Business and Marketing Planning: Game Theory vs Driving Markets - Coursework Example

Business and Marketing Planning: Game Theory vs. Driving Markets Name of Student: Student No: Course: Date: Introduction When formulating a strategy, it is possible to utilise two approaches; a deliberate or an emergent strategy. The former is characterised by analysis and structure and contains such features as a vision statement, mission statement, SWOT analysis etc. The latter on the other hand is highly dependent upon chance or may occur inadvertently within the organisation without the benefit of long term planning. It involves the making of daily decisions on how the firm is managed both at strategic and practical level (Stewart, 2008). The former may utilise the driving markets strategy within its long term strategic plan while the latter may adopt the game theory in order to predict and react to market forces. The concept of Game theory has a wide scope but can be summarised as the manner in which individuals or organisations interrelate within particular parameters (Axelrod, 1984). In the business arena, game theory helps to predict the reaction of an individual or business entity to a certain phenomenon within the environment. This theory is unique because unlike standard qualitative assessment techniques, it incorporates elements of human psychology (Roth, 1993) For example, if two students are caught with the answer sheet to an exam paper, and questioned separately – with amnesty being offered to the one who reveals where the answer sheet was obtained first; the culprits must weigh relative benefits. Either one party would gain freedom, both parties could be expelled or the second party could suffer all the consequences. The response of the second party to own up would depend not only on their own desires but also what consequences remaining silent would have vis a vis spilling the beans. Market orientation is a concept where businesses seek to understand and develop advanced solutions to consumer demands by the systematic and anticipatory acquisition and assessment of market information (Slater and Narver, 1999). There are two distinct approaches to it as recorded in literature; that is, a firm can take the ‘market driven’ approach in which it reacts to events in the market or can be ‘market driving’ in which it affects the events that lead to market trends (Kumar et al, 2000, Jaworski et al, 2000). Driving markets has been variously described as an emergent approach of market orientation (Jaworski et al, 2000; Kohli et al, 2000) or else as a completely different marketing strategy ( Hills and Sarin, 2003). This essay will attempt to explain why it is necessary to achieve a sense of balance between these two types of approaches, the planned and emergent, within business and marketing planning. The Marketing Planning Process The stages of planning a marketing strategy are summarised below according to Macdonald (1995); When creating the market strategy via setting objectives and strategies, it may be necessary to incorporate team building exercises in order to enhance departmental performance. Game theory is very useful in facilitating a better understanding of each individual’s roles in the business. It can also assist in determining the inter-departmental interactions as well as evaluations done to assess the what method is best suited for team building. The game theory is also a tool of evaluation of customer self-perception in relation to the business. This is usually done via surveys and phone interviews (Arias, 2011) Game theory can be used as a predictor in many business scenarios. When conducting forecasts for expected results, it can be useful in analysis of the reaction of partners and competitors to certain strategic moves. For example, the loss of Steve Jobs is a game changer for Apple and they could utilise game theory to analyse the reactions of Microsoft and other players in terms of technology development and brand reputation. Carillat et al (2004) makes the argument for development of a market driving culture as crucial to facilitation of innovation through shared principles and customs. It is said to offer a more proactive approach for companies to fashion market trends by facilitating the paradigm shift amongst market players (Jaworski et al, 2000). The market outlook adopted with this strategy is wider requiring analysts to take into account the customers, competitors, employees and other stakeholders. To continue with the example of the Apple situation, they could come up with an innovative and revolutionary product that lets competitors know that although Steve Jobs is gone, his creativity and that of Apple remains intact and that they intend to continue as market leaders in iapplications. In this way, they continue to drive the market instead of waiting on market forces to propel them forward. Reasons for Balancing Emergent vs. Planned Approaches It would make sense to companies to have a strategic plan before investing in any business venture. While this is a sound strategy, it may not always turn out to be practical. There is a high failure rate among smart companies in new markets. This happens due to using the wrong strategy according to Anthony et al (2008) therefore using the emergent approach to strategy may actually help them avoid the hazards and unknowns that are characteristic of innovative ideas. By its very nature, a plan is a static entity that is contained within a timeframe. The circumstances under which it was formulated could alter immediately following its formulation. This could lead to failure due to the inflexible nature of this approach. In order for planning to be effective, a certain versatility is pertinent, with those working on implementation being capable of modifying it as needed. While the long term objectives may remain relatively unchanged over time, shorter term action plans must maintain a certain fluidity ( Geigher and Swenson, 2001). While the planning process by its very nature assumes that events will occur in incremental steps, the reality tends to differ. This is where Game Theory comes in. If , for example, this is compared to a game of football, where a 4,5,1 formation has been planned for and executed but in the course of play, the other team scores three goals in a row, leading to a change of game plan where seven team members are basically now playing defence. This may be much the same in a business environment where for example facebook may have had a strategy to make money through the sale of user information to third parties but due to the bad publicity resulting from public outcry and the emergence of Google plus, they have shifted to creation of new applications and changing the user interface (International Business Times, 2011). The emergent approach is not so much a plan as it is a response to happenings, most of which are unforeseen. Yet, the responses are designed to meet the intended goals outlined within the planned approach. This means that business executives need to assess information stemming from in house activities and identify where there is deviation from the intended strategy. They will then modify the plan in order to keep it consistent with the company mission, aspirations and objectives as outlined in the planned approach. Game Theory and Driving Markets: Understanding the Framework At strategic level, game theory facilitates the analysis of dynamic and sequential decisions. Its elemental value is in assisting the process of thinking ahead, coming up with alternate scenarios and anticipation of the reactions of other players. The important concepts related to game theory are the extensive form games, payoff matrix and the nucleus of a game. This can be practically applied in the planning process in for example introduction of new products, pricing of goods, research and development, advertising and regulation. If a strategy is to succeed, it cannot rely on the company’s position, capabilities and activities alone. It must take into account the reactions of others, the company’s relationship with them and how they think the company will react to them. when this is fully understood, it is possible to create win-win situations or carry out strategies that will skew the rules or players in your favour (Brandenburger and Nalebuff, 1995) illustrate this with the Nintendo example. To sum up, it is possible for companies to alter their business game by changing the players- who are made up of customers, suppliers, substitutors and complementors. Each player brings added value to the game. This game would be structured using rules, strictures and laws and tactics are used to determine state of play within a defined scope. Driving markets encompasses collective behavioural characteristics utilised by companies seeking to order market inclinations and configuration to suit their needs. This has been labelled as ‘the rules’ by Kumar, Sheer and Kolter (2000). It entails proactively fashioning the expectations of market players towards a certain paradigm. Their reactions affect the shape of future efforts to mould expectations. Driving markets also entails market experimentation in an incremental manner in order to evaluate and improve market offerings and value schemes (Gatignon and Xuereb, 1997). Companies attempt to profile the structure of the market through calculated activities designed to skew the competitive field in their favour as well as impact upon standards in the industry (Jaworski et al, 2000). Market drivers aim to either thwart or obliterate the competition. They do this in several ways. Changing Preferences: according to Kumar et al (2000) market drivers generate, fashion and hasten rather than forecast and react to prospective market shifts. The focus is on evolving the marketplace rather than simply on consumer demands. The aim is to change the ‘rules of the game’ to benefit the firm which means redefinition of markets through effecting radical change in the mindset of the customer, business processes and value propositions. Catalysing a market: in order to drive a market, a business must be a market leader capable of compelling others to follow them. The supreme aim is to propel the evolution of the market in an advantageous direction to the firm. The development of iTunes by the late Steve Jobs was clearly motivated by the desire to bring order to the disorganised online music industry thus gaining prominence as the dominant force in that sector. Influencing market structure: Jaworski et al (2000) define three ways in which the structure or behaviour of market forces are driven. These are market deconstruction, market construction and functional modification. The Effectiveness of Game Theory and Driving Market in Achieving Balance Between Planned and Emergent Approaches The relationship between planned and emergent approaches as outlined earlier in the paper reveals a scenario where plans are formulated through the planning process as laid down by Macdonald (1995). Once the structure of planning has been laid out, then implementation begins. However, within the process of implementation, the market environment could change, necessitating a change in plan. There needs to be some flexibility in the planning process to allow for these emergent situations that may arise. Many companies, especially those in the technological sector, may find that they use the wrong strategy on start up. A practical case study would be the mortgage industry in the pre-2008 period in which many institutions lent money to individuals for the purchase of houses, even though they knew that the amounts borrowed were slightly higher than the individuals could comfortably service (CBSNews, 2009) This led to massive defaults that contributed to the global financial crisis. Had strategist adopted game theory in this scenario, they could have predicted the probability of defaulters and used market drivers to provide a game changer. One possibility would have been to encourage formation of cooperatives that would take mortgage loans as a group in order that should one member default, the group would act as guarantors to cover the amount. In this way, banks protect themselves, and individuals with ‘sub-prime’ incomes get the opportunity to own a home. Conclusion From the above example, it can be deduced that in order to ensure success in business, one cannot simply concentrate on one strategy alone; whether planned or emergent. The two approaches work in concert in a way that promotes synergy. It is necessary to have a planned approach in order to bring clarity to one’s business vision and to engage all employees in a collective direction. Once that is done, the day to day decision making and short term growth of the business may depend on having sufficient flexibility to accommodate unlooked for events. Game theory is useful in formulating ‘game plans’ or strategies to deal with these short term obstacles and opportunities while market driving propels the business forward in the long term direction it wishes to go. iTunes was created in reaction to a market event, the chaos in the online music industry. However, its formulation was part of a long term plan to become market leader and create a niche for Apple. Thus it drove the market toward purchase of music in this manner and has caused a paradigm shift in the way that music is purchased. References Anthony, D.S, Johnson, M.W., Sinfield, J.V., Altman, E.J. (2008). Innovator’s Guide to Growth: Putting Disruptive Innovation to Work. Boston Massachusetts. Harvard Business School Publishing Corporation. Axelrod, R. (1984). The Evolution of Cooperation. New York: Basic Books.Brandenburger, Adam M.; Nalebuff, Barry J. "The right game: use game theory to shape strategy" Harvard Business Review v73, n4 (July-August, 1995):57. CBS News. (2009). Fed Cracks Down On Deceptive Lending. February 11th. Retrieved 12th October, 2011from http://www.cbsnews.com/stories/2008/07/14/business/main4258425.shtml Carrillat, F., Jaramillo, F. and Locander, W. (2004). “Market-Driving Organisations: A Framework”, Academy of Marketing Science Review, No 5, pp. 1-14. Gatignon, H., & Xuereb, J.-M. (1997). Strategic Orientation of the Firm and New Product Performance. 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