“India’s Bajaj Auto Ltd will set up a joint venture (JV) with the Renault-Nissan alliance to produce and market small cars — but priced higher than Tata Nano, the companies announced on Monday. “For Bajaj Auto, the project is important as Tata Nano will be a serious threat to its three-wheeler business”.
“India’s leading retail chains such as Future Group, Reliance Retail, Shoppers Stop, Style Spa and Woodland are advancing their annual discounts by up to three weeks, facing a huge slump in sales since Diwali. “Our inventory situation is not bad, but we also started our sales since the entire market is getting into discount mode”, says Spencer’s retail executive director Subrata Siddhanta”
The Bajaj story transpired a mere two days before the launch of the Tata Nano during Auto Expo 2008 in Delhi. It signalled Bajaj’s intention to transition from an established bike manufacturer to a passenger-car maker. The second case of Indian retailers advancing their annual discounts is more recent and shows how the movement of one market player affects choices made by others. Both news stories provide evidence of science at work in the making of strategic decisions.
When looked at closely, these and numerous other examples show the potential for applying game theory to strategic decisions. However, managers are yet to fully assimilate the scientific rigour and discipline of game theory to the art of strategic decision making. Perhaps they are averse to the idea of applying theory to business, which many believe to be a more ‘practical’ field. They may also lack the time or interest to do the rigorous analysis that game theory demands. In the case of big decisions, such detailed analysis is necessary to highlight all the possible options available, some of which, under traditional strategic analysis, would be unthinkable.
The applicability of game theory to economics first came to light when John von Neumann and Oscar Morgenstern published their path-breaking book Theory of Games and Economic Behaviour in 1944. The book showed how a scientific approach can be applied to making decisions influenced by decisions made by other players. However, the influence of game theory did not become widespread until 1994, when three economists: John C Harsanyi, John F Nash and Reinhard Selten were awarded the Nobel prize for their pioneering work on non-cooperative games.
Game theory is a tool for analysing strategic interactions. It helps improve the quality of strategic decisions in situations where decisions are interdependent. In oligopolistic situations where a few firms dominate the market - the prevailing condition in almost all industries - strategic decisions have an effect on other players in the market. Any move by one company is closely followed by their competitors. Therefore, when one takes into account how other players are going to react to the boardroom metrics, action is taken. The optimum choice may lie somewhere between the best and the worst choices seen in isolation. These decisions are based on reasoning backward and thinking forward, so we are able to understand the perspective of others in order to choose the best path, considering other players are also going to choose the best course of action for themselves.