinar on Friday 5/2/14 1:00 –
2:00PM EDT
entitled Game Theory for Business: Overcoming Rivals and Gaining
Advantage.

Seats are limited so register soon!

Update: Even if you weren’t able to attend this webinar, you don’t have to miss out on all the great information shared. Go here and fill out the form to get the video recording of the webinar along with the SlideShare presentation. Then come back and let us know what you thought!

 

David vs. Goliath: Compete Like A Dollar Store

Walmart is a retail Goliath. The company operates:

  • 11,000 stores in 27 countries,
  • E-commerce websites in 10 countries,
  • 630 U.S. Sam’s Club warehouse stores,
  • And grocery stores through 3,267 Supercenters and 322 Neighborhood Markets.

Enter the dollar store. It doesn’t look like much from the outside (a “no-frills box,” as Dollar General CEO Richard Dreiling described it to the NY Times a few years ago). Yet something (besides a flagging economy) is propelling dollar stores to become some of the fastest growing retailers in the country. How are dollar stores successfully battling the low-cost market giant Walmart?

Focus on the right competitive advantage

How does DG compete with Walmart on price? They don’t. DG isn’t delusional; it knows that going head-to-head only on price with Walmart is a losing proposition. True, DG does strive towards low costs, but their true competitive advantage is convenience. Maintaining a competitive position focused on convenience requires selecting its store locations, size, product selection, and pricing accordingly (more details below).

You can start to see the subtle but important differences between Walmart and DG by looking at their taglines (and also check out this). Walmart’s tagline is “Save Money. Live Better.” But moreover, here’s a line from a weekly ad circular: “Get it all in one trip.” Dollar General’s (DG) tag line is so similar, you might miss it: “Save time. Save money. Every day!” So, DG is looking to lure customers who are looking to make a few quick purchases, not do their weekly shopping all in one go.

Choose your position, then own it

DG and other dollar stores compete with big box stores by making it easier for consumers to buy everyday, popular brand items at a low price. With ease of purchase as the main customer value proposition, dollar stores own the category by:

  • Building small, no frills stores in residential areas along routes consumers travel frequently to and from work.
  • Carrying a low variety of products, mostly essential non-perishable items consumers need weekly (laundry detergent, toilet paper, snack food, and basic toiletries).
  • Reducing the number of brands and price points in each category.

The result is that dollar store shoppers spend less than 10 minutes inside the store. Contrast this to a usual Walmart shopping experience. If you need toilet paper, milk, and dish soap, would you rather spend a half hour meandering through a cavernous Walmart and comparing prices on 20 brands, or run into the Dollar General? This is another reason it’s common to see dollar stores located in the same shopping centers as a Walmart. While both stores draw cost-conscious customers, the dollar store picks off those who’d prefer an easier, quicker low-cost shopping trip. It doesn’t matter that Walmart actually has the lowest prices.

Hit them where it counts

The dollar store lesson is simple, but not easy: Know what your competition is capable of, and define your market carefully given what you know about your competition and customers. Define it for the specific problems you’re helping specific customers solve. Don’t try to be all things to all people. Strive to be the right things to the right people. Your well-defined market position is your weapon; take aim and hit your competition where it counts.

The ability to do this—whether you’re up against a market Goliath or creating a new market from scratch—will determine your fate in the short and long term.

Game Theory for Business: Gaining Competitive Control

Organizational leaders are often so focused on handling the many surface-level problems they must deal with, that they lose sight of the big picture. Yet, by taking a more expansive view one can gain true control of a market.

This is the essence of game theory: finding ways to give players (or firms) more control. The key is to develop a better understanding of your competitive environment and how that environment will respond to your actions. Once you have this understanding, manipulating your rivals to do what you want them to do becomes a possibility.

You can’t outcompete what you don’t know.

Putting game theory to work for your organizations starts with three key concepts: understanding other competitors; understanding how other competitors see your firm; and understanding “added value” and “outside options.” These concepts require you to put yourself in your competitors’ shoes. Remember, it’s not all about you. In this article, we’ll focus on understanding other competitors to kick things off.

Understanding rivals

Let’s start with building an understanding of your strategic environment and how to influence it. Here are four questions you need to ask in order to better predict how your rivals will react, and to gain more control:

What are my rivals really after? Just profits, or are other goals important? Maybe market or customer service leadership is their goal, or being the biggest, even is these goals don’t bring the highest profits. Even if rivals are only interested in profits, are they long-run or short-run thinkers?

  1. How do my rivals think they can obtain their goals? For example, do they think M&A is key, or developing resources organically? Do you have any biases or preconceptions about how they see the market?
  2. What are my rivals capable of doing? What are their resources?
  3. What do my rivals think I’m going to do?

Playing the game

Game theory isn’t a Jedi mind trick. It’s using your knowledge of rivals to predict how they’ll react, and hopefully, using this insight to get them to act in ways that are beneficial to your firm. Once you understand your rivals, you may be able to choose your own actions so as to get your rivals to behave in a manner that suits you.

I’m not saying this is easy, by the way.

How does it work? Here’s an example. Your rival is trying to decide whether to introduce a high or low quality product. You find out they’re leaning towards the high quality product, but this is also a move your firm would like to make. In this case, you have three options based on what you know:

  1. Let your rival introduce a high quality product, then introduce your own high quality product. This might lead to pretty fierce competition, especially if the products are similar.
  2. Introduce a low quality product.
  3. Be first to market with your own high quality product, and perhaps demonstrate a real commitment and dedication to that product.

If you choose Option #3, the assumption is that your rival is still trying to decide which product to offer. This allows you to “force their hand,” making it more likely that they will introduce a low quality product instead — decreasing direct competition for your new product, and potentially increasing revenues because you now corner the market for this high quality product, have a reputation for excellence with customers, and may be able to charge a premium price.

Options vs. decisions

The key concept of game theory is understanding the overall competitive environment, and how individual players think and behave within it. This understanding makes it easier for your firm to make profitable decisions. But game theory doesn’t tell you which decision to make—it only tells you which factors to consider. It’s just one part of competitive analysis. Typical industry analysis and market positioning frameworks are still crucial tools for honing your competitive advantage.