Tuesday, November 2, 2010

Coopetition, by Adam Brandenburger, Nalebuff

Co-Opetition : A Revolution Mindset That Combines Competition and Cooperation : The Game Theory Strategy That's Changing the Game of Business


by Adam M. Brandenburger, Barry J. Nalebuff

(my Amazon.com review)
Amazing book, and a classic that still retains its relevance and power to educate. You won't find much game-theory theory in this book, and certainly no math, but as a book on business strategy, this is one of the very best. Think Competitive Strategy: Techniques for Analyzing Industries and Competitors and The Innovator's Dilemma.

It is a bit surprising to give a book on game theory strategy 5 stars that really does not talk much about the theory of game theory, and contains not a single formula, and no math - not a single formula. Leave that little lacuna aside, and you will find this is, even 15 years after its publication, one of the best business books on strategy there are.

The authors do acknowledge, at the very outset of the book, in the Foreword, that "John Nash's ... theory of games provides a model ... We rely on these insights throughout Co-opetition."

Using game theory as the theoretical construct on which to build an edifice of business strategy, the authors go about describing such a game (based on game theory), and liberally sprinkle findings and theories with practical insights. The usual suspects are all there - Nintendo and the battle over 8-bit and 16-bit games, Nutrasweet, Gillette and the launch of their Mach 3 shaving blade, GM and its loyalty card, movie studios and their initial short-sightedness over video rentals, and so on. In most of these cases there are still some interesting insights that the authors share.
The introductory chapters of the book introduce the reader to game theory and its basic elements - Players, Added-Values, Rules, Tactics, and Scope. The bulk of the book covers these topics, in detail.

The single biggest point that the authors make, and indeed the most important in my opinion, is that a win-loss perspective is not the only one to approach the game of business with. A win-win perspective is also quite viable, and in many cases a more profitable one. A competitor can also be a complementor in some cases. Hence the name "co-opetition". You compete when required, and co-operate when needed. What you do depends on the game you are in. The game you are in depends on how you perceive the game to be. And yes, how you perceive the game can also in turn determine what the game is, what its rules are.

How your suppliers, customers, competitors, and partners interact with you, and with each other also, can be plotted using a Value Net. Plotting a value net can help you cut through the clutter of players and organize them in a way that can help you better understand the market landscape.

A minor quibble I have is that despite its heavy reliance on game theory to build their book, the authors studiously avoid reference to the technicalities of game theory. They do refer you to a well-received book, Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, but that's about it. This is obviously by design, and the book certainly does not suffer for want of this additional material, so full of valuable insights it is. The complaint, however minor, or otherwise, still remains.

"Anytime you enter a game, you change it. ... There's a Heisenberg principle in business too" [pg 71]
To become a player, you have to pay. If you play a game - a part in a business transaction, you should make sure you are getting something out of it. If you have been invited to play, make sure you get paid for it. The examples of Nutrasweet and the "Rail Spur" controversy bring that out with ample clarity. The point of "termination" clauses in takeover deals is for precisely this reason.
"It's abrasive to ask to be paid in cash; it's often not that smart, either. Fortunately, there are many other ways of getting paid to play." [pg 85]
As a player, you have to make decisions on playing - by making bids on contracts, by deciding whether you want to match a competitive bid, or not. These all have costs.

IBM's decision on creating the PC market by bringing in Microsoft and Intel has been discussed to death. However, did you know that IBM had forced Intel to license its microcode, and that "by 1987 Intel had less than 30 percent of the market"? Bringing in competition is good, but you have to account for the ineluctable force of lock-in too.

Added Values

And then there is the case of the "Incredible Soap Machine", launched in 1977, and later renamed "Softsoap". Reading about the case now, more than 30 years later, gives you goosesbumps. Why? Here's the lowdown on Softsoap. Softsoap dispensed liquid soap from a plastic bottle. Yes - it was an innovation 30 years ago. Brought out by a small Minnesota based company, "Minnetonka", Softsoap reached $39 million in sales in its first year. However, the threat of competition from the 800 lb gorillas of the consumer market was immense - Amour-Dial, Lever Brothers, Colgate-Palmolive, Procter & Gamble....
"Softsoap was hardly a patentable innovation. Pumps have been around since Archimedes. The brand name was good, but there were other, more established brand names in the soap business.
The majors adopted a wait-and-see stance. Liquid soap was still unproven and they preferred to let Softsoap be the guinea pig Once they say that Softsoap was  a success, the majors decided to do their own test-marketing. A surprise awaited them.
An essential part of any liquid-soap product is the little plastic pump, and Taylor realized there were just two suppliers. In a bet-the-company move, he locked up both suppliers' total annual production by ordering 100 million pumps. ... Softsoap had bough some more time to build brand loyalty and thus establish its added value." [pg 150]
How does this story end?
"Two years later, Colgate-Palmolive, which had missed the boat on liquid soap, played catch-up by buying Softsoap for $61 million." [pg 151]
So why should this give you goosebumps?
When Apple itroduced the iPod music player, which was based on a small form-factor hard drive, it had to contend with the fact that the small hard drive is what made the iPod so attractive - small and sleek but with a (then) humongous capacity to hold songs.
"But Toshiba had recently developed a revolutionary new hard drive that would allow Apple to introduce an MP3 player that approximated the size of flash-memory-based players but held ten times the number of songs. That allowed Apple to make its move: it purchased Toshiba’s entire inventory of these new hard drives to prevent competitors like Sony from following too closely. By locking up Toshiba’s supply, at least temporarily, Apple made it impossible for competitors to match the iPod’s performance." (Seven Key Strategies)

The same strategy applied by a liquid soap manufacturer in 1980 - of locking up supply of a critical part to ensure a limited-time monopoly on a market - was adopted 20 years later by a computer manufacturer, with stunning success. Apple today commands an overwhelming market share, and by many accounts make more money than the entire industry (some make losses, so this is not Wall Street style accounting I am spinning). True, Apple did come with the blockbuster iTunes Store concept to lock-in buyers into the iPod platform, but in 2001 Apple was not close to the behemoth it has become in 2010.

"When the rules of the game prove unsuitable for victory, the gentlemen of England change the rules." - Harold Laski [pg 159]
There are some rules of the game that you cannot change - laws formed by governments for example. And then there are rules of a game that you could and should change.
"The battle to establish the rules is the battle before the battle." [pg 161]
A best-price provision, or a MFC (Most Favoured Customer) provision looks very tempting to a customer. But, that is not the case.
"MFCs are counterintuitive in their effects. The natural guess is that customers do better with the protection of an MFC. And they would - if MFCs didn't change the game. But they do change the game. [pg 163]
MFCs are an instance of "strategic inflexibility. [pg 165]
One drawback of giving out MFCs is that doing so makes it harder to keep your customers.
... holding on to the first customer may well be too expensive. You have to let him go.
... it becomes more expensive to go after a rival's customer with a low price."
If you're a seller, remember that asking for an MFC is a way of getting paid to play.
MFCs put an incumbent seller in a powerful position." [pg 168]

Ever wonder what value education really brings? Or that often asinine hand-wringing by self-proclaimed pundits who lament the fact that even the rigorous education imparted at the high temples of learning do not seem to equip its students with the real-world, practical tools necessary? It turns out that is really missing the whole darn point, to not put too fine a point on it. It turns out that the whole tamasha of interviews, multiple rounds of interviews with several bored-looking people, and all, is really to "build credibility".
"Educational qualifications help employers cut through the fog by helping them judge how smart you are. But it's not that you're smart because you're educated. What you actually learned in college is the least of it. More important is the fact that college wasn't easy. You had to master abstruse academic disciplines. Making it through college is a display of intellectual strength.
The high cost of business school sends another convincing signal to prospective employers. Many people say they're committed to a career, but going to business school is a way to prove it." [pg 204]
This is also helps explain why, part-time MBA programs are not granted the same status as full-time programs. It's to do with credibility. This of course is only part of the explanation. If other things held equal, you could proclaim one program to be a better indicator of credibility than the other, but in India at least, that is not the case.

Another fascinating example taken up by authors to shed light on this credibility issue is by describing how the book publishing business works, especially when it comes to advances versus royalties.
"An alternative way to signal your confidence in your product is to spend a lot of money advertising it." [pg 208]
Think about it. Apart from the obvious need to advertise to let people know about your product, create awareness, help make money for the advertising agency, and to keep clueless marketers at companies employed, putting down big money on advertising sends out a signal to the potential customer that the company is serious about its product, is in it for the long term, and is putting its money where its mouth is.

"When banks, consultancies, and other professional firms set up operations in new cities, they often spend a lot of money on conspicuously lavish office space. Likewise, MBS students often wear expensive attire to job interviews. In each case, spending big is a way to signal confidence." [pg 209]
Sometimes it is beneficial (to at least one party) to maintain or introduce complexity, or to "stir up the fog."
"Most of the time, complex pricing schemes serve to mask the high prices. Sometimes, though, sellers make things complicated in order to hide how little they're charging. ... to avoid creating a perception of low quality." [pg 224]

"Complex pricing schemes create a fog that obscures the true price. ... Instead of raising prices, some hotels sell only four-day packages." [pg 223] Sounds strange, until you consider how often this is practiced. Remember the flight deals that mandate a "Saturday night stay required" condition? This is to filter out the non-business traveler, who will most likely not be interested in sticking out in the city over the weekend. He needs to fly out on a Monday morning, and fly back on a Friday evening.
Amazon US, Amazon IN

© 2010, Abhinav Agarwal. All rights reserved.