Purchasing Strategy Toolbox 1) Game Theory application

Recently I issued a series of articles about how to create a comprehensive purchasing strategy. In this issue now I am going to initiate some articles about options you may use to feed your strategy journey with efficient content. In the recent months I did some research and learning about application of the game theory within the purchasing environment.

Game Theory is not a new thing and it makes no sense to repeat the historical development of the theory. You may gather lots of information in Wikipedia or other academic Webpages just by searching for “Game Theory”.

In short I see Game Theory as combination of mathematics and behavioral psychology. The basic requirement of a game are the rules. So many of the academic publications about game theory are showing the behavior and the decisions of individuals or groups once one or another rule is applied.

Many situations and processes within the purchasing environment can be defined as a game-setting even if it is not so obvious. Just conventions or habits for negotiations can be defined as RULES even if not written down. The negotiation itself is the GAME.

To actively use elements of the game theory in the purchasing environment a basic condition is that your party in the game has influence or power to set the rules. This does not initially mean that your side pulls the longer lever but it needs to have some power to define the setting and the information flow of an event.

In comparison to events that are not treated with game theory elements the preparation phase is much more intense. First you will need to identify the information that needs to be exchanged and its meaning to the supplier’s decision making process (i.e. people, competences, corporate culture, specifications, batch sizes, prices...) You should further know about the information a supplier already owns. What are the “unwritten customs or procedures” in the focused business sector.

A very important and yet interesting question is the influence of time (and time constraint) in the game. This is because time influences significantly the process of decision-making within the individuals and it limits the possibility of information transfer, -processing or information gathering. The less time available the less proofs or counter-checks will be available to make a decision. However, if there is too much constraint there might happen unwanted exits before the defined end.

To run through the preparation phase it is advisable to have checklists already prepared and to set a clear border conditions and a clear objective about the outcome. Findings need to be clustered, weighed and prioritized. During this phase all experts – even when not involved in the final event - should contribute to produce a full picture of the situation.

The next phase is the creation of the rule-set. All findings need to be referenced and woven into the final rule. If there are still some uncertainties about significance of some of the set rules towards the wanted outcome multiple variants of the rule-set can be created. The final qualification of the set can easily be made after a simulation (life or in scenario) took place. I made the experience that the simulation outcome is very realistic by inviting some people who were not involved in the planning process and have them instructed by simple information sheets.

The events should happen in a setting that underlines the importance of the procedure. There is almost no overstatement possible. The more short-term impression you can add to the time constraint, the more the decision-makers have to leave their comfort zones opening your possibility to better achieve your objective.

For a purchaser it is necessary to always have some game theory content involved in his daily tasks with some experience about how people react in specific situations. You can even take into account bio-rhythmical considerations like is the negotiation set before or after lunch. What happens if the negotiation is on the phone and the other party is in the afternoon (in China) whilst you just had your breakfast? Which side of the table should I claim for me? What does smalltalk imply and which points can be mentioned within this phase of the negotiation?...

However, if the business concerned is important for you and there is a lot of money in the game you want to approach the event(s) much better prepared – leaving nothing to coincidence.

Last not least one thing has to be pointed out: not in every and any situation within purchasing it makes sense to aggressively apply game theory.

It will be highly efficient in markets where you have a competitive situation. The more transparent the products and services are priced and offered the better. Unfortunately, everyone who competes in this kind of markets tries to hide direct cost-price-value statements. When applying your system, you have to force the suppliers to act according your total cost reality instead of allowing them to set their preferred rules.

In business areas where the levers are getting more and more equal you have to implement more constraints within your rule set. The energy that has to be put into analysis and creation of the rules needs to be much bigger to achieve good results.

The application within trade markets won’t make sense, because the rules are public and you are usually not able to change them.

If you are negotiating for a partnership the rules will be set by both parties within a mutual agreement. You won’t achieve your goal by creating unparalleled settings.

Bernhard Rau, Radolfzell 4.5.2017