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Knowledge and Sensemaking. Thinking about thinking: Cognition, Sensemaking, Irrationality, Rationality and Game Theory. Oh Yeah!. Bush at a kindergarten reading, receiving first notification that the WTC has been attacked.
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Knowledge and Sensemaking Thinking about thinking: Cognition, Sensemaking, Irrationality, Rationality and Game Theory
Bush at a kindergarten reading, receiving first notification that the WTC has been attacked
Vacationers at Phuket exploring exposed beach from quake induced inverse-tide
Vacationers at Phuket: Tsunami from second biggest earthquake in the world on record. Immediate casualties: 232,000, still missing: 46,000
Café in Phuket Time Magazine Recovered Photo
Common Economic Assumptions “Rational Actors” are assumed to: • Be unboundedly rational • possess limitless appetites for utility • Purely self interested
Game Theory: • Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. • Map of WWII • Game Theory Application • Game Theory Introduction
Power We usually associate game theory with competition, but it also is fundamental in customer/supplier/substitution and new entrants.
Game Theory Important Points (to remember): • Participants • Added Value • Rules • Tactics • Scope Also: *Commitment: (at least perceived) *Strategic Interaction
Participants: Who’s In? It matters: Aspartame (Nutrasweet) • 1965 Chemist making Lspartic acid licks his fingers • 1970 Patented • 1983 USDA approved for beverage use • 1987 and 1992 – patent expiration date for US and EU. • 1986 Holland Mining Co builds Aspartame Plant “all manufacturer’s want at least two suppliers.” • 1987 Aspartame price falls from $70/lb to $20/lb • 1990 Coke and Pepsi sign supplier contract with Monsanto (Nutrasweet manufacturer) • 1992 Holland plant near nothing sales to US market. Who Won?
You: are a new sales rep at Pratt & Whitney, selling engines to plane manufacturers. You make standard 2% commission (one 737 engine costs about $4 million). You’re hoping to sell two engines this year. Boeing-your competitors’ main customer calls you. What are you going to do?
Your boss • is going to kill you. Why?
Two days…weeks….months later, Boeing hasn’t returned any calls or spoken to you…. …because they “shopped” you. • Boeing went to their supplier with your bid. • They only went to you for a price. • Your other long term customers have heard that Boeing got a sweetheart price. • Your competitors think you are trying to price compete, so are going to retaliate. Nice work hero!
Player Gaming Continued Eight Hidden Costs of Bidding: • There may be better uses of your time. • When you win the business, you lose money. (price sensitive customers) • Your competitor can retaliate. • Your existing customer will want a better deal. • New customers will use the low price as a benchmark. • Competitors will use the low price as a benchmark • It doesn’t help to give your customers’ competitors a better cost position • Don’t destroy your competitors’ “glass houses”
Player Gaming Continued Your presence in a competitive situation is valuable: you don’t need to give it away • Ask for contributions up front • Ask for a guaranteed sales contract • Ask for better access to information • Ask to deal with someone who will appreciate what you bring to the table • Ask to bid on other pieces of business in addition to the current contract • Ask the customer to quote a price at which he will give you his business
Added Value: What are you bringing to the table? This is where we usually screw up: • Underestimating our added value • Overestimating our added value BATNA? Comes from this
Added value Prize: University sets up a deal worth $2600 They will give us $100 for each red/black pair of cards Rules: • Card holders bargain iteratively on individual basis. (you don’t communicate with other card-holders) • One person holds 26 black cards. • 26 people hold one red card. • You negotiate to get the black card holder to give you money for your red card. • If they don’t buy your card, they get nothing. • If you don’t sell your card, you get nothing.
Added Value-New gameWhat’s different? • Prize: University sets up a deal worth $2600 • They will give us $100 for each red/black pair of cards • Rules: Card holders bargain iteratively on individual basis. • One person holds 23 black cards (she threw away three cards) • 26 people hold one red card. • You negotiate to get the black card holder to give you money for your red card. • If they don’t buy your card, they get nothing. • If you don’t sell your card, you get nothing.
Added Value – Under Supply Oversupply: each customer has added value Undersupply: each has no added value: Examples of Monopolies/Intentional Undersuppliers • Opec • DeBeers • NFL
Rules Find out what they are, change them to your advantage if you can. • “Take it or leave it” offers • Last look provisions • + Reduces incentive for competitors to bid • + Takes the Guesswork out of bidding • + Lets you decide whether customer is worth keeping • - Allows competitors to bid without having to deliver
Tactics • Offer “1st Class” guarantees if you offer 1st class service or products • + Communicates the excellence of your offerings • + Inferior competitors can not match your commitment • + Communicates to your organization the importance of quality • Complex Pricing Schemes: • + Hide high prices • + Disguise opportunistic pricing • + Hide low prices too preserving an image of quality • + Hamper comparison shopping • - Increase administrative costs • - Confuse and frustrate customers