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Applying Game Theory to Strategy Practice !MDI Gurgaon 07/07/14

We are a management consulting firm helping businesses ...

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Develop winning strategies1

Drive profitable growth2

Achieve operational excellence3

to reap long lasting rewards in fast growing Indian economy.

and help clients to compete on a global canvas

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We address top management issues of a business

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STRATEGY•Corporate strategy •Business unit strategy •Full potential growth realisation

CORPORATE FINANCE

•M & A •Valuation •Capital management

MARKETING•Marketing strategy •Pricing •Branding •Channel management

OPERATIONS•Manufacturing strategy •Supply chain management •Process improvements

Some of our current projects include

Corporate strategy for a leading solar equipment

manufacturer in India

Business plan for a fashion retailer

Market assessment for an Australian multinational in branded

flour market

Management dashboard for a home furnishing company

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To find more about Kanvic, you can visit our website kanvic.com

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kanvic.com

Content

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What comes in the way of applying game theory in business?

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How can you overcome the challenges?3

Applying game theory to a real life case4

Where is a space for game theory in business?

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Content

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What comes in the way of applying game theory in business?

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How can you overcome the challenges?3

Applying game theory to a real life case4

Where is a space for game theory in business?

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The strategy triangle helps in thinking about key actors in the strategy development process

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THE STRATEGY TRIANGLE

CUSTOMER

COMPANY COMPETITOR

Game theory allows us to think about competition in market structures that lie between perfect competition and monopoly

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Perfect Competition Monopoly

The space for game theory

Market Entry

Pricing

Capacity Addition

New Product Launch

It is applicable to business decisions in a number of critical areas

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Content

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What comes in the way of applying game theory in business?

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How can you overcome the challenges?3

Applying game theory to a real life case4

Where is a space for game theory in business?

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Research has shown a lack of attention is paid to competitor behaviour and reaction

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511

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4453

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5766

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7580

New product Pricing

Internal Customer Market Competitor Past/current competitor behaviour

Expected future competitor behaviour

Expected future competitor reaction

Retrospective

Source: Montgomery, Moore, and Urbany: Reasoning About Competitive Reactions: Evidence from Executives

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62

4753

73

52

4855

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77Prospective

Frequency: Decision factors mentioned

However, there are many barriers when thinking about competition in strategy development

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BARRIERS TO THINKING ABOUT COMPETITORS IN STRATEGIC DECISION MAKING

GREATER CONFIDENCE IN

INTERNAL COMPANY

INFORMATION1

EASY AVAILABILITY OF

CUSTOMER INFORMATION

2POOR

ORGANISATIONAL MEMORY3

ORGANISATION CULTURE4 LIMITED MOVE

COUNTER MOVE SEQUENCES

5 DELAYS BETWEEN ACTION AND REACTION

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Content

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What comes in the way of applying game theory in business?

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How can you overcome the challenges?3

Applying game theory to a real life case4

Where is a space for game theory in business?

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Understanding the competition is a journey with some key stages

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PREDICT COMPETITOR’S REACTIONS

• Managers predict how competitors will react to their firm’s decisions

• Requires stepping into competitor’s shoes

• Requires a great deal of cognitive effort and information about competitors that is neither easily available nor routinely collected

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PREDICT COMPETITOR’S ACTIONS

• Managers make predictions about competitors’ behaviour but only about actions

• Stop short of making predictions about competitor’s reactions

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DESCRIBE THE COMPETITION

• Study competitors to describe their goals, strengths and weaknesses, assumptions, strategy, past and current behaviour

• Stop short of making predictions about competitor’s future actions

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IGNORE THE COMPETITION

• Simply ignore the competition

• Assumes that success of a strategy depends on the company’s capability and customer’s response

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Source: Montgomery, Moore, and Urbany, Kanvic analysis

Stages in competitor maturity model

If you have not yet started thinking about your competition, asking whether this is the right time can be useful

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IGNORE THE COMPETITION

• Simply ignore the competition

• Assumes that success of a strategy depends on the company’s capability and customer’s response

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DESCRIBE THE COMPETITION

• Study competitors to describe their goals, strengths and weaknesses, assumptions, strategy, past and current behaviour

• Stop short of making predictions about competitor’s future actions

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PREDICT COMPETITOR’S ACTIONS

• Managers make predictions about competitors’ behaviour but only about actions

• Stop short of making predictions about competitor’s reactions

3

PREDICT COMPETITOR’S REACTIONS

• Managers predict how will competitor’s react to their firm’s decisions

• Requires stepping into competitor’s shoes

• Requires a great deal of cognitive effort and information about competitors that is neither easily available nor routinely collected

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SHOULD YOU THINK ABOUT THE

COMPETITION?

Market structure

Industry/market concentration

Strategic groups

Growth forecasts

History of competitive behaviour

Once you have decided to move on the journey, start building a profile of your competitors

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IGNORE THE COMPETITION

• Simply ignore the competition

• Assumes that success of a strategy depends on the company’s capability and customer’s response

1

DESCRIBE THE COMPETITION

• Study competitors to describe their goals, strengths and weaknesses, assumptions, strategy, past and current behaviour

• Stop short of making predictions about competitor’s future actions

2

PREDICT COMPETITOR’S ACTIONS

• Managers make predictions about competitors’ behaviour but only about actions

• Stop short of making predictions about competitor’s reactions

3

PREDICT COMPETITOR’S REACTIONS

• Managers predict how will competitor’s react to their firm’s decisions

• Requires stepping into competitor’s shoes

• Requires a great deal of cognitive effort and information about competitors that is neither easily available nor routinely collected

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Dependent on the decision at hand e. g. pricing vs new capacity addition

Resources

Tangible - financial, physical, technological and people

Intangible - brand, reputation and knowledge

current market positions - access to customers, economies of scale and scope, and experience

Capabilities - ability to identify and exploit opportunities

WHAT INFORMATION DO

WE GATHER? !

HOW TO GATHER BETTER QUALITY INFORMATION?

Start with publicly available information

Build layers of proprietary information through a disciplined process

By using market intelligence and listening to weak signals, you can start learning about your competitors’ moves

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IGNORE THE COMPETITION

• Simply ignore the competition

• Assumes that success of a strategy depends on the company’s capability and customer’s response

1

DESCRIBE THE COMPETITION

• Study competitors to describe their goals, strengths and weaknesses, assumptions, strategy, past and current behaviour

• Stop short of making predictions about competitor’s future actions

2

PREDICT COMPETITOR’S ACTIONS

• Managers make predictions about competitors’ behaviour but only about actions

• Stop short of making predictions about competitor’s reactions

3

PREDICT COMPETITOR’S REACTIONS

• Managers predict how will competitor’s react to their firm’s decisions

• Requires stepping into competitor’s shoes

• Requires a great deal of cognitive effort and information about competitors that is neither easily available nor routinely collected

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Market intelligence through front line sales team

Setting up systems e. g. a common email ID to to send all field information at one place

Lost order analysis

Listen to the weak signals and hidden moves - activities across the value chain

HOW TO KNOW OF COMPETITOR

MOVES?

Finally, understanding your competitors’ behaviour both at organisational and individual level can help you in predicting their behaviour

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IGNORE THE COMPETITION

• Simply ignore the competition

• Assumes that success of a strategy depends on the company’s capability and customer’s response

1

DESCRIBE THE COMPETITION

• Study competitors to describe their goals, strengths and weaknesses, assumptions, strategy, past and current behaviour

• Stop short of making predictions about competitor’s future actions

2

PREDICT COMPETITOR’S ACTIONS

• Managers make predictions about competitors’ behaviour but only about actions

• Stop short of making predictions about competitor’s reactions

3

PREDICT COMPETITOR’S REACTIONS

• Managers predict how will competitor’s react to their firm’s decisions

• Requires stepping into competitor’s shoes

• Requires a great deal of cognitive effort and information about competitors that is neither easily available nor routinely collected

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Differentiate between organisation and the team (TMT, owners, other stakeholders)

How much do they resemble you?

Decoding their personality

Companies they have worked and schools they have gone to (LinkedIn)

Reading their PR, website content

Reading their mind - listen to their interviews

HOW TO PREDICT COMPETITOR BEHAVIOUR?

Content

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What comes in the way of applying game theory in business?

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How can you overcome the challenges?3

Applying game theory to a real life case4

Where is a space for game theory in business?

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Today we’ll be looking at its practical application to a real life client problem

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Our client is India’s leading solar manufacturer, and it was looking to launch new product in the market to take advantage of its new manufacturing technology

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Diversified into PV and glass

Modern manufacturing facility

Quality product exported to Europe

High brand recognition

20 years in the industry

•...

•...

•...

•...

Client

Domestic Solar Water Heaters are a renewable alternative to electric geysers

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There were three types of competitor in the market with very different characteristics

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Market Protectors

Price Warriors

Opportunity Seekers

Client

Market protectors already have an establ ished brand and distribution network to add a n e w p r o d u c t f o r t h o s e customers who care for the environment

Price warriors are small players and are posing a threat because of their low pricing developed as a result of a low cost base

Opportunity seekers already have a customer relationship and brand in existing business and are keen to leverage that in the field of renewable energy

For whichever strategy the client chose, the competition had 3 possible responses

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Client

Above current price

Same as current price

Below current price

Do nothing

Reduce Price

Match Warranty

Do nothing

Reduce Price

Match Warranty

Do nothing

Reduce Price

Match Warranty

!Kanvic is a management consulting firm helping businesses develop winning strategies, drive profitable growth and achieve operational excellence to reap long lasting rewards in fast growing Indian economy. We work with C-level executives to develop innovative solutions for business challenges of 21st century India by bringing in leading edge management thinking informed by in-depth research and sound analysis.

Contact

www.kanvic.com

Jaipur !Deepak Sharma !M: +91 99283 77800!E: deepak@kanvic.com

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London !Bharat Vagadia !M: +44 7711 898089 E: bharat@kanvic.com

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