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The Right Game: Use

Game Theory to Shape


Strategy

by Adam M. Brandenburger and Barry J. Nalebuff

Harvard Business Review


Reprint 95402
HBR
J U LY- A U G U S T 1 9 9 5

The Right Game: Use Game


Theory to Shape Strategy
by Adam M. Brandenburger and Barry J. Nalebuff
Business is a high-stakes game. The way we ap- published their book Theory of Games and Eco-
proach this game is reflected in the language we use nomic Behavior. Immediately heralded as one of
to describe it. Business language is full of expres- the greatest scientific achievements of the century,
sions borrowed from the military and from sports. their work provided a systematic way to under-
Some of them are dangerously misleading. Unlike stand the behavior of players in situations where
war and sports, business is not about winning and their fortunes are interdependent. Von Neumann
losing. Nor is it about how well you play the game. and Morgenstern distinguished two types of games.
Companies can succeed spectacularly without re- In the first type, rule-based games, players interact
quiring others to fail. And they can fail miserably according to specified rules of engagement.
no matter how well they play if they make the mis- These rules might come from contracts, loan
take of playing the wrong game. covenants, or trade agreements, for example. In the
The essence of business success lies in making second type, freewheeling games, players interact
sure youre playing the right game. How do you without any external constraints. For example,
know if its the right game? What can you do about buyers and sellers may create value by transacting
it if its the wrong game? To help managers answer in an unstructured fashion. Business is a complex
those questions, weve developed a framework that mix of both types of games.
draws on the insights of game theory. After 50 years
Adam M. Brandenburger is an associate professor at the
as a mathematical construct, game theory is about Harvard Business School in Boston, Massachusetts.
to change the game of business. Barry J. Nalebuff is a professor at the Yale School of Man-
Game theory came of age in 1994, when three agement in New Haven, Connecticut. The authors re-
pioneers in the field were awarded the Nobel Prize. search, teaching, and consulting focus on game theory
It all began in 1944, when mathematics genius John and business strategy, and their book on the subject will
von Neumann and economist Oskar Morgenstern be published by Currency/Doubleday in 1996.

PHOTOS BY CHRISTOPHER MAKOS Copyright 1995 by the President and Fellows of Harvard College. All rights reserved.
GAME THEORY

For rule-based games, game theory offers the examples and others worked in practice, starting
principle, To every action, there is a reaction. But, with the story of how General Motors changed
unlike Newtons third law of motion, the reaction the game of selling cars.
is not programmed to be equal and opposite. To ana-
lyze how other players will react to your move, you From Lose-Lose to Win-Win
need to play out all the reactions (including yours)
to their actions as far ahead as possible. You have to In the early 1990s, the U.S. automobile industry
look forward far into the game and then reason was locked into an all-too-familiar mode of destruc-
backward to figure out which of todays actions will tive competition. End-of-year rebates and dealer
lead you to where you want to end up.1 discounts were ruining the industrys profitability.
For freewheeling games, game theory offers the As soon as one company used incentives to clear
principle, You cannot take away from the game excess inventory at year-end, others had to do the
more than you bring to it. In business, what does same. Worse still, consumers came to expect the re-
a particular player bring to the game? To find the bates. As a result, they waited for them to be offered
answer, look at the value created when everyone is before buying a car, forcing manufacturers to offer
in the game, and then pluck that player out and incentives earlier in the year. Was there a way out?
see how much value the remaining players can cre- Would someone find an alternative to practices that
ate. The difference is the removed players added were hurting all the companies? General Motors
value. In unstructured interactions, you cannot may have done just that.
take away more than your added value.2 In September 1992, General Motors and House-
Underlying both principles is a shift in perspec- hold Bank issued a new credit card that allowed
tive. Many people view games egocentrically that cardholders to apply 5% of their charges toward
is, they focus on their own position. The primary buying or leasing a new GM car, up to $500 per year,
insight of game theory is the importance of focus- with a maximum of $3,500. The GM card has been
ing on others namely, allocentrism. To look for- the most successful credit-card launch in history.
ward and reason backward, you have to put yourself One month after it was introduced, there were 1.2
in the shoeseven in the headsof other players. To million accounts. Two years later, there were 8.7
assess your added value, you have to ask not what million accounts and the program is still growing.
other players can bring to you but what you can Projections suggest that eventually some 30% of
bring to other players. GMs nonfleet sales in North America will be to
Managers can profit by using these insights from cardholders.
game theory to design a game that is right for their As Hank Weed, managing director of GMs card
companies. The rewards that can come from chang- program, explains, the card helps GM build share
ing a game may be far greater than those from main- through the conquest of prospective Ford buyers
taining the status quo. For example, Nintendo suc- and others a traditional win-lose strategy. But
ceeded brilliantly in changing the video game the program has engineered another, more subtle
business by taking control of software. Segas sub- change in the game of selling cars. It replaced other
sequent success required changing the game again. incentives that GM had previously offered. The net
Rupert Murdochs New York Post changed the effect has been to raise the price that a noncard-
tabloid game by finding a convincing way to dem- holder someone who intends to buy a Ford, for ex-
onstrate the cost of a price war without actually ample would have to pay for a GM car. The pro-
launching one. BellSouth made money by changing gram thus gives Ford some breathing room to raise
the takeover game between Craig McCaw and Lin its prices. That allows GM, in turn, to raise its
Broadcasting. Successful business strategy is about prices without losing customers to Ford. The result
actively shaping the game you play, not just play- is a win-win dynamic between GM and Ford.
ing the game you find. We will explore how these If the GM card is as good as it sounds, whats
stopping other companies from copying it? Not
1. In-depth discussion and applications of the principle of looking forward much, it seems. First, Ford introduced its version of
and reasoning backward are provided in Thinking Strategically: The
Competitive Edge in Business, Politics, and Everyday Life, by Avinash
the program with Citibank. Then Volkswagen in-
Dixit and Barry Nalebuff (W.W. Norton, 1991). troduced its variation with MBNA Corporation.
2. The argument is spelled out in Adam Brandenburger and Harborne Stu- Doesnt all this imitation put a dent in the GM pro-
art, Value-based Business Strategy, which will appear in a forthcoming
issue of Journal of Economics & Management Strategy. gram? Not necessarily.
3. This portmanteau word can be traced to Ray Noorda, CEO of Novell, Imitation is the sincerest form of flattery, but in
who has used it to describe relationships in the information technology
business: You have to cooperate and compete at the same time (Elec-
business it is often thought to be a killer compli-
tronic Business Buyer, December 1993). ment. Textbooks on strategy warn that if others can

58 HARVARD BUSINESS REVIEW July-August 1995


imitate something you do, you cant make money To encourage thinking about both cooperative
at it. Some go even further, asserting that business and competitive ways to change the game, we sug-
strategy cannot be codified. If it could, it would be gest the term coopetition.3 It means looking for
imitated and any gains would evaporate. win-win as well as win-lose opportunities. Keeping
Yet the proponents of this belief are mistaken both possibilities in mind is important because
in assuming that imitation is always harmful. Its win-lose strategies often backfire. Consider, for ex-
true that once GMs program is widely imitated, ample, the common and dangerous strategy of
the companys ability to lure customers away from lowering prices to gain market share. Although it
other manufacturers will be diminished. But imita- may provide a temporary benefit, the gains will
tion also can help GM. Ford and Volkswagen offset evaporate if others match the cuts to regain their
the cost of their credit card rebates by scaling back lost share. The result is simply to reestablish the
other incentive programs. The result was an effec- status quo but at lower prices a lose-lose scenario

Successful business strategy is about actively


shaping the game you play, not just playing
the game you find.
tive price increase for GM customers, the vast ma- that leaves all the players worse off. That was the
jority of whom do not participate in the Ford and situation in the automobile industry before GM
Volkswagen credit card programs. This gives GM changed the game.
the option to firm up its demand or raise its prices
further. All three car companies now have a more
loyal customer base, so there is less incentive to
The Game of Business
compete on price. Did GM intentionally plan to change the game of
To understand the full impact of the GM card selling cars in the way we have described it? Or did
program, you have to use game theory. You cant the company just get lucky with a loyalty market-
see all the ramifications of the program without ing program that turned out better than anyone had
adopting an allocentric perspective. The key is to expected? Looking back, the one thing we can say
anticipate how Ford, Volkswagen, and other auto- with certainty is that the stakes in situations like
makers will respond to GMs initiative. GMs are too high to be left to chance. Thats why
When you change the game, you want to come we have developed a comprehensive map and a
out ahead. Thats pretty clear. But what about the method to help managers find strategies for chang-
fact that GMs strategy helped Ford? One common ing the game.
mind-set seeing business as war says that others The game of business is all about value: creat-
have to lose in order for you to win. There may in- ing it and capturing it. Who are the participants in
deed be times when you want to opt for a win-lose this enterprise? To describe them, we introduce the
strategy. But not always. The GM example shows Value Net a schematic map designed to represent
that there also are times when you want to create a all the players in the game and the interdependen-
win-win situation. Although it may sound surpris- cies among them. (See the exhibit Who Are the
ing, sometimes the best way to succeed is to let Players in Your Companys Value Net?)
others, including your competitors, do well. Interactions take place along two dimensions.
Looking for win-win strategies has several advan- Along the vertical dimension are the companys
tages. First, because the approach is relatively un- customers and suppliers. Resources such as labor
explored, there is greater potential for finding new and raw materials flow from the suppliers to the
opportunities. Second, because others are not being company, and products and services flow from the
forced to give up ground, they may offer less resis- company to its customers. Money flows in the re-
tance to win-win moves, making them easier to im- verse direction, from customers to the company
plement. Third, because win-win moves dont force and from the company to its suppliers. Along the
other players to retaliate, the new game is more horizontal dimension are the players with whom
sustainable. And finally, imitation of a win-win move the company interacts but does not transact. They
is beneficial, not harmful. are its substitutors and complementors.

HARVARD BUSINESS REVIEW July-August 1995 59


Who Are the Players in Your Companys Value Net?

Customers

Substitutors Company Complementors

Suppliers

Substitutors are alternative players from whom a player a competitor, you tend to focus on compet-
customers may purchase products or to whom sup- ing rather than on finding opportunities for cooper-
pliers may sell their resources. Coca-Cola and Pep- ation. Substitutor describes the market relation-
sico are substitutors with respect to consumers be- ship without that prejudice. Complementors, often
cause they sell rival colas. A little less obvious is overlooked in traditional strategic analysis, are the
that Coca-Cola and Tyson Foods are substitutors natural counterparts of substitutors.
with respect to suppliers. That is because both The Value Net describes the various roles of the
companies use carbon dioxide. Tyson uses it for players. Its possible for the same player to occupy
freezing chickens, and Coke uses it for carbonation. more than one role simultaneously. Remember that
(As they say in the cola industry, No fizziness, no American and United are both substitutors and
bizziness.) complementors. Gary Hamel and C.K. Prahalad
Complementors are players from whom cus- make this point in Competing for the Future (Har-
tomers buy complementary products or to whom vard Business School Press, 1994): On any given
suppliers sell complementary resources. For exam- dayAT&T might find Motorola to be a supplier,
ple, hardware and software companies are classic a buyer, a competitor, and a partner.
complementors. Faster hardware, such as a Pen- The Value Net reveals two fundamental symme-
tium chip, increases users willingness to pay for tries in the game of business: the first between cus-
more powerful software. More powerful software, tomers and suppliers and the second between sub-
such as the latest version of Microsoft Office, in- stitutors and complementors. Understanding those
creases users willingness to pay for faster hard- symmetries can help managers come up with new
ware. American Airlines and United Air Lines, strategies for changing the game or new applica-
though substitutors with respect to passengers, are tions of existing strategies.
complementors when they decide to update their Managers understand intuitively that along the
fleets. Thats because Boeing can recoup the cost of vertical dimension of the Value Net, there is a mix-
a new plane design only if enough airlines buy it. ture of cooperation and competition. Its coopera-
Since each airline effectively subsidizes the others tion when suppliers, companies, and customers
purchase of planes, the two are complementors in come together to create value in the first place. Its
this instance. competition when the time comes for them to di-
We introduce the terms substitutor and comple- vide the pie.
mentor because we find that the traditional busi- Along the horizontal dimension, however, man-
ness vocabulary inhibits a full understanding of the agers tend to see only half the picture. Substitutors
interdependencies that exist in business. If you call are seen only as enemies. Complementors, if viewed

60 HARVARD BUSINESS REVIEW July-August 1995


GAME THEORY

at all, are seen only as friends. Such a perspective PARTS does more than exhort you to think out of
overlooks another symmetry. There can be a cooper- the box. It provides the tools to enable you to do so.
ative element to interactions with substitutors, Lets look at each strategic lever in turn.
as the GM story illustrates, and a competitive
element to interactions with complementors, as Changing the Players
we will see.
NutraSweet, a low-calorie sweetener used in soft
drinks such as Diet Coke and Diet Pepsi, is a house-
Changing the Game hold name, and its swirl logo is recognized world-
The Value Net is a map that prompts you to ex- wide. In fact, its Monsantos brand name for the
plore all the interdependencies in the game. Draw- chemical aspartame. NutraSweet has been a very
ing the Value Net for your business is therefore the profitable business for Monsanto, with 70% gross
first step toward changing the game. The second margins. Such profits usually attract others to enter
step is identifying all the elements of the game. Ac- the market, but NutraSweet was protected by pat-
cording to game theory, there are five: players, ents in Europe until 1987 and in the United States
added values, rules, tactics, and scope PARTS until 1992.
for short. These five elements fully describe all With Cokes blessing, a challenger, the Holland
interactions, both freewheeling and rule-based. To Sweetener Company, built an aspartame plant in
change the game, you have to change one or more of Europe in 1985 in anticipation of the patent expira-
these elements. tion. Ken Dooley, HSCs vice president of market-
Players come first. As we saw in the Value Net, ing and sales, explained, Every manufacturer likes
the players are customers, suppliers, substitutors, to have at least two sources of supply.
and complementors. None of the players are fixed. As HSC attacked the European market, Mon-
Sometimes its smart to change who is playing the santo fought back aggressively. It used deep price
game. That includes yourself. cuts and contractual relationships with customers
Added values are what each player brings to the to deny HSC a toehold in the market. HSC man-
game. There are ways to make yourself a more aged to fend off the initial counterattack by appeal-
valuable player in other words, to raise your added ing to the courts to enable it to gain access to cus-
value. And there are ways to lower the added values tomers. Dooley considered all this just a preview
of other players. of things to come: We are looking forward to mov-
Rules give structure to the game. In business, ing the war into the United States.
there is no universal set of rules; a rule might arise But Dooleys war ended before it began. Just prior
from law, custom, practicality, or contracts. In ad- to the U.S. patent expiration, both Coke and Pepsi

None of the players are fixed. Sometimes


its smart to change who is playing the game.
That includes yourself.
dition to using existing rules to their advantage, signed new long-term contracts with Monsanto.
players may be able to revise them or come up with When at last there was a real potential for competi-
new ones. tion between suppliers, it appeared that Coke and
Tactics are moves used to shape the way players Pepsi didnt seize the opportunity. Or did they?
perceive the game and hence how they play. Some- Neither Coke nor Pepsi ever had any real desire
times, tactics are designed to reduce mispercep- to switch over to generic aspartame. Remembering
tions; at other times, they are designed to create or the result of the New Coke reformulation of 1985,
maintain uncertainty. neither company wanted to be the first to take the
Scope describes the boundaries of the game. Its NutraSweet logo off the can and create a perception
possible for players to expand or shrink those that it was fooling around with the flavor of its
boundaries. drinks. If only one switched over, the other most
Successful business strategies begin by assessing certainly would have made a selling point of its ex-
and then changing one or more of these elements. clusive use of NutraSweet. After all, NutraSweet

HARVARD BUSINESS REVIEW July-August 1995 61


had already built a reputation for Coke and Pepsi. As for
for safety and good taste. Even HSC, perhaps it was too quick
though generic aspar tame to become a player. The ques-
would taste the same, con- tion for HSC was not what it
sumers would be unfamiliar Neither Coke nor Pepsi could do for Coke and Pepsi;
with the unbranded product the question was what Coke
and see it as inferior. Another wanted to be the first to and Pepsi could do for HSC.
reason not to switch was that Although it was a duopolist in
Monsanto had spent the previ- a weak position when it came
ous decade marching down the take the NutraSweet to selling aspartame, HSC was
learning curve for making as- a monopolist in a strong posi-
partamegiving it a significant logo off the can tion when it came to selling its
cost advantage while HSC service to make the aspar-
was still near the top. tame market competitive. Per-
In the end, what Coke and and create a haps Coke and Pepsi would
Pepsi really wanted was to get have paid a higher price for
the same old NutraSweet at a perception this valuable service, but only
much better price. That they if HSC had demanded such
accomplished. Look at Mon- payment up front.
santos position before and af- that it was Pay Me to Play. As the Nu-
ter HSC entered the game. traSweet story illustrates,
Before, there was no good sub- fooling around sometimes the most valuable
stitute for NutraSweet. Cycla- service you can offer is creat-
mates had been banned, and ing competition, so dont give
saccharin caused cancer in with the flavor it away for free. People in the
laboratory rats. NutraSweets takeover game have long un-
added value was its ability to of its drinks. derstood the art of getting paid
make a safe, good-tasting low- to play. The cellular phone
calorie drink possible. Stir in business was undergoing rapid
a patent and things looked consolidation in June 1989,
very positive for Monsanto. when 39-year-old Craig Mc-
When HSC came along, Nutra- Caw made a bid for Lin Broad-
Sweets added value was great- casting Corporation. With 50
ly reduced. What was left was million POPs (lingo for the
its brand loyalty and its manu- population in a coverage area)
facturing cost advantage. already under his belt, McCaw
Where did all this leave HSC? Clearly, its entry saw the acquisition of Lins 18 million POPs as the
into the market was worth a lot to Coke and Pepsi. best, and possibly the only, way to acquire a nation-
It would have been quite reasonable for HSC, be- al cellular footprint. He bid $120 per share for Lin,
fore entering the market, to demand compensation which resulted in an immediate jump in Lins share
for its role in the form of either a fixed payment price from $103.50 to $129.50. Clearly, the market
or a guaranteed contract. But, once in, with an un- expected more action. But Lins CEO, Donald Pels,
branded product and higher production costs, it didnt care much for McCaw or his bid. Faced with
was much more difficult for the company to make Lins hostile reaction, McCaw lowered his offer to
money. Dooley was right when he said that all man- $110, and Lin sought other suitors. BellSouth, with
ufacturers want a second source. The problem is, 28 million POPs, was the natural alternative, al-
they dont necessarily want to do much business though acquiring Lin wouldnt quite give it a na-
with that source. tional footprint.
Monsanto did well to create a brand identity and Nevertheless, BellSouth was willing to acquire
a cost advantage: It minimized the negative effects Lin for the right price. But if it entered the fray, it
of entry by a generic brand. Coke and Pepsi did well would create a bidding war and thus make it un-
to change the game by encouraging the entry of a likely that Lin would be sold for a reasonable price.
new player that would reduce their dependence on BellSouth knew that only one bidder could win, and
NutraSweet. According to HSC, the new contracts it wanted something in case that bidder was Mc-
led to combined savings of $200 million annually Caw. Thus, as a condition for making a bid, Bell-

62 HARVARD BUSINESS REVIEW July-August 1995


GAME THEORY

South got Lins promise of a $54 million consola- ness by bringing players into the complements
tion prize and an additional $15 million toward ex- market. To those who know 3DOs founder, Trip
penses in the event that it was outbid. BellSouth Hawkins, this should come as no surprise: He de-
made an offer generally valued at between $105 and signed his own major at Harvard in strategy and
$112 per share. As expected, BellSouth was out- game theory.
bid; McCaw responded with an offer valued at $112 3DO owns a 32-bit CD-ROM hardware-and-soft-
to $118 per share. BellSouth then raised its bid to ware technology for next-generation video games.
roughly $120 per share. In return, Lin raised Bell- The company plans to make money by licensing
Souths expense cap to $25 million. McCaw raised software houses to make 3DO games and collecting
his bid to $130 and then added a few dollars more to a $3 royalty fee (hence the company name). Of
close the deal. At the same time, he paid BellSouth course, to sell software, you first need people to buy
$22.5 million to exit the game.4 At this point in the the hardware. But those early adopters wont find
bidding, Lins CEO recognized that his stock op- much software. To start the ball rolling, 3DO needs
tions were worth $186 million, and the now friend- the hardware to be cheap the cheaper the better.
ly deal with McCaw was concluded. The companys strategy is to give away the li-
So how did the various players make out? Lin got cense to produce the hardware technology. This
itself an extra billion, which made its $79 million move has induced hardware manufacturers such
payment to BellSouth look like a bargain. McCaw as Panasonic (Matsushita), GoldStar, Sanyo, and
got the national network he wanted and subse- Toshiba to enter the game. Because all 3DO soft-
quently sold out to AT&T, making himself a bil- ware will run on all 3DO hardware, the hardware
lionaire. And BellSouth, by getting paid first to play manufacturers are left to compete on cost alone.
and then to go away, turned a weak hand into $76.5 Making the hardware a commodity is just what
million plus expenses. 3DO wants: It drives down the price of the comple-
BellSouth clearly understood that even if you mentary product.
cant make money in the game the old-fashioned But not quite enough. 3DO is discovering that to
way, you can get paid to change it. Such payments create momentum in the market, the hardware
need not be made in cash; you can ask for a guaran- must be sold below cost, and hardware manufactur-
teed sales contract, contributions to R&D, bid- ers arent willing to go that far. As an inducement,
preparation expenses, or a last-look provision. 3DO now offers them two shares of 3DO stock for
The examples so far show how you can change each machine sold. The company also has renegoti-
three of the four players in the Value Net. Lin paid ated its deal with software houses up to a $6 royal-
to bring in an extra buyer, or customer. Coke and ty, with the extra $3 earmarked to subsidize hard-
Pepsi would, no doubt, have been prepared to pay ware sales. So Hawkins is actually paying people

BellSouth understood that even if you cant make


money in the game the old-fashioned way, you can
get paid to change it.
HSC handsomely to become a second supplier. And to play in the complements market. Is he paying
McCaw paid to take out a rival bidder, or substitu- enough? Time will tell.
tor. That leaves complementors. The next example Creating competition in the complements mar-
shows how a company can benefit from bringing ket is the flip side of coopetition. Just as substitu-
players into the complements market. tors are usually seen only as enemies, complemen-
Cheap Complements. Remember that hardware tors are seen only as friends. Whereas the GM story
is the classic complement to software. One cant shows the possibility of win-win opportunities
function without the other. Software writers wont with substitutors, the 3DO example illustrates the
produce programs unless a sufficient hardware base
4. McCaw paid $26.5 million to Los Angeles RCC a joint venture be-
exists. Yet consumers wont purchase the hardware tween McCaw and BellSouth that was 85% owned by BellSouth. Since
until a critical mass of software exists. 3DO Com- McCaw did not get any additional equity for his investment, it was in
essence a $22.5 million payment to BellSouth and a $4 million payment
pany, a maker of video games, is attacking this to himself. Security laws override antitrust laws, so its legal for one
chicken-and-egg problem in the video-game busi- bidder to pay another not to be a player.

HARVARD BUSINESS REVIEW July-August 1995 63


GAME THEORY

possibility of legitimate win-lose opportunities saw a way to move the industry away from the self-
with complementors. Creating competition among defeating price competition that goes on when air-
its complementors helped 3DO at their expense. lines try to fill up the coach cabin. This was busi-
ness strategy at its best.5
The idea of raising your own added value is natu-
Changing the Added Values ral. Less intuitive is the approach of lowering the
Just as you shouldnt accept the players of a game added value of others. To illustrate how the strategy
as fixed, you shouldnt take what they bring to the works, lets begin with a simple card game.
game as fixed, either. You can change the players Adam and 26 of his M.B.A. students are playing a
added values. Common sense tells us that there are card game. Adam has 26 black cards, and each of the
two options: Raise your own added value or lower students has one red card. Any red card coupled
that of others. with a black card gets a $100 prize (paid by the
Good basic business practices are one route to dean). How do we expect the bargaining between
raising added values. You can tailor your product to Adam and his students to proceed?
customers needs, build a brand, use resources more First, calculate the added values. Without Adam
efficiently, work with your suppliers to lower their and his black cards, there is no game. Thus Adams
costs, and so on. These strategies should not be un- added value equals the total value of the game,
derestimated. But there are other, less transparent which is $2,600. Each student has an added value of
ways to raise your added value. As an example, con- $100 because without that students card, one less
sider Trans World Airlines introduction of Com- match can be made and thus $100 is lost. The sum
fort Class in 1993. of the added values is therefore $5,200 made up of
Robert Cozzi, TWAs senior vice president of $2,600 from Adam and $100 from each of the 26
marketing, proposed removing 5 to 40 seats per students. Alas, there is only $2,600 to be divided.
plane to give passengers in coach more legroom. Given the symmetry of the game, its most likely
The move raised TWAs added value; according to that everyone will end up with half of his or her
J.D. Power and Associates, the company soared to added value: Adam will buy the students cards for
first place in customer satisfaction for long-haul $50 each or sell his for $50 each.
flights. This was a win for TWA and a loss for other So far, nothing is surprising. Could Adam do any
airlines. But elements of win-win were present as better? Yes, but first hed have to change the game.
In a public display, Adam
burns three of his black cards.
After TWA removed seats to create more legroom in coach, True, the pie is now smaller,
its renamed Comfort Class placed first in customer satisfaction. at $2,300, and so is Adams
added value. But the point of
this strategic move is to de-
stroy the added values of the
other players. Now no student
has any added value because
3 students are going to end up
without a match, and there-
fore no one student is essential
to the game. The total value
with 26 students is $2,300, and
the total value with 25 stu-
dents is still $2,300.
At this point, the division
will not be equal. Indeed, be-
well: With fuller planes, TWA was not about to cause no student has any added value, Adam would
start a price war. be quite generous to offer a 90:10 split. Since 3 stu-
But what if other carriers copied the strategy? dents will end up with nothing, anyone who ends
Would that negate TWAs efforts? No, because as up with $10 should consider himself or herself
others copied TWAs move, excess capacity would lucky. For Adam, 90% of $2,300 is a lot better than
be retired from an industry plagued by overcapa- half of $2,600. Of course, his getting it depends on
city. Passengers get more legroom, and carriers stop the students not being able to get together; if they
flying empty seats around. Everyone wins. Cozzi did, that would be changing the game, too. In fact, it

64 HARVARD BUSINESS REVIEW July-August 1995


would be changing the players, as in the previous games. Nintendo hit the jackpot by developing
section, and it would be an excellent strategy for Mario. After he became a hit in his own right, the
the students to adopt. added value of comic-book heroes licensed from
Just a card trick? No a strategy employed by the others, such as Spiderman (Marvel), and of cartoon
video-game maker Nintendo (which, it so happens, icons, such as Mickey Mouse (Disney), was re-
used to produce playing cards). To see how the com- duced. In fact, Nintendo turned the tables com-
pany lowered everyone elses added value, we take pletely, licensing Mario to appear in comic books
a tour around its Value Net. (See the exhibit Nin- and on cartoon shows, cereal boxes, board games,
tendo Trumped Every Player in Its Value Net.) and toys.
Nintendo Power. Start with Nintendos cus- Finally, there were Nintendos substitutors.
tomers. Nintendo sold its games to a highly con- From a kids perspective, there were no good alter-

The idea of raising your own added value


is natural. Less intuitive is the approach of lowering
the added value of others.
centrated market predominantly megaretailers natives to a video game; the only real threat came
such as Toys R Us and Wal-Mart. How could Nin- from alternative video-game systems. Here Ninten-
tendo combat such buyer power? By changing the do had the game practically all to itself. Having the
game. Nintendo did just what Adam did when he largest installed base of systems allowed the com-
burned the cards (although Nintendo made a lot pany to drive down the manufacturing cost for its
more money): It didnt fill all the retailers orders. In hardware. And with developers keen to write for
1988, Nintendo sold 33 million cartridges, but the the largest installed base, Nintendo got the best
market could have absorbed 45 million. Poor plan- games. This created a positive feedback loop: More
ning? No. Its true that the pie shrank a little as people bought Nintendos systems, leading to a
some stores sold out of the game. But the important larger base, still lower costs, and even more games.
point is that retailers lost added value. Even a gi- Nintendo locked in its lead by requiring exclusivity
ant like Toys R Us was in a weaker position when from outside game developers. With few alterna-
not every retailer could get supplied. As Nintendo- tives to Nintendo, that was a small price for them
mania took hold, consumers queued up outside stores to pay. Potential challengers couldnt simply take
and retailers clamored for more of the product. successful games over to their platforms; they had
With games in short supply, Nintendo had zapped to start from scratch. Although large profits might
the buyers power. normally invite entry, no challenger could engineer
The next arena of negotiations concerned the any added value. The installed base, combined with
complementors namely, outside game developers. Nintendos exclusivity agreements, made compet-
What was Nintendos strategy? First, it developed ing in Nintendos game hopeless.
software in-house. The company built a security What was the bottom line for Nintendo? How
chip into the hardware and then instituted a licens- much could a manufacturer of a two-bit well,
ing program for outside developers. The number of eight-bit game about a lugubrious plumber called
licenses was restricted, and licensees were allowed Mario really be worth? How about more than Sony
to develop only a limited number of games. Because or Nissan? Between July 1990 and June 1991, Nin-
there were many Nintendo wanna-be programmers tendos average market value was 2.4 trillion yen,
and because the company could develop games in- Sonys was 2.2 trillion yen, and Nissans was 2 tril-
house, the added value of those that did get the li- lion yen.
cense was lowered. Once again, Nintendo ensured The Nintendo example illustrates the impor-
that there were fewer black cards than red. It held tance of added value as opposed to value. There is
all the bargaining chips. no doubt that cars, televisions, and VCRs create
Nintendos suppliers, too, had little added value. more value in the world than do Game Boys. But its
The company used old-generation chip technol-
5. Unfortunately, the program provided little comfort to Cozzi, who re-
ogy, making its chips something of a commodity. signed when TWA scaled it back. TWA returned to full-scale Comfort
Another input was the leading characters in the Class in the fall of 1994.

HARVARD BUSINESS REVIEW July-August 1995 65


Nintendo Trumped Every Player in Its Value Net

Customers
Toys R Us, Wal-Mart

Substitutors Nintendo Complementors


Atari, Acclaim
Commodore Electronic Arts
(hardware) (software)

Suppliers
Ricoh, Sharp (microchips)
Marvel, Disney (game characters)

not enough simply to create value; profits come once the likes of Procter & Gamble and Lever
from capturing value. By keeping its added value Brothers muscled in with their brands and distribu-
high and everyone elses low, Nintendo was able tion clout. Nothing in the product could be patent-
to capture a giant slice of a largish pie. The name ed. But, to his credit, Taylor realized that the hard-
of the enthusiasts monthly magazine, Nintendo est part of producing the soap was manufacturing
Power, summed up the situation quite nicely. the little plastic pump, for which there were just
Nintendos success, however, brought it under two suppliers. In a bet-the-company move, he
scrutiny. In late 1989, Congressman Dennis Eckart locked up both suppliers total annual production
(D-Ohio), chairman of the House Subcommittee on by ordering 100 million of the pumps. Even at 12
Antitrust, Impact of Deregulation and Privatiza- cents apiece, this was a $12 million order more
tion, requested that the U.S. Justice Department in- than Minnetonkas net worth. Ultimately, the ma-
vestigate allegations that Nintendo of America un- jor players did enter the market, but capturing the
fairly reduced competition. Eckarts letter argued, supply of pumps gave Taylor a head start of 12 to 18
among other things, that the Christmas shortages months. That advantage preserved Softsoaps added
in 1988 were contrived to increase consumer value during this period, allowing the company to
prices and demand and to enhance Nintendos mar- build brand loyalty, which continues to provide
ket leverage and that software producers had be- added value to this day.
come almost entirely dependent on Nintendos ac- As the TWA, Nintendo, and Softsoap examples il-
ceptance of their games. None of Nintendos lustrate, added values can be changed. By reengi-
practices were found to be illegal.6 neering them raising your added value and lower-
Pumping Up Profits. Protecting your added value ing othersyou may be able to capture a larger slice
is as important as establishing it in the first place. of pie.
Back in the mid-1970s, Robert Taylor, CEO of Min- Game theory holds that in freewheeling interac-
netonka, had the idea for Softsoap, a liquid soap tions, no player can take away more than that play-
that would be dispensed by a pump. The problem er brings to the game, but thats not quite the end of
was that it would be hard to retain any added value the matter. First, there is no guarantee that any
6. On a separate issue, Nintendo made a settlement with the Federal
player will get all its added value. Typically, the
Trade Commission in which it agreed to stop requiring retailers to ad- sum of all the added values exceeds the total value
here to a minimum price for the game console. Further, Nintendo would
give previous buyers a $5-off coupon toward future purchases of Nin-
of the game. Remember that in Adams card game,
tendo game cartridges. Reflecting on the case, Barrons suggested that the total prize was only $2,600 even though the
the legion of trust-busting lawyers would be far more productively oc-
cupied playing Super Mario Brothers 3 than bringing cases of this kind
added values of all the players initially totaled
(December 3, 1991). $5,200. Second, even if you have no added value,

66 HARVARD BUSINESS REVIEW July-August 1995


GAME THEORY

that doesnt prohibit you from making money. Oth- carriers on balance, not much, if any, added value.
ers might be willing to pay you to enter or exit the So what did it do? It went for low prices and limited
game (as with BellSouth); similarly, you might be capacity. According to public statements from its
paid to stay out or stay in. Third, rules constrain in- then CEO, Robert Iverson, We designed our sys-
teractions among players. We will see that in games tem to stay out of the way of large carriers and
with rules, some players may be able to capture to make sure they understand that we pose no
more than their added values. threat.... Kiwi intends to capture, at most, only
10% share of any one market or no more than
Changing the Rules four flights per day. Because Kiwi targets business
travelers, the major airlines cant use stay-over
Rules determine how the game is played by lim- and advance-purchase restrictions to lower price
iting the possible reactions to any action. To ana- selectively against it. So Kiwi benefited from the
lyze the effect of a rule, you have to look forward one-price-to-all rule.
and reason backward. Now Kiwi, in turn, became the large player for
The simplest rule is one price to all. According to any newcomer to the same market. That didnt
this rule, prices are not negotiated individually leave much room to be small in relation to Kiwi, so
with each customer. Consequently, a company can Kiwi had to fight if someone else tried to follow
profitably enter a market even when it has no added suit. According to Iverson, [The major airlines] are
value. If a new player enters with a price lower than better off with us than without us. Even though
the incumbents, the incumbent has only two effec- Kiwi was Deltas rival, by staying small and keep-
tive responses: match the newcomers price across ing out other potential entrants, it managed to
the board or stand pat and give up share. By looking bring an element of coopetition into the game.
forward and reasoning backward, a small newcom- From Deltas perspective, Kiwi was rather like the
er can steer the incumbent toward accommodation devil it knew.
rather than retaliation. The Kiwi story illustrates how a player can take
Imagine that a new player comes in with a lim- advantage of existing rules of the marketplace in
ited capacity say, 10% of the market and a this case, the one-price-to-all rule. In addition to
discounted price. Whether it makes any money practicality, rules arise from custom, law, or con-
depends on how the incumbent responds. The tracts. Common contract-based rules are most-
incumbent can recapture its lost market by coming favored-nation (most-favored-customer) clauses,
down to match the newcomers price, or it can give take-or-pay agreements, and meet-the-competition
up 10% share. For the incumbent, giving up 10% clauses. These rules give structure to negotiations
share is usually better than sacrificing its profit between buyers and sellers. Rules are particularly
margin. In such cases, the newcomer will do all useful for players in commodity-like businesses. As
right. But it cant get too greedy. If it tries to take an example, take the carbon dioxide industry.
away too much of the market, the incumbent will Solid Profits from Gas. There are three major pro-
choose to give up its profit margin in order to regain ducers of carbon dioxide: Airco, Liquid Carbonic,
share. Only when the newcomer limits its capacity and Air Liquide. Carbon dioxide creates enormous
does the incumbent stand pat and the newcomer value (in carbonation and freezing), but it is essen-
make money. For this reason, the strategy is called tially a commodity, which makes it hard for a pro-
judo economics: By staying small, the newcomer ducer to capture any of that value. One distinguish-
turns the incumbents larger size to its own benefit. ing factor, however, is that carbon dioxide is very
To pull off a judo strategy, the newcomers com- expensive to transport, which gives some added
mitment to limit its capacity must be both clear value to the producer best located to serve a specific
and credible. The newcomer may be tempted to ex- customer. Other sources of added value are differ-
pand, but it must realize that if it does, it will give entiation through reliability, reputation, service,
the incumbent an incentive to retaliate. and technology. Still, a producers added value is
Kiwi Is No Dodo. Kiwi International Air Lines usually small in relation to the total value created.
understands these ideas perfectly. Named for the The question is, Can a producer capture more than
flightless bird, Kiwi is a 1992 start-up founded by its added value?
former Eastern Air Lines pilots who were grounded In this case the answer is yes, because of the rules
after Eastern went bankrupt. Kiwi engineered a cost of the game in the carbon dioxide industry. The pro-
advantage from its employee ownership and its use ducers have a meet-the-competition clause (MCC)
of leased planes. But it had lower name recognition in their contracts with customers. An MCC gives
and a more limited flight schedule than the major the incumbent seller the right to make the last bid.

HARVARD BUSINESS REVIEW July-August 1995 67


GAME THEORY

The result of an MCC is that a producer can sus- an initial price break in return for the subsequent
tain a higher price and thereby earn more than its lock-in. Or maybe they dont thoroughly under-
added value. Normally, an elevated price would in- stand the rules implications. Whatever the reason,
vite other producers to compete on price. In this MCCs do offer benefits to customers. The clauses
case, however, a challenger cannot come in and guarantee producers a long-term relationship if
take away business simply by undercutting the ex- they so choose, even in the absence of long-term
isting price. If it tried, the incumbent could then contracts. Thus producers are more willing to in-
come back with a lower price and keep the busi- vest in serving their customers. Finally, even if
ness. The back-and-forth could go on until the price there is no formal MCC, its generally accepted that

If negotiations in your business take place without


rules, consider how bringing in a new rule would
change the game. But be careful.
fell to variable cost, but at that point stealing the you dont leave your current supplier without giv-
business wouldnt be worth the effort. The only one ing it a last chance to bid.
to benefit would be the buyer, who would end up Using an MCC is a strategy that, far from being
with a lower price. undermined by imitation, is enhanced by it. A car-
Cutting price to go after an incumbents business bon dioxide producer benefits from unilateral adop-
is always risky but may be justified by the gain in tion of an MCC, but there is an added kicker when
business. Not so when the incumbent has an MCC: other producers copy it. The MCCs allow them to
The upside is lost and the downside remains. Low- push prices up further, so they now have even more
ering price sets a dangerous precedent and increases to lose from starting a share war. As MCCs become
the likelihood of a tit-for-tat response. The incum- more widespread, everyone has less prospect of
bent may retaliate by going after the challengers gaining share. With even more at risk and even less
business, and even if the challenger doesnt lose to gain, producers refrain from going after one an-
customers, it certainly will lose profits. Another others customers. A moral: Players who live in
downside is that the challengers customers may glass houses are unlikely to throw stones. So you
end up at a disadvantage. If the challenger supplies should be pleased when others build glass houses.
Coke and the incumbent supplies Pepsi, the chal- Both the significance of rules and the opportunity
lenger shouldnt help Pepsi get a lower price. Its to change the game by changing the rules are often
future is tied to Coke, and it doesnt want to give underappreciated. If negotiations in your business
Pepsi any cost advantage. It might even end up take place without rules, consider how bringing in
having to lower its own price to Coke without get- a new rule would change the game. But be careful.
ting Pepsis business. Finally, the challengers ef- Just as you can rewrite rules and make new ones,
forts are misplaced: It would do better to make sure so, too, can others. Unlike other games, business
that its existing customers are happy. has no ultimate rule-making authority to settle dis-
Putting in an MCC changes the game in a way putes. History matters. The government can make
thats clearly a win for the incumbent. Perhaps sur- some rules through antitrust laws, for example. In
prisingly, the challenger also ends up better off. the end, however, the power to make rules comes
True, it may not be able to take away market share, largely from power in the marketplace. While its
but the incumbents higher prices set a good prece- true that rules can trump added value, it is added
dent: They give the challenger some room to raise value that confers the power to make rules in the
prices to its own customers. There also is less dan- first place. As they said in the old West, A Smith &
ger that the incumbent will go after the challengers Wesson beats a straight flush.
share, because the incumbent, with higher profits,
now has more to lose. An MCC is a classic case of Tactics: Changing Perceptions
coopetition.
As for the customers, why do they go along with Weve changed the players, their added values,
this rule? It may be traditional in their industry. and the rules. Is there anything left to change? Yes
Perhaps its the norm. Perhaps they decide to trade perceptions. There is no guarantee that everyone

68 HARVARD BUSINESS REVIEW July-August 1995


agrees on who the players are, what their added val- Seeing no response, Murdoch tried a second tac-
ues are, and what the rules are. Nor are the implica- tic. He started the price reduction on Staten Island
tions of every move and countermove likely to be as a test run. As a result, sales of the Post doubled
clear. Business is mired in uncertainty. Tactics in- and the fog lifted. The Daily News learned that its
fluence the way players perceive the uncertainty readers were remarkably willing to read the Post in
and thus mold their behavior. Some tactics work by order to save 15 cents. The papers added value was
reducing misperceptions in other words, by lifting not so large after all. Suddenly, it didnt seem so stu-
the fog. Others work by creating or maintaining un- pid for Murdoch to have lowered his price to a quar-
certainty by thickening the fog. ter. It became clear that disastrous consequences
Here we offer two examples. The first shows how would befall the Daily News if Murdoch extended
Rupert Murdoch lifted the fog to influence how the his price cut throughout New York City. In London,
New York Daily News perceived the game; the sec- just such a meltdown scenario was taking place be-
ond illustrates how maintaining a fog can help ne- tween Murdochs Times and Conrad Blacks Daily
gotiating parties reach an agreement. Telegraph. It was in the context of all these events
The New York Fog. In the beginning of July 1994, that the Daily News raised its price to 50 cents.
the Daily News raised its price from 40 cents to 50 Only the New York Times remained in a fog.
cents. This seemed rather remarkable under the cir- Murdoch had never wanted to lower his price to 25
cumstances. Its major rival, Rupert Murdochs New cents. He never would have expected the Daily
York Post, was test-marketing a price cut to 25 News to stay at 40 cents had he initiated an across-
cents and had demonstrated the-board cut to 25 cents. Mur-
its effectiveness on Staten Is- dochs announcement and the
land. As the New York Times Can a test run on Staten Island were
saw it (Press Notes, July 4), it simply tactics designed to get
producer
was as if the Daily News were the Daily News to raise its
daring Murdoch to follow capture more price. With price parity, the
through with his price cut. Post no longer would be losing
But, in fact, there was more than its subscribers, and both papers
going on than the Times real- would be more profitable than
added value?
ized. Murdoch had earlier if they were priced at 25 cents
raised the price of the Post to With the or even at 40 cents. Coopeti-
50 cents, and the Daily News tion strikes again. The Post
had held at 40 cents. As a carbon took an initial hit in raising its
result, the Post was losing price to 50 cents, and when the
dioxide
subscribers and, with them, Daily News tried to be greedy
advertising revenue. Whereas industrys and not follow suit, Murdoch
Murdoch viewed the situation showed it the light. When the
as unsustainable, the Daily meet-the- Daily News raised its price, it
News didnt see any problem was not daring Murdoch at all.
competition
or at least appeared not to. A It was saving itself and Mur-
convenient fog. clause, it can. doch from a price war.
Murdoch came up with a In the case of the Daily
tactic to try to lift the fog. In- News and the Post, the fog was
stead of just lowering his price convenient to the former but
back down to 40 cents, he an- not to the latter. So Murdoch
nounced his intention to lower lifted it.
it to 25 cents. The people at Disagreeing to Agree. Some-
the Daily News doubted that times, a fog is convenient to all
Murdoch could afford to pull it parties. A fee negotiation be-
off. Moreover, they believed tween an investment bank and
that their recent success was its client (a composite of sever-
due to a superior product and al confidential negotiations)
not just to the dime price ad- offers a good example. The
vantage. They were not par- client is a company whose
ticularly threatened by Mur- owners are forced to sell. The
dochs announcement. investment bank has identi-

69
GAME THEORY

fied a potential acquirer. So far, the investment while the rest fell by the wayside, Sega didnt give
bank has been working on good faith, and now its up. It introduced a new 16-bit system to the U.S.
time to sign a fee letter. market. It took two years before Nintendo respond-
The investment bank suggests a 1% fee. The ed with its own 16-bit machine. By then, with the
client figures that its company will fetch $500 mil- help of its game hero, Sonic the Hedgehog, Sega had
lion and argues that a $5 million fee would be ex- established a secure and significant market posi-
cessive. It proposes a 0.625% fee. The investment tion. Today the two companies roughly split the 16-
bankers think that the price will be closer to $250 bit market.
million and that accepting the clients proposal Was Sega lucky to get such a long, uncontested
would cut their expected fee from $2.5 million to period in which to establish itself? Did Nintendo
about $1.5 million. simply blow it? We think not. Nintendos 8-bit
One tactic would be to lift the fog. The invest- franchise was still very valuable. Sega realized that
ment bank could try to convince the client that a by expanding the scope, it could turn Nintendos
$500 million valuation is unrealistic and that its 8-bit strength into a 16-bit weakness. Put yourself
fear of a $5 million fee is therefore unfounded. The in Nintendos shoes: Would you jump into the 16-
problem with this tactic is that the client does not bit game or hold back? Had Nintendo jumped into
want to hear a low valuation. Faced with such a the game, it would have meant competition and,
prospect, it might walk away from the deal and hence, lower 16-bit prices. Lower prices for 16-bit
even from the bank altogether and then there games, substitutes for 8-bit games, would have re-
would be no fee. duced the value created by the 8-bit gamesa big hit
The clients optimism and the investment to Nintendos bottom line. Letting Sega have the
bankers pessimism create an opportunity for an 16-bit market all to itself meant that 16-bit prices
agreement rather than an argument. Both sides were higher than they otherwise would have been.
should agree to a 0.625% fee combined with a $2.5 Higher 16-bit prices cushioned the effect of the
million guarantee. That way, the client gets the per- new-generation technology on the old. By staying
centage it wants and considers the guarantee a out of Segas way, Nintendo made a calculated
throwaway. With a 0.625% fee, the guarantee kicks trade-off: Give up a piece of the 16-bit action in or-
in only for a sales price below $400 million, and the der to extend the life of the 8-bit market. Ninten-
client expects the price to be $100 million higher. dos decision to hold back was reasonable, given the
Because the investment bankers expected $2.5 mil- link between 8-bit and 16-bit games. Note that the
lion under their original proposal, now that this fee decision not to create competition in a substitutes
is guaranteed, they can agree to a lower percentage. market is the mirror image of 3DOs strategy of cre-
Negotiating over pure percentage fees is inher- ating competition in a complements market.
ently win-lose. If the fee falls from 1% to 0.625%,
the client wins and the investment bankers lose. The Traps of Strategy
Going from 1% to 0.625% plus a floor is win-win
but only when the two parties maintain different Changing the game is hard. There are many po-
perceptions. The fog allows for coopetition. tential traps. Our mind-set, map, and method for
changing the game coopetition, the Value Net, and
PARTS are designed to help managers recognize
Changing the Scope and avoid these traps.
After players, added values, rules, and tactical The first mental trap is to think you have to ac-
possibilities, there is nothing left to change within cept the game you find yourself in. Just realizing
the existing boundaries of the game. But no game is that you can change the game is crucial. Theres
an island. Games are linked across space and over more work to be done, but its far more rewarding to
time. A game in one place can affect games else- be a game maker than a game taker.
where, and a game today can influence games to- The next trap is to think that changing the game
morrow. You can change the scope of a game. You must come at the expense of others. Such thinking
can expand it by creating linkages to other games, can lead to an embattled mind-set that causes you
or you can shrink it by severing linkages. Either ap- to miss win-win opportunities. The coopetition
proach may work to your benefit. mind-set looking for both win-win and win-lose
We left Nintendo with a stock market value ex- strategies is far more rewarding.
ceeding both Sonys and Nissans, and with Mario Another trap is to believe that you have to find
better known than Mickey Mouse. Sega and other something to do that others cant. When you do
would-be rivals had failed in the 8-bit game. But come up with a way to change the game, accept that

70 HARVARD BUSINESS REVIEW July-August 1995


your actions might well be imitated. Being unique and price, Kiwi had to put itself in the shoes of the
is not a prerequisite for success. Imitation can be major airlines to ensure that they would have a
healthy, as the GM card story and others illustrate. greater incentive to accommodate rather than fight
The fourth trap is failing to see the whole game. Kiwis entry. The effect of a meet-the-competition
What you dont see, you cant change. In particular, clause becomes clear only after you consider how a
many people overlook the role of complementors. challenger thinks you would respond to an attempt
The solution is to draw the Value Net for your busi- it might make to steal one of your customers. To
ness; it will double your repertoire of strategies for achieve his ends, Murdoch had to recognize that
changing the game. Any strategy toward customers the Daily News was in a fog and find a way to lift
has a counterpart with suppliers (and vice versa), it. By understanding how different parties perceive
and any strategy with substitutors has a mirror im- the game differently, a negotiator is better able to
age for complementors (and vice versa). forge an agreement. Segas success depended on
The fifth trap is failing to think methodically the dilemma it created for Nintendo by starting a
about changing the game. Using PARTS as a com- new 16-bit game linked to the existing 8-bit game.
prehensive, theory-based set of levers helps gener- Finally, there is no silver bullet for changing the
ate strategies, but that is not enough. To under- game of business. It is an ongoing process. Others
stand the effect of any particular strategy, you need will be trying to change the game, too. Sometimes
to go beyond your own perspective. Be allocentric, their changes will work to your benefit and some-
not egocentric. times not. You may need to change the game again.
For the Holland Sweetener Company, it would There is, after all, no end to the game of changing
have helped to recognize that Coke and Pepsi would the game.
have paid a high price up front to make the aspar-
The authors are grateful to F. William Barnett, Putnam Coes,
tame market competitive. BellSouth succeeded Amy Guggenheim, Michael Maples, Anna Minto, Troy Paredes,
with a weak hand only because it understood the Harborne Stuart, Bart Troyer, Michael Tuchen, and Peter
incentives of Lin and McCaw. Nintendos power in Wetenhall, along with many other colleagues and students, for
their generous comments and suggestions.
the 8-bit game came from lowering everyone elses
added value. To craft the right choice of capacity Reprint 95402

HARVARD BUSINESS REVIEW July-August 1995 71


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