Brand Washed

The Right Game: Use Game Theory to Shape Strategy
by Adam M. Brandenburger and Barry J. Nalebuff

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Harvard Business Review

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PHOTOS BY CHRISTOPHER MAKOS

The Right Game: Use Game Theory to Shape Strategy
by Adam M. Brandenburger and Barry J. Nalebuff
Business is a high-stakes game.The way we approach this game is reflected in the language we use to describe it. Business language is full of expressions borrowed from the military and from sports. Some of them are dangerously misleading. Unlike war and sports, business is not about winning and losing. Nor is it about how well you play the game. Companies can succeed spectacularly without requiring others to fail. And they canfail miserably no matter how well they play if they make the mistake of playing the wrong game. The essence of business success lies in making sure you’re playing the right game. How do you know if it’s the right game? What can you do about it if it’s the wrong game? To help managers answer those questions, we’ve developed a framework that draws on the insights of game theory. After 50 years as amathematical construct, game theory is about to change the game of business. Game theory came of age in 1994, when three pioneers in the field were awarded the Nobel Prize. It all began in 1944, when mathematics genius John von Neumann and economist Oskar Morgenstern published their book Theory of Games and Economic Behavior. Immediately heralded as one of the greatest scientific achievements ofthe century, their work provided a systematic way to understand the behavior of players in situations where their fortunes are interdependent. Von Neumann and Morgenstern distinguished two types of games. In the first type, rule-based games, players interact according to specified “rules of engagement.” These rules might come from contracts, loan covenants, or trade agreements, for example. In thesecond type, freewheeling games, players interact without any external constraints. For example, buyers and sellers may create value by transacting in an unstructured fashion. Business is a complex mix of both types of games.
Adam M. Brandenburger is an associate professor at the Harvard Business School in Boston, Massachusetts. Barry J. Nalebuff is a professor at the Yale School of Management inNew Haven, Connecticut. The authors’ research, teaching, and consulting focus on game theory and business strategy, and their book on the subject will be published by Currency/Doubleday in 1996.

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Copyright © 1995 by the President and Fellows of Harvard College. All rights reserved.

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GAME THEORY

For rule-based games, game theory offers the principle, To every action,there is a reaction. But, unlike Newton’s third law of motion, the reaction is not programmed to be equal and opposite. To analyze how other players will react to your move, you need to play out all the reactions (including yours) to their actions as far ahead as possible. You have to look forward far into the game and then reason backward to figure out which of today’s actions will lead you towhere you want to end up.1 For freewheeling games, game theory offers the principle, You cannot take away from the game more than you bring to it. In business, what does a particular player bring to the game? To find the answer, look at the value created when everyone is in the game, and then pluck that player out and see how much value the remaining players can create. The difference is theremoved player’s “added value.” In unstructured interactions, you cannot take away more than your added value.2 Underlying both principles is a shift in perspective. Many people view games egocentrically – that is, they focus on their own position. The primary insight of game theory is the importance of focusing on others – namely, allocentrism. To look forward and reason backward, you have to put...