Game Theory in Management

A Google® search on the words “Communicate with stakeholders” returned over 8.5 million hits, and, without reading all of them, I’m fairly confident that most of these sites believe that such communications are a good thing. The problem here, as with other overly-extended project management precepts, is that the definition of “stakeholder” varies significantly depending on who you’re talking to, but it’s almost always overly broad.

According to eHow – money,

The broad definition of a “stakeholder” is anyone in a position to affect or be affected by the actions of a group or organization. [i]

Well, according to Metcalf’s Law (dealing with the ability of very small variances in distant nodes of a large network to have a massive, cascading effect on many other nodes of that network. Also known as the “Butterfly Effect”), that’s just about everybody on the planet.

To be fair, most of the scholarship on communicating with stakeholders does specify the need to tailor the message to the intended audience. But here’s the problem with that: if by “tailor” we actually mean “change,” then the message sent to the employees may be different than the message sent to customers, or even shareholders, and such changes are bound to be seen as duplicitous.

There’s also the problem of such “messages” falling into the hands of the organizations’ competitors. This threat is the primary reason why no organization’s mission statement ever contains any information that is, well, usable. It’s the same “delivering the best value to our customers while pursuing the goals of our shareholders” silliness, re-phrased in ever more convoluted syntax (and almost always in the weak passive tense, which makes me insane).

In my recently-released, must-have book, Game Theory in Management, I discuss games which have as a component communications among players. One of the most iconic is Chicken, made famous by the scene in Rebel Without a Cause where Buzz Gunderson gets stuck in his car as it careens off of a cliff. Whether both cars are headed for each other, or towards a cliff, the basic payout matrix is the same:

·         If Player A swerves and Player B does not, then Player A is considered to be cowardly (“chicken”), and Player B is considered brave.

·         And, vice-versa: if Player A does not swerve, but Player B does, A is brave, and B is chicken.

·         If both players swerve, then both are considered chicken (then why play in the first place?), and

·         If neither player swerves, then both die in a fiery car crash.

If this were represented in a payoff matrix, it would look like this:

So, just based on the rules and this payoff matrix, the only reasonable strategy to adopt would be to always swerve. But, if that’s the case, why would the game theory analyst ever even engage in a game of Chicken?

Because of the pre-game communications. Remember, based on the eHow—Money definition, your Chicken opponent is certainly a “stakeholder.” If, prior to actually getting into your car and speeding off to the critical decision point, you were to have a talk with your opponent, and convince him that you are either extremely brave (or crazy), and absolutely will not swerve, then you have increased the odds of selecting the no-swerve strategy, and living past then next ten minutes.  Conversely, if, after your interaction with your opponent, you come away convinced that he is brave enough (or crazy enough) to not engage in the swerve strategy, you would be well-advised to update your approach accordingly.

Which brings us back to why would anyone in the business world would communicate a strategy that’s worth hearing. If the message being delivered is inconsistent across the projected audiences, then the strategist will be seen as duplicitous. If the strategy being communicated is accurate and provides actual insight, then the competitors will inevitably catch wind of it, and use it to your strategic disadvantage. In attempting to communicate your strategy, you are either wasting people’s time, lying to them, or giving your competition an advantage. So, here’s my recommendation for communicating your strategy:

Don’t communicate your strategy.

“Plans are nothing. Planning is everything.”

--Dwight D. Eisenhower

Strategic management is an odd animal, similar to those creatures that are actually combinations of known animals that appear in classic mythology, like the griffin. This makes writing insightful generalities about strategic management very tricky, since any guidance on how to arrive at the best strategy for a given management scenario is going to (obviously) depend heavily on the scenario. That having been said, there are, actually, some valuable (if conversely axiomatic and counter-intuitive) methods for developing a winning strategy, in virtually any situation. And it has to do (wouldn’t you just know it?) with management information systems.

Management writers (like me) love using war analogies. They just seem to fit so well – instead of people’s lives and property being in the hazard, though, in business we see people’s jobs (or even careers) and corporate assets being arrayed against each other, and the manner in which the winners win offers a certain fascination. And the wartime analogy I wish to invoke to gain insight into how one arrives at a winning strategy has to do with the legendary Battle of Midway.

In mid-1942, the United States had suffered a string of defeats at the hands of the Imperial Japanese Navy (IJN), with the only high-point being a tactical draw in the Battle of the Coral Sea, in May. By the time of that battle, U.S. Naval Intelligence had become aware that the IJN had plans to launch a massive attack against a target known only by code-breakers as “A.F.”  Suspecting that “A.F.” might be Midway Island, the USN arranged for radio operators on Midway to transmit in the open that their water distilling plant was having operations difficulties. Sure enough, a few days later the IJN passed along a message that “A.F.” was short of drinking water.

And the target wasn’t the only thing the USN knew. Long story short, by the time Chester Nimitz began to plan his strategy, he was in possession of the approximate number of ships and planes arrayed against him, their timetable – just about the IJN’s entire order of battle. Conversely, since the Japanese scouting submarines did not arrive at their stations until after the American fleet had sailed from Pearl Harbor, Admiral Chuichi Nagumo had absolutely no idea of the number of fleet units, their timetables, or (most importantly) their whereabouts leading up to June 4, 1942. In reality, the Japanese force was considerably more potent than their American counterparts. They had more ships, of superior firepower and capability. Their aircraft performed better than their American counterparts, and their crews were exceptionally trained. But, by the end of June 5, the Japanese fleet had been shattered, with a four-to-one loss ratio in aircraft carriers alone.

What was the difference in Nimitz’s and Nagumo’s strategies? I believe that the American victory at Midway was due to two distinct advantages:

·         The aforementioned information advantage. Nimitz knew almost everything about Nagumo’s order of battle before the shooting even started, while Nagumo knew almost nothing of the American fleet’s disposition until dive bombers were tearing up his flight decks, and

·         The strategic approach to the battle. Nagumo had a very rigid set of tactical goals, to be executed on a specific schedule. Nimitz essentially sent Admiral Raymond Spruance, the tactical commander, to a position to the North and East of Midway (“Point Luck”) with the American fleet, to simply respond to whatever the Japanese did. Spruance had greater latitude of action, meaning that he was far more likely to come up with a robust response to whatever happened in the battle area.

And those, I believe, are the two keys to developing a winning strategy in the business world. Ensure your organization’s management information systems produce timely, accurate, and, most of all, relevant information when forming a strategic approach. And, whatever you do, do NOT initiate a rigid set of tactics that must be executed on a given timetable. Instead, allow your managers on the project to develop a robust response to whatever happens to them as the project team executes its scope.

Although significant scholarship has gone into the assertion that the courage and convictions of Margaret Thatcher, Ronald Reagan, and Pope John Paul II were the major drivers in the stopping and then rolling back of the expansion of the former Soviet Union, there was one key player whose contribution should not be overlooked.  I’m referring, of course, to J. R. Euwing.

That J.R. Ewing had a role in the bringing down of the Berlin Wall was not my idea, though I am at a loss as to whose it was. Whomever it was, they’re brilliant, and, as I understand it, the dots are connected so: when Mikhail Gorbachev introduced the notion of glasnost, part and parcel of this new openness was to pipe in some American television programs into the Soviet Union. One of the programs re-telecast was the nighttime drama Dallas, the story of an independent oil company owned by the Ewing family. It is speculated that the high-level members of the Communist party allowed the airing of Dallas in order show to the Soviet citizenry the craven, immoral side of unbridled capitalism. Instead, what they saw were Mercedes-Benz sedans, pulling up to the opulent South Fork ranch, with vanity plates that said things like “EWING 5,” and parties with large amounts of barbequed meat in an immense back yard, which featured a swimming pool. Before you could say “class envy,” the Soviets  began to entertain the notion that any sense of a moral victory that they derived from being a member of the proletariat paled in comparison to a shot at becoming bourgeoisie. Soon afterwards, the Berlin Wall fell, Lithuania, Estonia, and Latvia furthered independence movements, and the whole Evil Empire imploded.

Okay, so what was Dallas? It’s the story of “Jock” Ewing, played by the late Jim Davis, patriarch of the Ewing clan. Jock had four sons: J.R., Bobby, Gary, and Ray. However, Gary discovered at an early age that he would be better off leaving the oil business and starting his own nighttime drama, set in California (“Knott’s Landing”), and Ray was Jock’s illegitimate child and a ranch hand by profession, leaving most of the management (read: wrangling) over Ewing Oil’s affairs to J.R. and Bobby.

J.R., played brilliantly by the recently deceased Larry Hagman, was ambitious, aggressive, savvy, and devious in the extreme. He was often contrasted with the younger Bobby (played by Patrick Duffy), who was the more virtuous brother (though, in comparison, Atilla the Hun could lay claim to being more virtuous than J.R.). J.R. acquired, connived, maneuvered, and slept his way to the top, keeping Ewing Oil a step ahead of the other independent drillers in the market. And therein lies the genius of the writers of Dallas as they allowed us a view into J.R.’s machinations: J.R. was almost completely consumed with knowing and anticipating the actions and decisions of the other major players in the independent oil drilling market.  You rarely saw J.R. talking with his accountant, or engaged with the actual drilling (project) teams. Instead, he would collect intelligence from his competitors’ communications, both formal and informal, their employees, their creditors and clients, shareholders and relatives of shareholders – no source was off limits. With this information he was (almost) always a step ahead of his competitors, especially the despised Cliff Barnes. J.R. spun this information into gold (black gold, Texas tea) by preemptively making deals that the competitors sought, or denying them their planned acquisitions, or eliminating lenders, customers, allies…the list goes on and on.

Now, our friends, the accountants, might try to assert that J.R. was performing the first duty of all managers, to maximize shareholder wealth. But their claim to understanding J.R.’s tactics crumbles when you take into account (get it?) the fact that none of J.R.’s information came from anybody’s general ledger. That asset management is predicated on the information streams originating from GAAP systems is inescapable, and that those bits of data are extremely limited in their strategic management utility is beyond debate.

No, strategic management is, by its very nature, exclusively concerned with where the organization is with respect to its competitors in a given market. And this is where IT professionals can have the biggest impact: you know all of those “portfolio” or “enterprise” management systems, which are little more than conflations of project and asset management systems? They can no more manage an entire enterprise or portfolio than Cliff Barnes can overcome J.R.  The way to structure a management information system to correctly perform the portfolio management function is to first …

…purchase my recently-released, must-have book, Game Theory in Management. Or, stay tuned to this blog, though the latter alternative may take a bit more time.

When Cameron sent us the editorial calendar, the theme for February was of particular interest. There is so much, well, idiocy out there with respect to strategic management, that the real threat to this blog is that it would turn into a particularly catty snarkfest, my inability to tolerate management science charlatanism being what it is. But, hey, Cameron served up a nice, slow straight pitch, so why shouldn’t I knock it out of the park?

What, exactly, is strategic management? Well, for this subject, the quackery presents early. That home for conjectural consensus, Wikipedia, defines it so:

Strategic management analyzes the major initiatives taken by a company's top management on behalf of owners, involving resourcesand performance in external environments.^[1] It entails specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs.[1]

I’m going to be polite, and say, umm, no. To be fair, this definition is consistent with the textbooks I had to read during my graduate work on the subject. Also, on the header of this particular article, Wikipedia posts up front that “This article has multiple issues.” (Ya think?) I don’t know what parts of the article Wikipedia thinks are problematic, but let me address just the definition.

·         What, exactly, constitutes a “major” initiative? Does that imply that the decisions taken under the rubric of strategic management are a matter of perspective?

·         Same issue for “top management.”

·         Aren’t all management actions taken on behalf of the company’s owners?

·         About that “specifying the organization’s mission, vision and objectives” business: when was the last time you saw an organization’s documented mission, vision, or objectives that were materially different from any other organizations’ in their industry?

But this is often what passes for the very definition of strategic management, even by the most prestigious business schools in the land. The problem, of course, with such a mushy, self-contradictory definition is that almost any assertion can be made as a strategic management truism, and there’s virtually no way of testing (or refuting) such an assertion. Additionally, these “truisms” are held out as somehow superior to all other management theories, dealing, as they do, with “major initiative taken by a company’s top management…” It’s as if when Cavendish discovered the element Hydrogen, in 1766, he was told by the thinkers of the time to shut up about it until the alchemists said it was okay.

“Okay, Hatfield” you say, “if you’re so smart, exactly what is strategic management?” As I point out in my recently-released, must-have book, Game Theory in Management, strategic management is that set of management decisions that directly influences the organization’s standing with respect to its competitors. It is distinct from asset management, which focuses on the decisions about the organization’s assets, as well as project management, which centers on the organization’s customers. Strategic management has its own goals and objectives, which means it requires its own management information products in order to be conducted intelligently. In other words, information generated by the general ledger has very little value in the strategic management realm, and the information generated by the organization’s project management system is only a bit more valuable here. As far as Wikipedia’s definition is concerned, the decision to, say, change the organization’s general ledger software, if it’s big enough of an effort and the decision made by the company’s top executives, is considered “strategic,” even though it really isn’t. Conversely, a mid or low-level marketing analyst who decides to change an advertising campaign to include vampire ads (ads that mention, or even mock, the competition) without changing the marketing budget at all would not qualify under the Wikipedia definition, but is most certainly a strategic management decision.

In the strategic management realm, what’s needed is information about the organization’s proposal backlog, contract win rate, and a few other internal tidbits; however, the focus of any serious strategic management information system has to be on market share, and where the organization and its competitors are situated with respect to each other.  Once this information is gathered and presented, it must be evaluated with input from the other two management realms in order to provide informed insight as to how the organization’s strategy should be adjusted or executed. How does such an evaluation take place? Well, for that answer, you can purchase my previously touted book, or wait for more of February’s blogs.

Or else bait me into a further discussion on the comments section.

Last week’s blog, where I called out the Drake Equation as fraudulent using some of Michael Crichton’s material, I was asserting that much of what passes for management “science” is of a similar structure, and is also vulnerable to quackery.  “But Michael!”, you say, “didn’t you cover much of that in your recently-released, must-have book, Game Theory in Management?” Yes, I did, but I would like to pass along one very handy device for quickly ascertaining if you are being bamboozled by business-related pseudo-science, or not. This is an old device, and it’s very simple.

You ask Aristotle.

Remember that scene in Ghostbusters when Dr. Venkman (Bill Murray) first goes to Dana Barrett’s (Sigourney Weaver) haunted apartment? He goes over to the piano, lifts the key guard, and plays two high-pitched notes back and forth, in quick succession. “They hate this” he explains.  Well, start talking classical logic and Venn Diagrams to your typical management “science” prognosticator, and he absolutely hates it.

Now, real scientists love Aristotle. His ideas of logic are the underpinnings of the (real) scientific method. A theory is considered scientific if it has the following characteristics:

·         It is observable.

·         It is repeatable in an experimental setting.

Let’s take that basic tenant of the asset managers, that the point of all management is to “maximize shareholder wealth.” Interesting hypothesis, and very widespread – but is it scientific? If you were to Venn Diagram that assertion, that the point of all management (A) is (=) to maximize shareholder wealth (B), you would have two identically-sized concentric circles, A and B. So, if we were to present even one case of an A that was not a B, that assertion would be revealed as invalid, right?

Consider the hostile takeover. For some very silly reasons, the organizations and people who participated in this perfectly legitimate business tactic were vilified in movies and pop culture back in the 1980s, as if they were doing something borderline illegal, and certainly immoral.  A hostile takeover usually involves one company buying up the shares of a rival, with the intent of liquidating the rival’s assets and driving them out of business. With the elimination of the rival, the acquiring company hopes to increase market share, and perhaps eventually become more profitable.

Here’s the problem that the hostile takeover presents to the “maximize shareholder wealth” axiom. When a company becomes targeted for a hostile takeover, its stock typically jumps in value. The shareholders are confronted with two options if they believe (or even desire) that the takeover will take place: they can sell their suddenly inflated shares, or they can hold on to them in anticipation of what they will receive once the company is liquidated (in the event that the then-stock price was seriously devalued). In short, their wealth has been maximized. Therefore, no targeted company of a hostile takeover should ever resist, right?

Meanwhile, the acquiring company is having to expend resources in order to – well, do what, precisely? They’re not enhancing their own product line, nor benefitting employees, nor “maximizing shareholder wealth.” They’re actually striking a blow against their own shareholders’ wealth, since the target company’s prices are jumping artificially, but must still be acquired. Therefore, no acquiring organization should ever even attempt the hostile takeover, right?

In reality, though, hostile takeovers are undertaken all the time, and their targets typically resist. Clearly we have an episode of an A (point of all management) not equaling B. There are actually plenty of other examples, but, according to the rules of logic, we only needed the one. The management science tenet that the point of all management is to maximize shareholder wealth is invalid. Period. End of discussion.

I am now going to engage in a little less-than-scientific analysis myself. I can’t provide instances of direct observation of the following ideas, other than anecdotally, nor can I recreate outcomes in an experimental setting. But, based on my experience and research, the “maximize shareholder wealth” is only relevant in the realm of asset management, which, itself, only represents one of three main arenas in management science. The research (as well as the supporting logic) is spelled out in detail in my previously-mentioned, recently-released, must-have book.

But at least I’m not insisting that everyone acknowledge my assertions as management “science.”