Surviving the recession: a Quocirca series

We've heard about it in the context of 3G spectrum auctions and corporate takeovers. With this 12-part guide stepping up a gear, Quocirca analyst Clive Longbottom explains game theory.

Last week this column looked at the outline of a Total Value Proposition and mentioned the use of game theory to create supporting data for arguing your case for a project in front of business audiences. But what is game theory? Put simply, it is based upon the observation of the strategies used by people who consistently win at games such as chess and poker, looking at the risks that they take, the overall strategies they follow and the way they can force the opposition into making specific moves to counter those taken by themselves.

Traditional game theory was developed by John van Neuman and Oskar Morgenstern to analyse formal models of conflict and co-operation. The full version of game theory utilises probability, calculus and linear algebra in the calculation of the predictability of strategic outcomes. Quocirca believes that would be, for the purposes of a Total Value Proposition, a bit of overkill. Quocirca's version of game theory is based on the simple basis of looking at what the probable outcomes will be in four standard cases.

These are:
* " What happens if neither ourselves nor our main competitor carries out this project?
* " What happens if we carry out this project, and our main competitor does not?
* " What happens if our main competitor carries out this project and we do not?
* " What happens if both ourselves and our main competitor carry out this project?

This is best illustrated by drawing up four squares on a large piece of paper, as in Figure 1:

The aim is to identify how the market would move in each quadrant, at a high level - again, we are not looking for actual figures here but a generalised understanding of the impact of the four possibilities on the overall market.

For each scenario you have to act in your company's own self-interest - which means that you have to understand what that 'self-interest' is. Is it to become the largest in the market, or the most profitable? You also have to expect that your competition will also act in their own self-interest, so you either have to make an informed guess at this or fill out multiple game theory boards. You will need to brainstorm the predicted outcomes in each area, but possible outcomes may be along the lines of:

" If neither of us do it, the market continues as it is. Our major competitor is growing faster than we are, so will continue to gain market share at our expense in the future.

" If we do it and the competitor does not, we create a window of opportunity to steal market share from our competitor.

" If the competitor does it and we don't, we're toast.

" If we both do it, we both gain market share from the smaller competitors. The main competitor continues to grow at a faster rate than we do but at least we survive.

Click here for the second part of this column: http://www.silicon.com/a50678