Category Archives: strategic decision making

Coming Up for Air in 2014

It is time to come up for air after having put my blog on sabbatical the last two years.  A sabbatical wasn’t really planned…it started out as a case of blogstipation which was followed by the all-consuming task of launching a new company RealWeld Systems, Inc.

Fast forward to today and I’m excited to join the board of Sitrion as the company executes on its multi-ecosystem strategy.  For over a decade while I was at Open Text, the company evolved from being entirely independent with no integration or major partnerships to having compelling integration and partnerships with SAP, Microsoft, and Oracle.   During that time, our sales and product evolved from the paraphrased positioning “we are the greatest” to “we are the greatest working with systems you’ve already bought”.

Creating win-win scenarios for the customer and partner, decision trade-offs on depth versus quantity of integration, and properly positioning added-value for all parties in a language familiar to the customer are just some of the strategic multi-ecosystem issues worth wrestling about.

In 2014, I will spend most of my time continuing to grow RealWeld, which has the opportunity to revolutionize manual welding training, credentialing, and quality assurance.  In addition to Sitrion, I’ll also spend board member time for Seen Digital Media, Inc who provides an application for visual marketing campaigns for leading brands.  Every time I’m in a deep discussion about one of these companies, I find myself writing an “ah-ha” reminder or action for one of the others.  Being a startup operator, I can relate better to Daniel and Brian as the CEO’s of Sitrion and Seen respectively.  And being a board member makes me a better operator of RealWeld.  It’s an awesome cycle of filtering on the best business ideas, practices, and people from a diverse set of companies.  It has already been a fun year!

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Deadlocks and Dominoes

 Deadlocks and Dominoes are two very common attributes of markets I often help clients understand.   Both are periods of time in the development of the market.  Deadlocks are time periods where the status quo prevails for a long time without major changes by any players.  Dominoes, on the other hand, is a period bursting of intensive change by many stakeholders.  This post explores both.

Deadlocks

Consider this chart that was developed for a Priiva client whose products are dependent on overall market adoption of a new technology.  The analysis concluded that the market has stalled because most players are waiting on the other, for something, before acting.  If you studied computer science, this is called a deadlock or a deadly embrace .  In everyday language, this is the “chicken or the egg” paradox.  That market structure was visually depicted in the graph below.

image

Each bubble in this deadlock picture is a market stakeholder, or “player”.  The arrows indicate who is waiting on who.   The green shaded aggressive players will act unconditionally without waiting. The yellow-shaded players are “Hesitant” and will act conditionally.  The blue-shaded players are “Followers” as they also act conditionally, but unlike the yellows, few others are conditional on them.

Deadlocks mean the market will develop slowly.  Deadlocks can be broken if parties are willing to coordinate and make decisions concurrently.  In this market example, a success by any early adopter is actually the key to breaking the deadlock for everyone.  This is a “rising tide” game structure whereby the success of one is the success of everyone.

In traditional markets, we’re taught to beat, punish, or kill competitors.  However, in a “rising tide” market,  all stakeholders should engage in short-term coordination and cooperation, as that is vital to long-term market viability.  Said differently, a market must first be viable for customers to buy and competitors to compete.

Dominoes

Dominoes is a period of time of cascading change where most players don’t like the status quo.  All players believe making their next move, either offensively or defensively, is better than the status quo.   This can be triggered by a big strategic move by an influential player that causes all other players to react.  It can also be the result of new technology, with all players hedging to get some toehold should that technology prove to be successful.

Consider the world of mobile payments.  We are on the threshold of dramatic change and rapid adoption of mobile payment technology.  Increasingly, consumers will start making payments with their digital wallet (i.e., their smartphone) instead of a plastic credit card in their wallet.  Printed receipts will stop being the norm and be over-taken by electronically assessable receipts stored in a secure and organized cloud service.

As that consumer adoption occurs, supply chain players in payments will be fearful of being left behind and will act aggressively and quickly to get a toehold in the new world order of payment processing originating from smartphones.  And all the while trying to leverage and protect their current position.  I expect to see a frenzy of chessboard moves by banks, merchants, credit card issuers, and giant and regional merchant acquirers that sit behind those credit cards and settle all those payments

Playing to Your Advantage

Strategy leaders must understand if they are in a period of Deadlock or Dominoes, play to their advantage, and sense when that market phase concludes.  Your positioning, partner strategy, new product introductions, and many other operational initiatives depend on it.

Forward Opaque and Backward Transparent

 

Forward Opaque and Backward Transparent is a term we use at Priiva that describes our methodology, and game theory methodology more generally.

“Forward Opaque” is the reason we can eliminate personal bias from decision making.  This type of bias can be lethal – McKinsey wrote a nice article guarding against this kind of bias.  Great advice, but game theory methodology actually helps avoid even having to be on guard – it avoids the bias altogether.

As you debate most topics in your organization, like budgets, role assignments, or strategic directions, the opinions expressed by those involved are likely to be biased by the eventual impact they believe the issue will have on them personally, or for a good manager, perhaps the staff they represent.

These debates are “Forward Transparent”, meaning that the opinions taken during the debate are susceptible to personal bias because those involved can speculate which side of the issue has a more favorable impact on them personally.

When you apply game theory to your strategy and decision making, the essence of the debate changes.  You don’t debate the merits of known outcomes A vs. B.  Rather, you debate what is most important to each of the stakeholders (or players) involved in that issue.  The entire debate shifts to be “Forward Opaque” because you don’t really know how importance for one specific player might impact the overall predicted outcome from the entire simulation.

Once you have settled all your debates on importance, the mathematics behind game theory determines your best possible outcomes.  Those outcomes are “Backward Transparent”! That is, the mathematics can be reverse engineered from the predicted best possible outcomes back to the importance assumptions made about each of the players.

Using this technique, you take away the ability to “game the system” – bad pun.  Intrigued?  Here are some more thoughts on my experiences applying game theory to decision making.

Priiva and iFridge Co-Developed CEO Strategy Workshop

I’m excited to be putting on the finishing touches of a new CEO workshop co-developed with Stefanie Lightman of iFridge & Company.  Stefanie is a former co-worker, world-class marketer, and passionate Red Sox fan, so the joint efforts are fun and lively.  Stefanie and I will deliver that workshop over the coming weeks to Vistage CEO groups on the east coast.  Each of us have been independently conducting CEO workshops this past year, but this is our first attempt to integrate our respective work.  You can learn more of Stefanie’s perspectives on our joint work in her blog.

We’ve developed a very nice pairing of strategy development and execution with pragmatic take-away tools for the participants.  First, is a scorecard developed by ifridge & Company for evaluating the sustainability of differentiation, and scoring an organization’s ability to articulate that differentiation in the marketplace.   This is always a continuous improvement project, reaching to all corners of the organization, and a great way to reconfirm sustainability, and then prioritize sales enablement and marketing programs.

The second take-away is the development of a Strategic Events Heat Map, a tool often recommended by Priiva to its clients.  While not a full-blown market model based on game theory, the development of this heat map forces a similar rigorous and structured codification of outside-in strategic thinking.   The heat map features a strategic lens, which includes the sustainable differentiators referenced above, to evaluate the impact of various world, market, and internal events as they occur.  Over time, the heat map provides a visual picture of the major stakeholders in your market.

Participants will leave the workshop with the ability to conduct quarterly strategic reviews using both of these tools.  We’re looking forward to the interactions and an excited set of CEO participants.

SWOT and SWAT

 

I had an amusing encounter recently while working on strategy planning for two different clients (yes, I am easily amused).   One client was focused on their SWOT.  The other was focused on SWAT.

A SWOT is a common planning framework – a 2×2 grid that identifies Strengths, Weaknesses, Opportunities, and Threats.  Its a popular framework because its easy to understand.  But at the same time, it on its own usually doesn’t produce useful insights.  I follow a LinkedIn discussion group on strategy planning and there was a recent vigorous debate on the merits of SWOT as a planning tool.  The conclusion in this thread, like many things, is that a SWOT exercise can be a valuable and worthwhile exercise, but is not a panacea for strategy planning.

A SWAT strategy is something different.  SWAT stands for “Sell Whats Available Today”.  All to often, we get excited about selling that next great thing and forget that we’ve already got lots of great things to sell.  Its an interesting exercise to do growth planning using the constraint of no new innovations or product development.  That constraint forces your growth strategy to focus on the market, customers, pricing, and competition.  Suddenly your debating target segments, value propositions, under-served markets, new pricing models, geographical expansion, competitive positioning, etc.

So both SWOT and SWAT are interesting strategic framework tools.   I’m guessing most organizations have spent too much energy on their SWOT and not enough energy on a SWAT.

The Anatomy of a Game Model

This is the fourth in a series of blog posts on game theory.  Hopefully, you’ve read those posts and understand game theory has great potential in business and decision making, and that it is different from game studies, the science behind Farmville, Foursquare, and video games.

If you attempt to learn game theory using the excellent textbooks available, you’ll probably get a headache.   I usually recommend “Games Strategies Decision Making Book CoverGames, Strategies, and Decision Making” by Harrington because it presumes no knowledge of math, econ, psychology, etc.  Yet I still get a headache reading it.  My headache sets in when values are assigned to all the possible outcomes in the game.  This is called the payoff table or payoff matrix.

Without payoff tables, applying game theory stops dead in its tracks.  Payoff tables in simple 2×2 games like the classic Prisoner’s Dilemma, are manageable.  But in more complex games of market strategy, they are unwieldy.  Payoff tables are, in my opinion, the biggest obstacle holding back game theory as a management discipline.  Firms like Priiva Consulting provide services that hide the complexity of payoff tables so that a client gets all the benefits but without getting bogged down in the mathematical science and its complexity.

The Three Inputs to a Game Model

Recall the reason for constructing a game model is to predict behaviors and optimize your outcome.  Formulating a game model requires three inputs:  Players, Options, and Preferences.

  • Players. Players are the stakeholders in the issue who act in their own self-interest.  Not every conceivable player needs to be included.  Shortcuts are available to eliminate weak players, or construct composite player definitions.
  • Options. Options are the set of options available to each player.  Think – “how many prongs exist on the proverbial fork-in-the-road?”  Note that players may, but don’t necessarily have the same options.
  • Preferences. And finally preferences.  For each player, what are the most important options, of all options available to all players, expressed either as fear (meaning the player doesn’t want an option to occur) or desire (meaning the player wants the option to occur).

ACDC Fly on the Boardroom Wall This process of identifying players, constructing their options, and role playing their preferences forces a level of discussion and insight about your market that few organizations ever achieve.   Its like being a fly on the boardroom wall of each of your current and future competitors.

The Analysis

For example, lets say your game model has ten players and (for simplicity), three options per player.  That is thirty total options – each of which are binary – each one either happens or not.  So there are just over one billion (2**3oth) possible outcomes to be analyzed.  That’s a big payoff table even though the vast majority of these billion outcomes are unstable, meaning they will never occur.

Priiva has developed proprietary software to crunch through the billions of possibilities, eliminate the unstable outcomes, analyze the stable ones, and calculate the payoff tables.  There are three primary outcomes of interest – the Natural Outcome, meaning the outcome that occurs naturally; the Best Achievable Outcome, meaning the best possible outcome for our client; and the Worst Achievable Outcome, meaning the worst possible outcome for our client.

Ah Ha!  Outcomes are an Output

In traditional strategy or decision-making, an outcome is a selected goal and an input to the overall strategy process.  All your energy is about the tactics to achieve the selected goal.  When you apply game theory to strategic decision-making, the process is reversed.  That is, the outcome is an output of the process!

Your energy is first spent debating importance, not tactics.  Once you have settled on importance, the mathematics behind game theory will determine your best possible outcome.  Then all of your energy is spent on the execution and tactics to make that occur.  This is all leads to a more repeatable, structured, and accurate decision making process.

Intrigued?  Here are some more thoughts on my experiences applying game theory to decision making.

On Decision Making

I’ve posted a white paper titled “On Decision Making”  located here on slideshare.  I hope you’ll read it and leave feedback either on slideshare or in this blog.  It talks about decision making at the proverbial fork in the road.

Happy reading.  Bill –=er