December 13, 2011
This article first appeared in Exchange4media and FirstPost on December 13, 2011.
We often think of business as being a war. The only way to win is to make the other guy lose. This article takes the view that businesses will make more money by abandoning this metaphor altogether.
Adam Smith, the father of Economics, said that society was best served if everybody did the best for themselves. This is considered to be the basis of capitalism today. The other way is to be a socialist and we already know that it doesn’t work as an economic model.
So is there a third way? Prof. John Nash, on whose life the film “Beautiful Mind” is based, won a Nobel Prize in Economics for showing that there is. He said that the best way forward was for everyone to think of what is best for themselves AND what is best for the group. In the movie, this principle is captured beautifully in the scene below.
In that scene, Prof. Nash and his friends are in a bar when a group of girls walk in. The blonde girl in the group is clearly the best looking of the lot and all the men are attracted to her. Nash tells his friends that if they all went for her, then they would just cancel each other out. They could then go for her friends, but then nobody likes being a second choice. So they would all end up sleeping alone. On the other hand, if they all ignored the blonde and went for the other girls, then they would “all get laid”. Eureka.
Let me explain this with another example. Imagine that two prisoners are being interrogated separately. The evidence against them is insufficient to convict them unless one or both of them confess. They cannot talk to each other, and the cops offer each a deal. Confess and we let you go free while the other guy gets 20 years. If both confess, then each gets 10 years. The table below shows the alternatives for the two prisoners.
It is in the best personal interest of both to confess. That way they may go free or, at worst, get 10 years. However, if both do what is best for them individually then they will end up getting 10 years each. Now if they think of the group, then they would realise that the best way forward is to not confess – both could then go free.
This is called Game Theory and is fast becoming the way business strategists are thinking. In the old way of thinking, one would assume that economic progress would necessarily lead to ecological disasters. But today many believe that it is possible to have sustainable strategies that combine being good to the environment with economic progress.
For decades, we have debated the issue of growth and equality. Should we grow the size of the cake or attempt to divide the cake more equitably. We never thought it was possible to do both. Today, everyone is looking for ways to achieve “inclusive growth”.
At the level of an individual firm too, game theory works. We all need to see how we can get to a win-win situation rather than stay with the win-lose mindset. Sales promotions are a classic case of win-lose thinking that is leading to a race to the bottom. Competing brands in a category are trying to woo consumers away from each other by offering steeper discounts. This leads to lower profitability for everyone and ultimately even the consumer loses out since many players will go out of business.
Using game theory, the brands can work out what is the optimal equilibrium point for the market and aim for that. It might mean reducing your market share target, but would mean increasing your profits. Isn’t that better than bleeding with a growing top line?
Telecom firms are today fighting this cheap, cheaper, cheapest war and are, consequently bleeding. As a result, they are not investing enough in the service and consumers are suffering too. Better to change this model and start to win. Airlines are doing the same too. Kingfisher Airlines and Air India may both close down soon and that will surely be bad for consumers too.
Consumers today refuse to trade off value for quality. They want both. When will brands realize that they too don’t need to sacrifice profitability for growth? How to do that is the subject of a longer discussion.