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SOFTWARE VALUE NET GameTheory applied
Seraphim Voliotis Ph.D. ; Barrister, Mediator
Adjunct Professor in Strategy, ALBA Graduate Business SchoolMicrosoft Innovation Day Presentation, Athens, GreeceTuesday, May 15, 2007
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
INTRODUCTION: motivation
• Greek Software Industry: stagnated?○ Increase the Pie○ Share the Pie
• Lack of available Strategy Frameworks○ Business Gurus?
• Theory and Practice
• Brandenburger & Nalebuff: Co-opetition○ Bantam Doubleday Dell Publishing Group Inc., NY, 1996
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• The Card Game: distributing value
• Game Theory and Business Strategy
• The Value Net: competitors and complementors
• The Software Value Net
• Creating Value
• Evolution and Elements of Cooperation
INTRODUCTION: outline
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• The Rules:○ 26 Red Cards for Professor ○ 26 Black Cards, one for each Student○ free form negotiations between Prof and St ○ Unstructured: ‘real business life’○ Independent negotiations – students don’t interact
• The Pay-off:○ each pair (Prof, St X) which strikes deal gets $100○ total pay-off $2,600○ provided by Dean, Harvard Business School
THE CARD GAME: rules
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Rationale (intuitive approach):○ Prof has Monopoly � power ○ should command most of the profits○ Prof: $90 St X: $10 for each deal?
• Rationale (analysis):○ each deal is independent○ Prof and St X are in symmetric position○ no alternatives for professor○ should split the proceeds fairly: $50 : $50
• Total Pie○ $2,600○ Professor = 26 * $50 = $1,300 ○ Student = $50 (each)
THE CARD GAME: result
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Professor feels has monopoly power unutilized
When you don’t like the outcome of the game Change the Rules
• Professor destroys 3 of his Cards:○ Prof and St X are not in symmetric position any more○ Prof has alternatives � other students○ Prof may command even $90 per deal - ultimatum (in theory)
• Counter-intuitive:○ pie decreases Total Pie = 23 x $100 = $2,300○ Prof = 23 x $90 = $2,070 St = 23 x $10 = $230
• Business Rationale○ in original game: despite monopoly no competition between Students○ in revised game: by destroying (three) cards competition was introduced
THE CARD GAME: change the rules
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Why ‘In Theory’ ?○ assumes rationality of players○ assumes common knowledge (rules and pay-offs)
• Ultimatum bargaining ○ experiments have shown that people don’t respond ‘rationally’
• Happened in practice: Nintendo in the ’80s○ had ‘monopoly’○ but very ‘powerful’ distributors: Toys “R” Us and Wal-Mart
• Change the Rules: 1988 - limited supply○ distributors requested 110 million cartridges○ estimated 45 million could have been sold○ only 33 million were made available – Christmas Season
THE CARD GAME: reality & assumptions
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• total Added Value○ what the Consumers are Willing to pay○ less the (opportunity) cost of Raw Materials
• how to distribute within Value Chain?○ between all members – not necessarily equally○ how much value do you bring to the table?
Your Added Value ≤≤≤≤ Value with You – Value without You
• Example: The Card Game○ Professor Value ≤ 26 x ($100 - $0) = $2,600 (in total)○ Student Value ≤ $100 - $0 = $100 (each) $2,600 (in total)
• Example: The Card Game revised○ Professor Value ≤ 23 x ($100 - $0) = $2,300 (in total)○ Student Value ≤ $100 - $100 = $ 0 (each) $0 (in total)
ADDED VALUE
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Not Additive○ upper bound not equality○ sum of each contribution doesn’t equal to Total Added Value
• Not Complete or Unique○ doesn’t end here○ still need ‘bargaining’○ but have a good measure of ‘bargaining power’
• Other ‘Solutions’
• Examples - UN Security Council: 15 members, 5 with veto, 9 votes in favour○ value of 5 permanent: 19.63% each � total: 98.2%○ value of remaining: 0.18 % each � total: 1.8%
• Examples - Parliament Voting (coalitions): 4 parties, 43,33,16,8 members resp.○ value of majority party: 50%○ value of remaining: 16.67% each
ADDED VALUE ctd.
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Can the students improve their position?
When you don’t like the outcome of the game Change the Rules
• All of the above assume no interaction by students
• Suppose in revised Game○ students cooperated to act in coordinated way○ game in effect Professor v. Student Coalition for $2,300○ purely symmetric
• Result:○ Professor = $1,150○ Student Coalition = $1,150
• But incentives to Defect: multi-party Prisoners’ Dilemma?
COALITIONS AND COORDINATION
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
professor just wasted $300
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• The Theory Interactive Decision Making
• The Mathematics of Strategy
• Decision Makers with interwoven Interests
• Founded by John Von Neumann (grandfather of computing)
• Two main Parts○ Non-cooperative: each player independently after own interests
• each deal in the separately Card game○ Cooperative: coalition analysis and wealth distributions
• the game collectively – free form negotiations• students agreeing to cooperate in Card game
GAME THEORY: origins
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• 2nd World War○ English Battle ships v. German Submarines○ Cat and Mouse
• Nuclear Warfare○ The Cold War - Cuban Missile Crisis
• Other Military Applications (differential games)○ Missile guidance design systems: optimal trajectories○ Shooting games: optimal shooting time
• The Study of Conflict: management and resolution○ Negotiation theory○ Mediation and Alternative Dispute Resolution
GAME THEORY: conflict management applications
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Evolutionary Biology○ The Selfish Gene○ Evolutionary Stable Strategies
• Economics○ Market equilibria: Nash equilibrium
• More Recently: Business Strategy
• Many more:○ social sciences○ even religion!
GAME THEORY: applications
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
“Strategy is about winning. ……… We examine the nature of strategy, and we distinguish strategy from planning.
Strategy is not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an individual or organization.”
Robert M. Grant, Contemporary Strategy Analysis, 3rd edition
BUSINESS STRATEGY
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Business Strategy: sustainable competitive advantage ○ like War developed independently from formal strategy○ too complex to be modelled formally○ a lot of confusion about concepts, techniques and importance
• four common factors in successful strategies○ simple goals , consistent and long term ○ profound understanding of competitive environment ○ objective appraisal of resources ○ effective implementation
• Organizational problem: decision makers not implementers○ translate down the chain – alignment & information problems○ Mintzberg’s emergent strategies : managers’ interpretation ○ compare this with intended strategy and realized strategies
BUSINESS STRATEGY
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• POSITIONING○ Founded on Industrial Economics○ Position based on assets○ Porter’s 5 forces model
• CAPABILITY BUILDING○ Resource Based View○ Core competencies○ Dynamic Capabilities
BUSINESS STRATEGY THEORIES
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• HYPER-COMPETITION & HIGH-VELOCITY ○ knowledge intensive○ Rapid innovations – short product cycles○ Temporary competitive advantage○ Speed, surprise, innovation and flexibility
• ECOSYSTEM & COMPLEX ENVIRONMENT○ Business ecosystems○ Uncertainty – Non-linearity○ Symbiosis – Co-evolution
BUSINESS STRATEGY THEORIES ctd.
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Stylized Environments: non-cooperative GT○ few players○ relatively stable rules○ e.g. Oligopoly, Market Entry and Price Fixing
• More complex environments: cooperative GT○ free form bargaining○ many players and coalition formation○ value creation and distribution○ e.g. The Value Net and Co-opetition
• Positioning & Ecosystem?
Game Theory and Business Strategy
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Bargaining Power of Suppliers and Buyers (concentrations)• Threat of New Entrants and of Substitutes• Internal Rivalry between firms
• Most widely used, but:○ considered static (Porter disagrees)○ purely Antagonistic: no room for cooperation and coalition analysis○ asymmetric between buyers and sellers○ how to distribute value
COMPETITIVE ENVIRONMENT: PORTER’S FIVE FORCES
Potential Entrants
Buyers
Substitutes
Suppliers
Industry Competitors
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Resembles the Value Chain more
• Recovers symmetry between buyers and sellers
• Uses Added Value of Player to analyze value distribution
• First step towards coalition analysis
• Still not complete
PORTER’S FIVE FORCES adjusted
“Porter’s added value”, Ac.Mgt.Exec., (16)2 (Brandenburger, 2002 )
Suppliers BuyersCompetitors
Actual and Potential
Alternative use of Resources
Substitutes
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Cannot analyze ‘game’ fully without knowing all players
• Competitors○ customers value your product less if they have competitor’s product
• Complementors○ customers value your product more if they have complementor’s product
• Examples (success)○ Intel & Microsoft: chip improvements ↔↔↔↔ software improvements○ MS Vista & new hardware○ Fax machines & Telephone lines○ Cars & Car Insurance○ Hot Dogs & Mustard
• Examples (celebrated failures)○ superior (?) Sony’s Betamax VCR lost to VHS: lack of Betamax format Movies○ US downtown Shopping lost to Malls: lack of available Parking
COMPLEMENTORS
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Introduces Complementors○ full picture of players � allows for Total Value Calculation
• Totally Symmetric○ Suppliers & Customers○ Competitors & Complementors
• Identifies all Players more clearly: Player Added Value (marginal contribution)
• But story doesn’t end here
THE VALUE NET
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
Competitors
Customers
Complementors
Suppliers
Company
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Relationships not Set in Stone○ avoid typecasting○ may loose opportunities for value creation
“On any given day AT&T may find Motorola to be a supplier, buyer, competitor, or partner”
Gary Hamel and C. K. Prahalad
Competing for the Future
MULTIPLE ROLES
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
• Example: Museum of Modern Art v.Guggenheim (NY)○ Competitors: they compete for customers○ Suppliers and Customers: may borrow painting from other○ Complementors
• visitors in New York attracted to one may also visit the other• visitors tend to like having more than one option • New York is complementor to both
○ Partners: may want to create joint promotional activity
• Value Creation○ appropriated from other City Museums
MULTIPLE ROLES ctd.
from Co-opetition, (Brandenburger & Nalebuff, 1996 )
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
THE GREEK SOFTWARE VALUE NET: a first approach
COMPETITORS• other ISV’s etc.• Universities• Microsoft (ERP)
CUSTOMERSHorizontal Solutions:companies (general)Vertical Solutions:
e.g. banks
COMPLEMENTORS• Hardware• Operating Systems
Windows - Linux• Databases
SQL - Oracle• other ISV’s etc.• Business Schools (ALBA)
SUPPLIERSMicrosoft etc.Universities
Human Resources
COMPANYISV-VAR-SI
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
THE GREEK SOFTWARE VALUE NET: multiple roles
• examples of Multiple Roles:○ Bank
• Customer (of product and deposits) • Supplier (of financing and banking services)
○ Universities (technical)• Competitor: in projects and research programmes• Supplier: of skilled labour• Partner: in projects (joint ventures)
○ Microsoft• Competitor: e.g. ERP• Supplier: Operating System & Database & Platforms
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
THE GREEK SOFTWARE VALUE NET: complementors
• concentrate on Complementors○ Hardware
• the standard Intel & MS example• better software ↔↔↔↔ better hardware
○ Operating Systems (Windows/Vista or Linux)○ Databases (SQL Server or Oracle)
• Applications and Platforms• more Applications sold - more valuable Platforms• more Platforms sold - more valuable Applications
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
THE GREEK SOFTWARE VALUE NET: complementors ctd.
• other ISV’s etc. as complementors○ through Differentiation (with ‘localized’ coordination)
• one ERP specialist the other CRM specialist• or, large client base & specialized solutions
○ Technology Innovation Hub (SE Europe?)• similar to MOMA and Guggenheim • Meet New Challenges
○ User Interface improvements○ Web2.0 interactivity and new functionalities ○ Software as Service (pay-as-you-use) etc.○ Parallel (dual) Processing: sooner than you might think
• Innovation culture: skilled labour, management, ideas…
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
EDUCATE THE CUSTOMER
• Innovative Techniques and Products○ what are the new functionalities?○ how can they create value with them?○ how can they avoid waste with them?○ how can they sustain growth with them?
• Business Education: (ERP, CRM etc.)○ 95% of Greek companies family owned○ problem: companies fail to see the need for business applications○ ALBA as Complementor○ better Managers more Applications required○ better Applications available the more business education required○ Sponsor Scholarships at ALBA!
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
VALUE CREATION: synergies
• Is value created out of thin air?○ revised Card Game: Student Coalition v. the Professor○ museum promotion: NY museums v. other city museums
• Synergies:○ economies of scale
• efficiency through numbers• e.g. large fixed costs
○ economies of scope• more than one product with common raw material
○ economies of experience & knowledge• re-invent the wheel?
○ economies utilization• grouping together products and employees
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
VALUE CREATION: synergies ctd.
• Synergies:○ financial
• more cash flow – less financing needs• diversification • creditworthiness � lower risk � lower cost of capital• collateralization & ‘cash cushion’ management
○ ‘bargaining’ power (the Value Net)• with customers• with suppliers• with banks• with competitors: competitive advantage
○ tax efficiencies?○ innovation and growth: R&D departments
• large outfits have potential for sustainable innovation
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
METHODS OF COOPERATING
• Methods○ ordered by degree of commitment
• Mergers (consensual)○ with share exchange
• Joint Ventures○ project based – temporary○ may evolve into merger through repetition and trust building
• Joint Activities○ promotional○ R&D○ cost cutting○ price fixing � illegal by competition law
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
CO-OPETITION: COOPERATION IN COMPETITION
• How to achieve and sustain Cooperation?○ in cooperative settings
• Also:○ Within Context of Competition?○ Often apparent interest to Compete
• Are We Really enemies?
• War and Peace
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
1ST WORLD WAR TRENCH WARFARE
• Most brutal War in History?○ Because of ferocity: front stabilized – Western Front○ In spite of ferocity: astonishing degree of cooperation
• Ashworth & Axelrod: soldiers in repeated Prisoner’s Dilemma
• Cooperation started tacitly : ○ common hours for rationing � unofficial and local cease-fire○ ‘cease-fire’ established○ signals (flags) designated areas out of bounds even for snipers
• Developed further○ hours of cease-fire were extended○ areas out of bounds were extended○ such tactics extended to other sectors of the front
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
COOPERATION: Theory
• Robert Axelrod, The Evolution of Cooperation○ Basic Books, US, 1984
• Theoretical Framework○ Game Theory○ Sociology and Political Science○ Behavioural Decision Making
• Non-cooperative Game Theory: a misnomer○ Prisoner’s Dilemma○ Iterated (repeated) Prisoner’s Dilemma○ Growth and Discounting (financial considerations)
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
EXAMPLES: general
• 17ΝΝΝΝ○ Ν 2928/2001 & Ν 3090/2002○ Omerta!
• Not All Cooperation is Bad!
• Nuclear Proliferation: non-proliferation treaties○ US v. SU: The Cold War○ Greece v. Turkey: dog fights
• International War Treaties○ Geneva Protocol: for Chemical gases (mustard 1st WW)○ Hague Convention: for Biological weapons ○ Geneva Conventions: treatment of POW’s – civilians
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
EXAMPLES: Business
• Price Fixing○ OPEC cartel
• Co-opetition○ Software & Hardware Development
• Organizational○ Manager – employee relations○ Teamwork ○ Internal politics and ‘backstabbing’
• Negotiations○ Principled Negotiations
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
RESOLVING THE DILEMMA
• Pure Individual Rationality○ Defect – not cooperate
• Human Rationality: can do better with○ Communication○ Credibility
• Collective Rationality○ Maybe even better○ Look for collective good: Increase the pie○ Find ways to distribute: Split the pie � Negotiations
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
CREDIBILITY: With Central Authority
• Use a mediator
• Law○ Contracts○ Collaterals○ Tort & Criminal: antisocial behaviour
• Value systems○ Codes of Conduct○ Sociological: professional bodies - guilds
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
CREDIBILITY: Without Central Authority
• Promise : to reward cooperation or to punish defection
• Reputation for Integrity � the past ○ Honour among thieves ○ Good community standing, even in bad communities○ Sunk cost - Investment?
• Inducement of Fear or Faith � the future○ Threats: Omerta!○ Belief in benevolence
• Future dealings & repeated games � back to the future○ Growth: higher-stakes and incentive to cooperate○ Discounting and inflation rates○ Purely co-operative (joint venture) end games
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
RECAPITULATION
• identify the Value Net and its Players
• recognize one’s Position(s) in the Value Net
• recognize one’s Contribution in the Value Net
• identify Value Creating opportunities
• enjoy Pure Cooperation
• if in Competitive environment balance between○ Cooperation and Competition○ Rationality and Emotion○ Self and Other○ Present and Future
SOFTWARE VALUE NET - GameTheory applied
Copyright © 2007 by Seraphim Voliotis
CONCLUSION
future comes quicker and counts more than temptation suggests
THANK YOU