Game Theory in Management

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.”

Wow, has it been more than three weeks since I last mocked the asset managers’ (read: accountants’) approach to quantitative business analysis? I must be slipping. But getting these guys to stay in their epistemological place requires a certain constancy, so – once more to the breach, dear friends!

How do we know if any organizational or managerial pursuit is worthwhile? Why, the asset managers can tell us – it’s the Return on Investment, or ROI (yes, I know I’ve taken this on before. It’s just such an easy target, having been chronically oversold as it has). It is calculated so:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

It’s all very simple, isn’t it? Simply calculate the ROI on anything, such as, say, the Project Management Office, and you have hard evidence about whether or not something is worth investing in, right?

As I discuss in my recently-released, must-have book, Game Theory in Management, the late, great Michael Crichton gave a speech entitled “Aliens Cause Global Warming[1], where he discusses the Drake Equation. The Drake Equation is:

N=N*fp ne fl fi fc fL

where N is the number of stars in the Milky Way galaxy; fp is the fraction with planets; ne is the number of planets per star capable of supporting life; fl is the fraction of planets where life evolves; fi is the fraction where intelligent life evolves; and fc is the fraction that communicates; and fL is the fraction of the planet's life during which the communicating civilizations live. As Crichton goes on to say, there is absolutely no way of knowing any of the parameters in this equation. What appears to be a “scientific” equation is actually structured speculation passing itself off as science.

Let’s revisit the simpler ROI equation. What’s the gain from investing in, say, lifeboats? There’s absolutely no way of knowing that. On board the QE II, they’re useless. On board the Titanic, they were priceless.  What’s the value of an Earned Value Management System (EVMS)? On projects that are successful, they may or may not have played a part in that success. On projects such as, say, the National Ignition Facility, where they were initially eschewed, an EVMS could have easily provided early warning on the massive overruns that project encountered – literally billions of dollars (USD) could have been saved.

Remember that scene from the movie Titanic, where the haughty Cal character is striding past the lifeboats, and actually strikes one with his cane, declaring “Waste of deck space on an unsinkable ship!”? How about the millions in taxpayer money that Carl Sagan finagled for the Search for Extraterrestrial Intelligence program, based on the fraudulent Drake Equation? That’s the type of analysis the accountants bring to your project meetings. It’s easy for them to “quantify” the “expected return” of doing project management, as well as its “cost,” and return a hard number indicating that their management information rivals over in the project management office represent a poor investment, or even a waste. So, you’ve got Cal, Carl Sagan, and your accountant, all lined up to provide you with actionable information for you to make key management and financial decisions, and there’s really only one question:

Are you going to listen to them?

This last January 8^th, David Schepp posted an article on AOL® Jobs entitled “Dish Network: The Meanest Employer in America?” In the article, Schepp examines some of Dish Network’s employees’ complaints about how their professional experiences have been, well, bad, due to the decisions of upper management at that organization. The AOL article cites a BloombergBusinessweek article by Caleb Hannan from January 2, describing some of the “draconian” tactics employed by Dish’s then-CEO, Charlie Ergen, including a fingerprint scanner replacing badge scanners for Dish’s Englewood facility access. Employees who were late – even by a few minutes, and even if they had put in 12 hours the day before – would trigger an automatic e-mail to the human resources department noting the late arrival.

As I discuss in my recently-released, must-have book Game Theory in Management, many commonly-held management concepts in use today have their roots in what is actually asset management, and are the theoretical children of the old axiom that the ultimate purpose of all management is to “maximize shareholder wealth.” Slavish adherence to the family of management concepts that are derived from this axiom lead to policies and tactics that are monumentally stupid, and do a lot more damage than just to an organization’s bottom line. In the cases of the unfortunate employees of Dish, both current and former, I would speculate that the dots were connected so:

·         The point of management is to maximize shareholder wealth.

·         Shareholder wealth is maximized when the organization’s assets are performing optimally.

·         Human resources are assets.

·         Optimally performing resources put in many hours, and are not late reporting to work.

·         Therefore, a valid function of management is to ensure the human resources put in many hours, and are not late reporting to work.

It all seems so logical, doesn’t it? But the entire argument’s structure is easily overturned with one simple intellectual exercise. Suppose you had a Dish employee who could completely execute all of the activities expected of the position, but did so in only 4 hours per day. Organizations not blinded by the asset managers’ take on reality would quickly recognize such a one as valuable, and probably seek to advance them within the organization. Other, less enlightened organizations would dismiss the employee for failing to put in more than 40 hours per week.

According to Wikipedia[i], the first reference to the term “going postal” was from a December 17, 1993 article in the St. Petersburg Times, where it cited that 35 people had been killed in 11 shootings associated with United States Postal Services’ facilities in the previous ten years. I would further speculate that certain vulnerable employees become so frustrated in attempting to get ahead in a system designed to ensure that the taxpayers’ money is never, ever wasted, that they arrive at a state of intellectual and professional despair, and employ murderously desperate remedies. Again, a focus on the performance of assets, I believe, led to a working environment that allowed management decisions to appear so rigid and disconnected from the macro organization’s mission that it literally drove the morally weaker elements of the workforce crazy.

And yet, the number of text books and business literature that are entirely predicated on the idea that the point of all management is to maximize shareholder wealth is legion. There’s a major sea-change coming in management science, and, when this Khunsian shift occurs, at its core will be the wholesale rejection of the many management science “truisms” foisted upon us by the asset managers (and, a little bit later, the risk managers). And I am so looking forward to this particular paradigm shift.