Co- opetition By Adam M. Brandenburger and Barry J. Nalebuff

1. Co-opetitionBy Adam M. Brandenburger and Barry J. Nalebuff Reviewed By: Mukesh Kumar Department of Business Administration, University of Lucknow.

2. OTHER BOOKS • Class • Location • Schedule • M-W-F • Lab Tues-Thurs • Office • Phone • Email • Book(s) • Required Text • Additional • Materials • Item 1 • Item 2 • Item 3

3. Adam BrandenburgerCo-Author of Co-opetition Adam Brandenburger is a professor at the Harvard Business School. He is the author of a number of Harvard's strategy cases and, with Barry Nalebuff, author of the book Co-opetition. His articles about game theory and business strategy have appeared in such publications as Econometrica, Journal of Economic Theory, Journal of Economics & Management Strategy, and Harvard Business Review. "The Right Game: Use Game Theory to Shape Strategy," which he wrote with Barry Nalebuff, was the lead article in the July–August 1995 issue of the Harvard Business Review. A pioneer in the application of the science of game theory to the art of management, Brandenburger has been interviewed by major publications around the world, including The Wall Street Journal and The Economist.Adam Brandenburger lives in Cambridge, Massachusetts, with his wife, Barbara Rifkind.

4. Barry NalebuffCo-Author of Co-opetition Barry Nalebuff, the Milton Steinbach Professor at Yale School of Management, is co-author with Adam Brandenburger of Co-opetition. His first book, Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life, written with Avinash Dixit, is a popular business school text. It has been translated into seven languages and was a bestseller in Japan. A consultant, as well as a scholar, Nalebuff applies Game Theory to his work with Fortune 500 clients and in antitrust litigation. He has advised American Express, Bell Atlantic, Citibank, Corning, General Re, Merck, and Procter & Gamble, among others. Nalebuff has worked with McKinsey & Co. to help bring game theory into their consulting practice and with the Federal Communications Commission in the design of the Personal Communication Spectrum Auction and then with the Bell Atlantic-Nynex-Airtouch-US West consortium as their bidding consultant. He serves as a director of Bear Stearns Financial Products and the Connecticut Citizenship Fund. In addition to his books, Nalebuff writes extensively on the application of game theory to business and politics. He has written dozens of academic papers, as well as the lead article in the July–August 1995 issue of the Harvard Business Review, "The Right Game: Using Game Theory to Shape Strategy," written with Adam Brandenburger. He is also an associate editor of the Journal of Economic Perspectives, theJournal of Law, Economics, and Organization, the Journal of Conflict Resolution, and was previously an associate editor of the leading politics journal, World Politics.   Born in the Boston area, Nalebuff lives in New Haven, CT with his wife, Helen Kauder, and their two children.

5. CONTENTS

6. The Game of Business: War and Peace “It is not enough to succeed .Others must fail” “You don’t have to blow out of other fellow’s light to let your own shine.” 'Co-opetition', a word coined by Ray Noorda (the founder of Novell), is defined by Brandenburger and Nalebuff on the cover of their book to be: a revolutionary new mindset that combines cooperation and competition. The game theory strategy that's changing the game of business despite being not all that revolutionary and only loosely related to game theory, the book does offer some valuable insights. The basic idea is that business is a game where you are sometimes competing and sometimes cooperating with other players in your industry. Cooperation generally leads to an expansion of the business pie and competition to a slicing up of the pie. Both cooperation and competition are necessary and desirable aspects of a business enterprise. An exclusive focus on competition (which is the predominant mindset of much that has been written about strategy in recent years) largely ignores the potential for changing the nature of business relationships, and thus the potential for expanding the market or creating new profitable forms of enterprise. A 'co-opetition' mindset actively looks for ways to change and expand the business, as well as newer and better ways to compete.

7. THE VALUE NET Suppliers and customers are clearly part of the production process. Competitors obviously influence the environment within which the company or organization does business. However, the oft-overlooked players in the game, according to Brandenburger and Nalebuff, are the 'complements' - other organizations with whom reciprocal and mutually advantageous relationships exist. Hardware and software manufacturers are a simple example: both depend upon each other (to the point where they couldn't exist separately: they are mutually dependent). "Though the idea of complements may be most apparent in the context of hardware and software, the principle is universal. A complement to one product or service is any other product or service that makes the first one more attractive. Hot dogs and mustard, cars and auto loans, televisions and videocassette recorders, television shows and TV Guide, fax machines and phone lines, phone lines and wide area networking software, catalogs and overnight delivery services, red wine and dry cleaners, Siskel and Ebert. These are just some of the many, many examples of complementary products and services." First of all, the authors introduce us to the concept of  the 'Value Net'. This is a way of looking at a business situation that recognizes that the company (or industry) operates in an environment having four main groups that influence the course of any business. These four groups are: suppliers, customers, competitors and complements. The basic framework is illustrated in the diagram below:

8. PARTS Strategy Co-opetition introduces a new mindset that “goes beyond the old rules of cooperation and competition to combine the advantages of both“. It shows you how to make the pie bigger (cooperation) and get a bigger slice of the pie (competition). It provides new tools using game theory and the PARTS strategy (the elements of a gameare:Players, Added values, Rules, Tactics, and Scope) to analyze business situations in a step by step manner. P stands for the players in the game (following the 'Value Map' approach outlined earlier); A stands for the added value that a company can bring to any of the players; R represents the rules of the game or business in which a company or organization is participating; T represents tactics, which are essentially ways of influencing perceptions of how your organization fits into the game; and S stands for the scope of the business, or the linkages between you and any of the other players in your Value Net (who in turn may be linked to other games, thus representing opportunities for you to expand or change your own operation). The rest of the book shows how by changing any one of these dimensions, you can in turn change the game, potentially to your own advantage. In their discussion of 'players', they make the point that, in most cases, when you want to enter a market, you have to 'pay to play'. Sometimes, if you are just being asked to submit a quote on a piece of work, the price to play can be fairly low. In other cases, for example if you have to build a new factory to compete, the price can be quite high. Another way to view market entry, though, is from a game theory perspective. Here the view is that your entry into the game may benefit somebody else - for example, you may be an alternative source of supply to a customer, or provide a complementary good or service. This added value (to whomever you are benefiting) that you bring to the game of business may be worth something. Recognizing this, you may be able to get the beneficiaries to 'pay you to play'. Brandenburger and Nalebuff provide several examples in the book where this has been the case. They also provide a full discussion of the pros and cons of changing the game of business by bringing in any one of the other players in the Value Net. Co-opetition explains how Holland Sweetener (competitor of NutraSweet) saved Coke and Pepsi $200 million annually without being paid a cent for its help. While BellSouth (one of the baby Bells in US) got paid $76.5 million to create competition in the bidding of LIN Broadcasting. This was a win-win deal as LIN managed to get $1 billion more from McCaw in the final price, not too bad for a cost of $76.5 million. The point is "Competition is valuable. Don’t give it away. Get paid to play.“

9. Contd. • To know your customer well you put yourself in their shoes. And ask yourself: a) What else might my customers buy that would make my product less valuable to them. b) How else might customers get their needs satisfied? • Surfing the net: To understand the game you’re in, start by going around your Value Net. • Playing Multiple role: In many situation players occupy more than one role in the Value Net. In some aspect your competitor become your Complementor and visa versa. • Friends and Foe? You mostly realize that competitor are your enemies and Complementor are your friends. • At the end we can say about peace and War: Companies are Complementors in making markets Competitors in dividing up markets.

10. GAME THEORY “Life is the Game that must be Played”- Edwin Robinson The authors' description of game theory begins with an exercise Mr. Brandenburger does with his students at Harvard. He keeps the 26 black cards in a deck of cards and distributes the 26 red cards to the students. His dean offers $100 to anyone, professor or student, who can hand in a red and black pair. The professor and the students, then, have to negotiate. The only limit is that students can't bargain collectively; they have to make their own deals. Who has the upper hand? If the professor offers you $20 for a card at the beginning of the game, is it better to take it or wait and hope for more? In this situation, with the variables -- the number and whereabouts of the cards -- all known, the decision is relatively easy. Because all the deals will eventually be made and no one has the upper hand, it's a 50/50 transaction. There's no penalty for waiting to see how the negotiations play out, because they should all play out the same way. But the dynamics of the game will change if three black cards are missing and instead of 26 students and 26 deals, there will be 26 students and 23 deals. Then the balance of power tips to the person with the black cards; the red-card holder needs to make an earlier deal or run the risk of losing out.

11. PLAYERS Who Stands to Gain?”- CICERO • Becoming a player changes the game »The Heisenberg principle. • Pay Me to Play: Competition is valuable: Don't give it away, Get paid to play. • How to Get Paid: • Cash • Contribution to upfront • expenses • Guaranteed sales contract • Last-look • Access to people • Access to information. • More Players: Bringing in • Customers –Harnischfeger • Suppliers –Amex and Merrill Lynch • Complementors –The 3DO Company • Competitors –Intel

12. ADDED VALUE “Nothing is more useful than Water, but it will purchase scare anything; scare anything can be had in exchange for it. A diamond, on the contrary, has scare any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”- Adam Smith Central to the concept of complements is the notion of added value, which is essentially the incremental benefit that you (your company or organization) brings to the game (the industry or situation). They define added value as: ADDED VALUE = the size of the pie when you are in the game, minus the size of the pie when you are out of the game. Turning next to 'added values', the authors debate the relative merits of a number of strategies for creating incremental value, including: • if you're a monopoly supplier, limit supply (which will naturally increase the value of your product or service) • if you're in a competitive environment, look for what they term 'trade-ons' (ways in which you can simultaneously cut costs yet increased perceived value) also, if you're in a competitive environment, develop a relationship with the customer (for example, through affinity programs such as frequent flyer schemes which create added value to the customer at little cost to the company, while at the same time enhancing customer loyalty).

13. RULES“When the rules of the game prove unsuitable for victory, the gentlemen of England change the rules.”- HAROLD LASKI The next section of the book deals with 'rules'. Here the basic idea is, not surprisingly, that if you can alter the rules to the game, then you can change the game itself in your favour. The authors go on at some length here discussing 'most favored customer clauses' (MFCs) and 'meet the competition clauses' (MCCs), again from a game theory perspective. MFCs give a purchaser the right to buy supplies at the lowest price offered to anybody else. The only problem with this arrangement is that once you offer a lower price to a customer, everyone else who has negotiated MFCs with you will automatically be entitled to that lower price too. Consider the case of giving a government customer (who will often be insistent on paying the lowest price possible) an MFC in order to secure their business. After this, whenever anyone else is negotiating a price with you, you'll have in the back of your mind that you will have to offer this new lower price to the government customer also. Consequently, you will try to keep the price higher than it otherwise might be, because you're in effect dealing with more than just the one customer - you're dealing with all customers who have MFCs. As a result, the price you negotiate will likely be higher than it would be otherwise for that one buyer alone. Consequently, MFCs can have the somewhat paradoxical effect of keeping higher prices across the board than would otherwise be the case (if there were no MFCs). Game theory at work! The authors apply the same sort of reasoning in discussing the effects of MCCs (most often found in commodity markets where they are contractual arrangements giving an incumbent supplier the right to meet a competitor's lower bid). Co-opetition explains the pros and cons of almost-favored-customer clause (MFC). On the surface MFC seems to be good for the customer as MFC guarantees the customer the best price the company gives to anyone. In fact, the MFC also makes the seller a tougher negotiator because discount for one customer will mean discount for every customers. And MFC also reduces the customers’ incentive to bargain.

14. TACTICS “Perception is Reality”- BISHOP BERKELEY The next element of the framework is 'tactics', which Brandenburger and Nalebuff define as "actions that players take to shape the perceptions of other players". The game of business is played in an arena of uncertainty, where each of the players has an idea (perception) of the situation and strategies of the other players, but ultimately is uncertain about the reality of those players' situations and strategies. Thus there is a certain 'fog' in which the game of business is played. The authors discuss certain situations where it is advantageous to lift the fog with other players, other situations where it is best to preserve the fog, and finally, situations where it may be best to mix it up a bit. (They quote Harry Truman at the beginning of the section where they discuss the merits of creating fog: "If you can't convince 'em, confuse 'em.") • Tactics are actions taken to shape other players’ perceptions

15. SCOPE “No man is an Island, entire of itself; every man is a piece of the Continent, a part of the main.”- JOHN DONNE Finally, the authors discuss the 'scope' of the business game being played. 'Scope' is simply the links that exist between the game of business that you are currently playing, and other games being played by those in your Value Net. The underlying logic here is that other enterprises in your Value Net, in addition to being part of the game that you are in, are also parts of other games that you are not in, and that linking to them in various ways can expand your scope. If this can create a larger pie, in which you can have a significant added value, then your profitability is potentially enhanced. • Recognize the links between games • Links through Added Values. • Links through Rules. • Links through Tactics. • The Larger Game. » Epson in laser printers

16. Testimonials • The idea of Complementors is one of the least appreciated concepts in business—yet it is immensely valuable. This book does a real service by introducing it into our thought processes.Andrew S. Grove, President and CEO, Intel • Adam Brandenburger and Barry Nalebuff's book uses a revolutionary approach to success in business—a form of thinking that is holistic, relational, contextual, and nourishing with a winning outcome for all those involved. Co-opetition could very well be the Eighth Law for Spiritual and Financial Success.Deepak Chopra, Author of The Seven Spiritual Laws of Success • Fast-paced, interesting, and full of cases, I raced through Co-opetitionin one marathon sitting. We all recognize that we're in a game of business or sorts, but we don't always see the whole game. Having all the elements—players, added values, rules, tactics, and scope—laid out was very useful. I found myself mapping our own behavior at PepsiCo along these dimensions just to explore how we've changed the game—and more importantly, how we can do so in the future.Indra K. Nooyi, Sr. Vice President, Strategic Planning, PepsiCo. • Co-opetition is a terrific book! It is a sophisticated book, but it's by no means obscure. Brandenburger and Nalebuff provide every businessperson a brand new, eminently usable lens—in particular the idea of complementarily—through which to view the marketplace.Tom Peters • Co-opetition shows you how to benefit from both aspects of business: how to make a bigger pie, as well as get a bigger share of the pie. These practical insights from game theory are helping companies find more profitable business strategies.F. William Barnett, Director, McKinsey & Co.