Use the 3 Main Tenants of Game Theory to Position Your Company to Win

Commitment matters – Use it to your advantage: The story of the Persians, Marathon, Nike and a heart attack.

If you think that U.S. politics are dangerous these days, consider the Persian Empire in 500 BC. It was the greatest and most powerful of the time. However, as the Athenians at the time proved, brains can beat brawn.

The growth and dominance of the Persian Empire had, in 504 BC, led the Athenians to reluctantly agree to a protection doctrine with the Persians. However, after a clever victory by the Athenians against another local foe, they became emboldened and decided to change their minds and tell the Persians they didn’t need them anymore and were pulling out from the agreement. This left a bitter taste in the mouth of the Persian ruler Darius (known as “Darius the Great”) — so much so that he had an aide whisper in his ear every night at dinner “Revenge to the Athenians!”

When the Persians went to collect the taxes due under the agreement (that they still recognized), the Athenians killed the collectors and threw their bodies in a well. This further agitated Darius, who then sent an army of 20,000 men to Athens to burn the city to the ground. Not so fast said the Athenians.

In the city of Marathon, 10,000 Athenian soldiers met the Persian army and the Athenian general wisely and strategically surrounded them in a valley. In the first known executed “pincer” movement, the army from Athens killed over half of the Persian army’s 20,000 men, while only suffering 198 deaths. (The names of these 198 are inscribed in the Parthenon in Athens to this very day).

Following this huge victory, the Athenian general sent a messenger to Athens to declare victory. Indeed, many runners today know that this is how the distance of the modern marathon came about: the distance from Marathon to the town square in Athens equals 26 miles and 385 yards. However, most don’t know that when the runner reached the town square and proclaimed “Nike, Nike” (“Victory, Victory”), he dropped dead of an apparent heart attack!

The Persians escaped to their remaining fleet of ships and decided to make a b-line for Athens, 62 nautical miles away. The Athenian general marched his troops to Athens, and when the Persian ships arrived in Athens they saw the troops waiting for them on shore. Since they had indeed just lost to the Athenians despite outnumbering them two to one, they decided to retreat back to Persia.

This story illustrates two key tenants of Game Theory — commitment (in this case, to fight on the part of the Athenian army) and a credible threat (in this case, the credibility of the Athenian army to back up its aggressive posturing in battle). Sometimes having both can force your rival to retreat without so much as a fight.

The lessons from this include: 

• Credible threats – given the defeat at Marathon, the threat that the Athenians would fight to the death was certainly credible.
• Commitment – they were there after all!
• Live to fight another day.  
• Sometimes the best battle won is the one not fought. 

Commitment needs to be made and a credible threat needs to be out there in order for you to be taken seriously. As an example, when my son was very young, he quickly learned not to negotiate with me on snacks or cookies. He once asked, “Dad, can I have four cookies?” I responded, “You can have two.” He next tried to compromise by saying: “How about three cookies?” My response was not the one he wanted to hear: “You get one cookie then.” And he got one cookie. The next time I said that he could have two cookies, he said, “Thank you.” Credible threats.

Order matters

A third key tenant of Game Theory has to do with the order in which your company makes its move relative to its competitors. For example, Big Box retailers can be quite effective with pitting suppliers against each other. They create “line reviews” whereby competing suppliers are invited to, in real time, compete on price. Home Depot, Lowe’s and other firms know that the minute they get multiple suppliers competing against each other in the same location — or real time online — they’ve already won.

The trick for a supplier is to compete ahead of time so that the decisions have already been made beforehand. The trick for the buyer is to force real-time competition among rival suppliers. If you’re a buyer, you’d generally prefer a simultaneous game; if you are a seller, you generally prefer a sequential game where you go first.

Indeed, Michael H Thaman “Mike”, a former chief executive officer of Owens Corning Inc. (NYSE:OC), often tells his people, “If we get to a line review, we’ve already lost.”

The key for firms, of course, is to put all of this together and form a coherent strategy. Use these three main tenants of Game Theory to enable your business to gain competitive advantage over your rivals:

1. The importance of commitment.
   You need to have a stake in the ground. An old Sun Tsu story tells of how a general would burn the bridge behind his army so there was no going back. They knew they were fighting to the death.
2. Credible threats.
   If there’s no threat that you will follow through, your rival’s incentives won’t change. The key is always putting your competitor in the position that what is in their best interest is in your best interest. This requires forethought and planning.
3. Order matters.
   Never wait for your rival to go first. Choose your strategic action first so that you take any bad outcomes off of the table. You can change the decision options available to your rivals to your anvantage!

Written by Dr. William Putsis. Have you read?
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