How game theory can improve a company's' strategy?

Insights from Game Theory can help managers to gain profits for their companies by designing games appropriate for their companies.

Business is all about interactions with multiple entities at the same time. Any business decision taken by any company thus impacts different entities and the whole web of interactions they engage in. Game theory essentially provides a tool to study interactive decision making processes, where the outcome for each entity depends on the actions of others.

This is particularly relevant when there are few players in the game. In case of too many players, the decisions and moves of one have relatively little impact on the others.

The basic question that companies and their businesses need to ask themselves constantly is – how will my opponent move next? In other words, companies constantly try to put themselves in the shoes of their opponents and try to preempt their moves. This is the very essence of business – every company ought to play the correct game.

Business is not fully about winning or losing. Neither does how well one plays the game matter. All that matters is whether they play the right game or the wrong one – companies may turn out to be very successful or may fail miserably depending on this one aspect.

Game Theory essentially provides the principles for different types of games. In rule-based games, players interact with each other according to specific “rules of engagement”. On the other hand, in freewheeling games, there are no external constraints. The principle in the former is every action has a reaction – but not exactly equal and opposite as Newton’s third law propounds. In the latter case, the principle is one cannot take away more from the game than what one has brought into it.

Successful corporate strategy is thus all about actively shaping the game one plays and not just playing any game that one comes across in the daily conduct of business.