Wargames

Throughout the semester, I emphasize the importance of outward thinking in identifying and anticipating the key levers available to rivals that might alter the business situation or opportunity. It is often said, mostly truthfully, that no plan survives contact with the enemy. In a business context, there are rarely enemies per se, but there are rivals seeking many of the same customers and opportunities. Thus, properly speaking, Uber and Lyft are not really enemies, but the plans and strategy of one do impinge on the opportunities and profits of the other.

Despite this interactive aspect to the outcomes of business strategy, the process producing that strategy is often mainly introspective rather than adversarial. Moreover, successful planning often requires a flexible approach by the most customer-facing elements of the business. Yet, too often, corporate roadmaps and designation of strategy is rigid, top-down, and its principles insufficiently precisely articulated up and down the hierarchy. The result is to make independent action, and retrenchment if the plan starts failing, difficult.

Such problems with the formulation and articulation of strategy are as old as time, though most often seen in a military context. What can be learned from these experiences?

In my view, one of the most noteworthy, and readily applicable, lessons in strategic planning and formulation that might be drawn from the military is the use of gaming applications. The Prussian General Staff first introduced Kriegspiel in the 19th. At least in part as a result of this, Prussia rapidly achieved rapid victories over Austria and France during this time. Prussia's success was especially surprising in light of its lack of materiel or manpower advantages, especially in relation to France.

While strategic planning using wargames is commonplace in military planning, it is unusual in corporate settings. Instead, most strategy departments create scenarios, explicitly announcing their assumptions. They assign probabilities to various sequences of events, but relying mainly on judgment for the generation of these probabilities.

What is missing from this analysis is human input on the part of the rival or rivals. Obviously, your rivals are not going to tell you their plans nor how they will react to your plans. But in most large firms, a substitute for these rivals is readily available--senior leaders who are ex-employees of your rivals. Wargames as the basis of strategy have two parties, your strategy group and your ersatz rivals, each making decisions and strategic choices that, together, determine outcomes.

A criticism of this type of strategy making approach centers on its practicality--how does one go about building a simulation engine capable of capturing the myriad possible strategies, countermoves, and consumer responses. Such an engine would, if fully fledged, be a daunting proposition. This, however, is to view the purpose of the exercise wrongly--wargaming is not full-fledged simulation. Rather, it is a much simplified model capturing the key big picture elements of the strategic landscape without trying to build from the ground up in capturing all of the particulars. An engineering mindset, strategy as simulation, represents a major hurdle, not logistically but conceptually.

So how do you make such a wargame? The key is the introduction of referees. Referees or umpires should be experts in the industry, possibly outside consultants, who view the strategies proposed by each side through the lens of their expertise and then make an assessment about the likely results. With such individuals in place, it becomes possible to create a rich space without restrictions on strategic options for either side without the impossibility of trying to build a reality engine.

Wargames also matter lower down the chain of leadership--they are central learning devices for developing independent action consistent with the overall plan but flexible enough to take advantage of unforeseen tactical possibilities. Turning back to Prussia, kriegspiel was not merely the province of generals planning campaigns but of sub-lieutenants developing instincts for the best action in the face of a given tactical situation in view of the overarching plans.

The same holds true in business. Wargames, and the umpiring framework, readily extend downstream to the level of product managers, brand managers, and the like. Part of the charge of the strategy group in any organization is in coordinating the actions of these parties in furtherance of the plan. By creating smaller scale wargaming sessions bringing together product managers, for example, there is a chance for spreading deep understanding of the overall strategy, and a manager's role small role in its execution, as well as a chance to infuse passion, and a spirit of friendly competition among these individuals in a way that is far more compelling, and leads to better retention, than the usual sorts of strategy briefs typical of corporate strategy. Returning to the military, the following article offers an interesting and important take on how the British military is using wargames to facilitate independent judgment and decision making prowess among NCO and lieutenants, military equivalents of product managers.

Wargaming: An Overlooked Educational Tool

The lightweight games used in game theory offer a taste for how wargaming can be used to develop outward thinking. But the serious challenge for firms seeking a competitive edge is in incorporating these techniques and ideas into what is, for the most part, an inwardly driven exercise.

Did Trump Win or Lose in Iowa?

The results of the Iowa Caucuses showed Donald Trump in second place, with 24% of the vote, behind Ted Cruz with 28 and just ahead of Marco Rubio with 23%. The difference in terms of numbers, is about 6,000 votes. In other words, if 3000 Iowans would switch their votes from Cruz to Trump, the outcome would have changed. Pundits, and the GOP establishment, seem to view this result as containing the seeds of destruction for the Donald. They point out that part of his campaign persona is that he's a "winner" and yet, in Iowa, he didn't win. What can game theory say about the GOP presidential race?

Coordination and Duverger's Law

Duverger was a French philosopher in the field of politics. He noted that, in winner take all elections (sometimes call first past the post), there is a strong tendency for just two candidates to receive large vote shares. From this, he concluded that such voting rules tend to produce two party systems as in the US and, at the time, the UK. In proportional representation systems, many parties get votes.

Note that the Iowa caucus is actually proportional representation, at least to an extent. Multiple candidates can collect delegates in Iowa,  but there is overrepresentation of delegates among the top vote getters.

Duverger's Law, it turns out, can be understood using game theory. Here's the idea: The main reason that people vote is to help their candidate to get elected. Let's say that there are three candidates, A, B, and C. All voters have rankings over these candidates and, within these rankings, can feel different levels of passion for each. In other words, you and I might both rank the candidates A > B > C, but I feel very strongly for A whereas you are close to indifferent between A and B.

Now for whom should you vote if solely motivated by the outcome of the election? One possible answer is to vote truthfully choosing A if that is your top choice, or B, or C if those are on top. But now suppose a poll has been taken. It shows that C leads narrowly over B while A trails badly behind. Since I rank the candidates ABC this is very bad news. My least favorite candidate is ahead while my candidate trails badly.

So how should I vote? Since I only care about election outcomes, I should switch my vote from A to B. In a very real sense, A is a wasted vote for a voter who cares about outcomes. Of course, all A voters reason in a similar fashion and so A's vote share dwindles ever lower, a death spiral of switching away. Notice that there is a "snowball" nature to this logic very similar to the information cascade--once my candidate's chances grow sufficiently dim, my love for that candidate no longer influences my vote.

So from this, we can conclude that Carly and Jeb and all the others in the single digits in Iowa are effectively doomed. Votes for these candidates will be seen as purely "wasted" and so will dry up.

These votes make up about 15% of the votes in Iowa, probably similar to national rates as well. Where will they go?

Back to the Donald. From his perspective, he benefited from Iowa by strongly affirming what the polls showed--that a vote for the Donald is not a wasted vote. Thus, the missing 15% view him as plausible. But my suspicion is that they mostly will go elsewhere. The Donald is a polarizing figure, you love him or you hate him. He benefits from the passion of his supporters, they provide energy in getting themselves and others out to vote. But this same polarization makes him an unlikely second choice for voters whose first choice was someone else.

Landscaping

Job #1 in strategy is analyzing, and characterizing the business landscape in which the opportunity exists. The use of 5 forces, value net, etc. all represent frameworks for such analysis. Suppose you evaluated the opportunity of an incumbent, small market NBA team seeking to retain a superstar player? You would, of course, examine the rivalry for this all-important asset and sensibly conclude that rivalry is witheringly intense. From here, you would be forced to conclude that the prospects for making profits from such an opportunity are correspondingly small.

Put simply, the intense rivalry of the landscape will compete away all of the "rents" from the superstar player. And, from here, you might also conclude that the overall opportunity of being a small market NBA owner is not worth much in such a landscape.

If, however, you look at the available data, you'll find that teams like the San Antonio Spurs, the Cleveland Cavaliers, and the Indiana Pacers all more or less mint money with their NBA franchises. That is, far from the prediction of our landscape analysis, these are promising opportunities, not poor ones.

The difference is that the analysis presumes that just because rivals can compete all out, they will compete all out, to the detriment of the smaller teams and the overall opportunity. Yet, as we saw in the experiment, competition under the ROFR clause is quite subdued. Rival teams could enter and compete, but they know they won't be successful. Moreover, since competing itself is expensive, there's no point in doing so unless the prospects of success are decent. So, far from the prediction of our models, that unbridled rivalry will destroy value, the reality is more of a "gentleman's" labor market where the incumbent team faces little competition.

On the other hand, take away the ROFR and the labor market becomes as the models predict, brutal and difficult for the small market players. Superstars are retained by the incumbent team only by offering extremely favorable salaries, vastly reducing the quality of the opportunity from owning a small market team.

So the major lesson is one of landscaping. A business landscape may appear unfavorable in pure form, but the details matter. A ROFR clause essentially redoes the landscape of the NBA labor market in a massively important way. An outward thinker is alert to such things in doing strategic analysis of opportunities. The ROFR is an apparently small thing, put in place officially for entirely different reasons than to suppress competition. Yet it and other distortions in the NBA labor market make the opportunity far better than what a simple 5 forces would imply.

How to Think Outwardly

A good exercise in learning to think outwardly is to perform 5 forces or other similar analysis to opportunities of interest as you would in strategy. The twist, though, is to now pay attention to WITS type moments where the implicit assumptions of such analysis get altered, using your outward thinking.