This post started when I read the Forbes post how aspiring CEOs can prepare for the top job. Joel Trammel recommended that budding leaders learn about game theory. Since the number one job of CEOs (and managing directors) is to make decisions, familiarity with game theory can be a useful tool in strategic planning.
Very basic definition of game theory
While some of game theory makes for dry reading, it is intriguing in its business applications. According to the Stanford Encyclopedia of Philosophy, game theory is “the study of the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents.” In essence, it is the idea that people and organizations take into consideration benefits and risks to make decisions on what they perceive to be in their best interest. It is important to remember that there is an assumption of rational thought behind the process and decisions within situations of competition, conflict, cooperation and interdependence. Game theory is often associated with decision theory.
Game theory and strategic planning
It’s important to not get too hung up on the word, game, when looking at this theory. As you know, much of what you do as leaders of your organizations is handle uncertainty. With strategic planning, it is a guessing game to some extent. You have a vision of where you want to bring your company over the coming year and you have some information about the market you operate in. One of the key things to remember is that you are making decisions with your team regarding the future and these are not made in a vacuum or in isolation. Game theory encourages one to know the variables and to be cognisant that the business is operating in a dynamic environment.
How do you make game theory work for you?
To identify potential avenues for your strategic plan, there is some information which will highlight the variables:
- Experience. Very simply put, what did you learn this year? Mistakes, near-misses and gains are all lessons for you and your team to use.
- Feedback from your staff. One of my clients was telling me this week that his staff has asked him to get out of the nitty gritty. They want him to take time to follow through on goals that were set already, work on his leadership skills and tell them what his next set of expectations are. In other cases, you might hear information about customers, new contacts and other opportunities.
- PESTEL Analysis. This analysis (learn more about PESTEL) allows you to identify more specifically what is going on in the environment outside of your business. That means everything from politics, social change or industry regulations become more clear in its relationship to your company.
- SWOT Analysis. This is a smaller picture than the PESTEL analysis but still provides information about what is currently going on in your business.
- Identify the assumptions underlying all of the opinions put forth. We’re all susceptible to making assumptions. There is a tactic called the 5 Why’s. Simply asking “why” can illuminate the information gaps, biases and faulty thinking.
- Challenging/upsetting the current system. Using the 5 Why’s is one way to challenge the system. Keeping yourself and your staff fresh is simply done by asking open-ended questions with an attitude of curiosity. Doing things differently might not mean you’re introducing a new product or service, it might be how work and communication gets done internally.
By taking a look at all of these, you gain information about potential opportunities, risks, trends, outside events that influence your business and much more information. Then you can identify various scenarios and how your strategic plan can flex in response.
Your strategic plan does more than provide the roadmap for the coming year
While you and your team do need to identify the goals, the steps and the responsible person for the coming year, there is more. Underlying each yearly strategic plan is the overall aim for the company over a period of five, ten or more years. Using game theory in the strategic planning process gives you alternative scenarios so that you are more able to anticipate the turbulence and dynamic quality of the business environment.