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The Right Game: Use
Game Theory to Shape
Strategy
by Adam M. Brandenburger and Barry J. Nalebuff
Harvard Business Review
Reprint 95402
 HBR
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 ap-
proach this game is reflected in the language we use
to describe it. Business language is full of expres-
sions 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 re-
quiring others to fail. And they can fail miserably
no matter how well they play if they make the mis-
take 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 a mathematical 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 Eco-
nomic Behavior
. Immediately heralded as one of
the greatest scientific achievements of the century,
their work provided a systematic way to under-
stand 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 the
second 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 Man-
agement in New Haven, Connecticut. The authors’ re-
search, teaching, and consulting focus on game theory
and business strategy, and their book on the subject will
be published by Currency/Doubleday in 1996.
PHOTOS BY CHRISTOPHER MAKOS
Copyright © 1995 by the President and Fellows of Harvard College. All rights reserved.
JULY-AUGUST 1995
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 ana-
lyze 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 to where 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 cre-
ate. The difference is the removed player’s “added
value.” In unstructured interactions, you cannot
take away more than your added value.
2
Underlying both principles is a shift in perspec-
tive. Many people view games egocentrically – that
is, they focus on their own position. The primary
insight of game theory is the importance of focus-
ing on others – namely, allocentrism. To look for-
ward and reason backward, you have to put yourself
in the shoes – even in the heads – of other players. To
assess your added value, you have to ask not what
other players can bring to you but what you can
bring to other players.
Managers can profit by using these insights from
game theory to design a game that is right for their
companies. The rewards that can come from chang-
ing a game may be far greater than those from main-
taining the status quo. For example, Nintendo suc-
ceeded brilliantly in changing the video game
business by taking control of software. Sega’s sub-
sequent success required changing the game again.
Rupert Murdoch’s
New York Post
changed the
tabloid game by finding a convincing way to dem-
onstrate the cost of a price war without actually
launching one. BellSouth made money by changing
the takeover game between Craig McCaw and Lin
Broadcasting. Successful business strategy is about
actively shaping the game you play, not just play-
ing the game you find. We will explore how these
examples and others worked in practice, starting
with the story of how General Motors changed
the game of selling cars.
From Lose-Lose to Win-Win
In the early 1990s, the U.S. automobile industry
was locked into an all-too-familiar mode of destruc-
tive competition. End-of-year rebates and dealer
discounts were ruining the industry’s profitability.
As soon as one company used incentives to clear
excess inventory at year-end, others had to do the
same. Worse still, consumers came to expect the re-
bates. As a result, they waited for them to be offered
before buying a car, forcing manufacturers to offer
incentives earlier in the year. Was there a way out?
Would someone find an alternative to practices that
were hurting all the companies? General Motors
may have done just that.
In September 1992, General Motors and House-
hold Bank issued a new credit card that allowed
cardholders to apply 5% of their charges toward
buying or leasing a new GM car, up to $500 per year,
with a maximum of $3,500. The GM card has been
the most successful credit-card launch in history.
One month after it was introduced, there were 1.2
million accounts. Two years later, there were 8.7
million accounts – and the program is still growing.
Projections suggest that eventually some 30% of
GM’s nonfleet sales in North America will be to
cardholders.
As Hank Weed, managing director of GM’s card
program, explains, the card helps GM build share
through the “conquest” of prospective Ford buyers
and others – a traditional win-lose strategy. But
the program has engineered another, more subtle
change in the game of selling cars. It replaced other
incentives that GM had previously offered. The net
effect has been to raise the price that a noncard-
holder – someone who intends to buy a Ford, for ex-
ample – would have to pay for a GM car. The pro-
gram thus gives Ford some breathing room to raise
its prices. That allows GM, in turn, to raise its
prices without losing customers to Ford. The result
is a win-win dynamic between GM and Ford.
If the GM card is as good as it sounds, what’s
stopping other companies from copying it? Not
much, it seems. First, Ford introduced its version of
the program with Citibank. Then Volkswagen in-
troduced its variation with MBNA Corporation.
Doesn’t all this imitation put a dent in the GM pro-
gram? Not necessarily.
Imitation is the sincerest form of flattery, but in
business it is often thought to be a killer compli-
ment. Textbooks on strategy warn that if others can
1. In-depth discussion and applications of the principle of looking forward
and reasoning backward are provided in
Thinking Strategically: The
Competitive Edge in Business, Politics, and Everyday Life
, by Avinash
Dixit and Barry Nalebuff (W.W. Norton, 1991).
2. The argument is spelled out in Adam Brandenburger and Harborne Stu-
art, “Value-based Business Strategy,” which will appear in a forthcoming
issue of
Journal of Economics & Management Strategy
.
3. This portmanteau word can be traced to Ray Noorda, CEO of Novell,
who has used it to describe relationships in the information technology
business: “You have to cooperate and compete at the same time” (
Elec-
tronic Business Buyer
, December 1993).
58
HARVARD BUSINESS REVIEW July-August 1995
imitate something you do, you can’t make money
at it. Some go even further, asserting that business
strategy cannot be codified. If it could, it would be
imitated and any gains would evaporate.
Yet the proponents of this belief are mistaken
in assuming that imitation is always harmful. It’s
true that once GM’s program is widely imitated,
the company’s ability to lure customers away from
other manufacturers will be diminished. But imita-
tion also can help GM. Ford and Volkswagen offset
the cost of their credit card rebates by scaling back
other incentive programs. The result was an effec-
To encourage thinking about both cooperative
and competitive ways to change the game, we sug-
gest the term
coopetition
.
3
It means looking for
win-win as well as win-lose opportunities. Keeping
both possibilities in mind is important because
win-lose strategies often backfire. Consider, for ex-
ample, the common – and dangerous – strategy of
lowering prices to gain market share. Although it
may provide a temporary benefit, the gains will
evaporate if others match the cuts to regain their
lost share. The result is simply to reestablish the
status quo but at lower prices – a lose-lose scenario
Successful business strategy is about actively
shaping the game you play, not just playing
the game you find.
tive price increase for GM customers, the vast ma-
jority of whom do not participate in the Ford and
Volkswagen credit card programs. This gives GM
the option to firm up its demand or raise its prices
further. All three car companies now have a more
loyal customer base, so there is less incentive to
compete on price.
To understand the full impact of the GM card
program, you have to use game theory. You can’t
see all the ramifications of the program without
adopting an allocentric perspective. The key is to
anticipate how Ford, Volkswagen, and other auto-
makers will respond to GM’s initiative.
When you change the game, you want to come
out ahead. That’s pretty clear. But what about the
fact that GM’s strategy helped Ford? One common
mind-set – seeing business as war – says that others
have to lose in order for you to win. There may in-
deed be times when you want to opt for a win-lose
strategy. But not always. The GM example shows
that there also are times when you want to create a
win-win situation. Although it may sound surpris-
ing, sometimes the best way to succeed is to let
others, including your competitors, do well.
Looking for win-win strategies has several advan-
tages. First, because the approach is relatively un-
explored, there is greater potential for finding new
opportunities. Second, because others are not being
forced to give up ground, they may offer less resis-
tance to win-win moves, making them easier to im-
plement. Third, because win-win moves don’t force
other players to retaliate, the new game is more
sustainable. And finally, imitation of a win-win move
is beneficial, not harmful.
that leaves all the players worse off. That was the
situation in the automobile industry before GM
changed the game.
The Game of Business
Did GM intentionally plan to change the game of
selling cars in the way we have described it? Or did
the company just get lucky with a loyalty market-
ing program that turned out better than anyone had
expected? Looking back, the one thing we can say
with certainty is that the stakes in situations like
GM’s are too high to be left to chance. That’s why
we have developed a comprehensive map and a
method to help managers find strategies for chang-
ing the game.
The game of business is all about value: creat-
ing it and capturing it. Who are the participants in
this enterprise? To describe them, we introduce the
Value Net – a schematic map designed to represent
all the players in the game and the interdependen-
cies among them. (See the exhibit “Who Are the
Players in Your Company’s Value Net?”)
Interactions take place along two dimensions.
Along the vertical dimension are the company’s
customers and suppliers. Resources such as labor
and raw materials flow from the suppliers to the
company, and products and services flow from the
company to its customers. Money flows in the re-
verse direction, from customers to the company
and from the company to its suppliers. Along the
horizontal dimension are the players with whom
the company interacts but does not transact. They
are its
substitutors
and
complementors.
HARVARD BUSINESS REVIEW July-August 1995
59
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