Game Theory studies the interactions of self-interested agents.
Even at a basic level—that is, without the aid of sophisticated
mathematics—it can be very useful to tackle real-life problems.
Consider the following framework, called The Prisoners’ Dilemma: Two men are suspects in a crime. They are interrogated
separately in an effort to extract the truth from them, and they
are told that their sentences will be as follows:
■ ■ If they both confess, then both will be convicted of a minor
offense and sentenced to one year in jail.
■ ■ If both defect, then both will be sentenced to jail for five years.
■ ■ If one confesses and the other does not, the confessor will
be released immediately but the other will be sentenced to
10 years in jail.
The best course of action for both men (“the system”) is
to cooperate—the best course of action for each individual is
to confess, whether the crime was committed or not. To use a
Game Theory term, confessing is the dominant strategy because
it always produces the best individual outcome. Do behaviors
change if the same game is played repeatedly? Yes, because the
suspects understand that a gain today can result in future losses.
Consequently, in repeated games, we should expect some degree
This simple framework has interesting applications in the
business world, such as with supply chain management, where
the decisions of self-interested players lead to suboptimal outcomes, known in this context as double marginalization. The
realization that profits could be improved if one decision-maker
were in charge explains the popularity of vertical integration to
reduce the number of self-interested players. This is why in its
origins Ford Motor Company not only produced automobiles
but also controlled raw material (steel mills, iron mines, glass
factories, etc.) and the production of auto parts such as tires.
Why is it that vertical integration, so popular with large
industrial companies during most of the 20th century, is in decline? The answer is that technology has changed the rules of the
game—but the new rules can be analyzed with Game Theory.
The lure of easy-to-understand strategic frameworks was responsible for the creation of a profitable industry, Pop Strategy,
which promotes the use of strategic terminology but offers little
more than generalizations and frequently flawed advice. (The
authors of this article adapted the term Pop Economics, coined
by Nobel Prize Laureate Paul Krugman). The problem with pop
frameworks is twofold: First, they generally advocate a formulaic approach to strategy, usually the result of observations in
unrepresentative data samples; second, they are ill-equipped
to tackle problems in dynamic environments—that is, in most
By the 1990s, many managers who looked for answers to
practical problems became disenchanted, not only with Pop
Strategy but also, by association, with strategy in general. For
example, in 2002 Kim Warren writes in the preface of his book
Competitive Strategy Dynamics that “the Strategic Management
field is in a somewhat sorry state today, as compared with the
confidence it exhibited in the 1970s and 1980s.”
Blue Ocean Strategy
Pop Strategy has been very influential even in academic circles.
For example, Blue Ocean Strategy, an idea developed by Chan
Kim and Renee Mauborgne, maintains that instead of competing
among each other in existing industries (“Red Oceans”), companies should create uncontested market spaces (“Blue Oceans”)
to render competition irrelevant. The authors introduce techniques to facilitate attaining this goal, such as the Strategy
Canvas, a two-dimensional graphical representation of the components that make products or services better. Management,
according to the authors, should decide which components
must be eliminated, reduced, raised, or created.
The recipe style of the ideas proposed by Kim and
Mauborgne in their book, Blue Ocean Strategy: How to Create
Uncontested Market Space and Make the Competition Irrelevant, are summarized in the Wall Street Journal online review,
What is Blue Ocean Strategy ( http://guides.wsj.com/manage-ment/strategy/what-is-blue-ocean-strategy/; accessed Jan. 24,
2015), which introduces the book as “a leadership guide featuring step-by-step how-tos.” In it, Kim and Mauborgne give
examples of companies that they believe have created “Blue
Oceans” such as Cirque du Soleil, which reinvented itself by
introducing opera and ballet while eliminating animals from
its shows. While it is difficult to disagree with the premise that
it is better to operate in uncontested markets than in highly
competitive environments, critics point out that the prescription is so general that it offers little guidance, for example, to the
health insurance executives who face regulatory uncertainty
and fierce competition in public exchanges. For criticism about
the ideas presented in Blue Ocean Strategy see “Ocean Strategy,
Red or Blue Belongs to the Dead Sea,” published by the TRU
Group ( http://trugroup.com/whitepapers/TRU-Blue-Ocean-
the strategy, you should
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The Connection Between Military and Businees Strategies CONTINUED