NEGOTIATING
ACROSS CULTURES
Origins of Game Theory:
Although some work had been done on this before,
Game Theory in its modern form owes much to the
publication of Von Neumann and Morgenstern’s
treatise ‘Theory of Games and Economic Behavior’
in 1944. Many of its extensions and re-formulations
in the last 60 odd years have come through the
works of Aumann, Shapely and Selten, to name a
few. Thus we can say that Game theory and its
application in business has come into its own
only in the last 50 years. (Ref 3.Roth)
Game Theory Explained:
Game theory is a branch of the study of empirical
economics, which deals with the behavior of rational
businessmen with each other in making the best
of an economic situation.
It studies their attempts at maximizing individual
and collective gains and minimizing losses through
cooperation and conflict. The theory seeks to
explain such behavior in the context of negotiations
and payoffs. Using the theory of games, we can
through experience, outline the conditions required
for cooperation. In a wider context, its application
towards strategic thinking and choices can aid
in the understanding of strategic decisions of
nations or actors in conflict, and can help in
the development of models of bargaining and deterrence.
A strategy is a plan of action that cannot be
upset by an opponent in the short run. A pure
strategy is one in which the individual plays
to his strengths or takes advantage of the others
weaknesses, in establishing his position. Businessmen
entering into the market base their initial entry
upon one of the following:
1) Cost Leadership: providing products or services
at lowest cost.
2) Quality: selling quality products at the highest
price that the buyer will pay; premium pricing
3) Differentiation: instilling the perception
of value in the mind of the buyer
The purpose of strategies is to secure the most
favorable game value in the long run. A mirroring
strategy, in which the player responds to a given
move with a similar move, is the most common.
A mixed strategy involves randomly choosing among
one's best strategies according to some proportions
in order to maximize favorable game value. This
is the strategy that would work best in the long
run, as it keeps the opponents guessing. Whereas
a pure strategy in repeated games would give the
opponent an advantage of predictability (Ref 1.Neumann,
Morgenstern & Nash)
A classic game in the theory of Games literature
is what is called The Prisoner's Dilemma. There
are two actors or participants in the game, and
while each has the incentive to maximize personal
gains at the expense of the other, in the long
run both participants would be better off in cooperating
against the other factors entering into their
world. The result is that they are both better
off, compared to a total loss if both carried
on in their individual strategy to outwit the
other.
This is not however a one-time stance. Game theory
understands that most games are repeated rather
than single-shot. Repetition means each player
has additional information based on past game
decisions of the other player. This complicates
calculation of choices and changes the equilibrium
point. Thus if the Prisoner's Dilemma is repeated
a sufficient number of times, players may learn
to take a strategic view and cooperate.
Application of Cohen’s Game Theory to Developed
Markets Outside Africa:
Raymond Cohen has sought to apply Game Theory
as a means of explaining the negotiation process
in the historical and cultural context of a country’s
political and social development, in his book
‘Negotiating across cultures: international
communication in an interdependent world.’
(Ref 4: Cohen). The book attempts an understanding
of different models of the negotiation process
and the application of these theories to a variety
of settings. It covers rational models of bargaining
behavior developed in economics and decision sciences,
as well as the related cognitive and behavioral
theories to investigate how bargaining behavior
may differ in various settings.
In the developed world, with the fast and easy
access to knowledge and technical know how, as
well as the speed of development and progress,
markets soon reach their stage of maturity or
stability. Let us first compare the characteristics
of a perfect market and imperfect market. In the
under-developed markets that characterize most
of the African
continent, there is a lack of perfect knowledge,
and this can be capitalized on by the sellers
of a product to make more profits than would otherwise
be possible in a market with perfect competition.
Perfect markets as in developed nations have instant
access to information and so these differences
of information know how are soon wiped out. The
products in a perfect market too, are forced to
measure up to a certain minimum standard or they
are deemed unfit for consumption and use. These
regulatory authorities therefore serve a role
in standardizing a product. In poorer nations
like Africa, the government or other regulatory
authorities may be bribed or coerced into looking
the other way, while substandard goods enter the
market and compete with higher quality goods.
The factor of quality is a basis for price differentiation.
However it would also be common for the seller
of a product in Africa to have certain customer
loyalty based upon his/ her previous dealings
with the customer. In developed nations where
the product or service has been standardized to
some extent, though there is still some brand
loyalty, yet the customer can move to another
seller without fear; he is assured that the basic
product is the same, with some cosmetic differences.
But in Africa the quality of the basic product
would differ as well.
Sellers are also likely to stoop to tactics such
as hoarding to raise the prices of their products
illegally. In developed nations, however, they
have institutions that curb such practices as
unethical, in the public interest. For most of
the technology products, the markets would not
be that developed in Africa. One could therefore
sell excess capacity or older models of products
or obsolete technologies, which would be useless
in the developed world. All these factors should
be taken into consideration while comparing markets
in Africa to that of the developed world. (Ref
7: Samuelson & Nordhaus)
The business environment in Africa is in slow
transition towards a free market economy. The
business environment suffers from underdeveloped
institutions, inept bureaucracy, limited and uncertain
resources and inadequate organizational capabilities.
Business organizations have developed a number
of strategies to deal with this situation. Some
companies have clung to the past, sought government
protection, focused on the local market and exploited
opportunities. These types of strategies are classified
as either defender or reactive. Some other companies
have capitalized on cheap local resources, sold
locally and abroad, established links with multinational
companies, developed their internal capabilities,
and benefited from government incentives and market
imperfections. These strategies are classified
as analyzer or analyzer/defender. A common pattern
in most is to dominate the market through acquisition
or related diversification or to follow unrelated
diversification strategy. Companies which operated
outside the domain of the government, while benefiting
from its incentives, appear to be more viable.
One way to judge the performance of the business
community is to look at macro-economic indicators.
While the rate of growth of the African economy
during recent years has hovered around 3 or 4
percent, export record of the economy is still
low and there is high level of unemployment. Products
are expensive and not of high quality.
Business strategies in under developed economies
are constrained by environmental forces, shortcomings
of government actions and policies as well as
inadequate response of business firms due to their
weak internal capabilities.
The absence of adequate regulatory institutions
in Africa has led inefficient entrepreneurs to
succeed based on political connections or questionable
practices. Resources are not allocated on the
basis of a transparent and equitable criteria.
The issue of settling claims has been a problem
since the State adopted the free market economy.
All this is intolerable in developed nations where
the regulatory institutions control quality and
price. The banking system is well developed and
serves the business establishments well in import
and export. However due to African business frequently
defaulting, the advance payment credit is the
best option. (Ref 6: Samir Youssef)
Given the institutional environment described
above, a number of strategies could be adopted.
Four types of business strategy role are identifiable:
prospector ,analyzer ,defender and a reactor.
Prospector is the most extroverted and opportunistic
type and displays an interest in new product and
market opportunities. The defender tends to be
efficient in a market that it tries to defend.
The analyzer maintains a balance between a stable
market and new product and market opportunities.
The reactor senses the environment but does not
appear to develop appropriate responses and as
a result exists in a state of perpetual instability.
The pure prospector strategy is difficult to find
in Africa due to institutional shortcomings, shortage
of entrepreneurs and limited indigenous sources
of innovations.
The other three strategies are more likely to
be found.
Elements of the Strategy:
These would first include the arenas of operations
or what business the company is in. This includes
product categories, market segments, geographic
areas, technologies and value-creation stages.
The second element is the vehicles of growth,
such as internal development, joint ventures,
licensing and acquisition.
The third element is the differentiating factors
the company possesses, such as image, price, styling,
service and product quality. These three elements
are the substance of a strategy. The fourth element
is the staging of these different moves; i.e.,
the sequencing of initiatives. The fifth element
is how profits will be generated; e.g., through
using scale and/or scope economies to achieve
low cost or through charging higher prices due
to unmatchable service or proprietary product
features.
These elements of strategy can be applied whether
the company is following a prospector, analyzer,
defender or a reactor strategy.
Companies following the Analyzer Strategy have
tried to utilize the local market as a stable
portion of their domain and in the mean time have
made some inroads in the export market. These
companies have developed an external market orientation
whereby they capitalized on the comparative advantage
Africa has in highly qualified engineers or cheap
labor and available raw material either in the
form of independent operations or to place Africa
on the value chain of multinational companies.
Owners of these companies have a global mindset
and their strategy can be classified as an analyzer.
Some companies that adopt a Defender Strategy
have a primarily local orientation with limited
export activity to nearby markets. They acquire
local companies. The acquisition is consistent
with the company's desire to maximize the use
of its distribution and service network. It works
well when the company has established reputation
in reasonably priced and quality products combined
with an extensive network of after-sale service.
This strategy helps in creating a mass local market,
especially when consumers are price conscious.
There is another group of companies, which having
a local mindset, adopt a reactive strategy and
are always demanding protection. Despite clear
signals they are not yet quite ready for the eventual
integration between local markets and global markets
They are highly inefficient but they are profitable
based on the difference in tariffs between local
and imported products. While these businessmen
may amass huge fortunes but their long term viability
in face of the continuous removal of barriers
to trade is in question. This strategy is encouraged
by the import substitution policy adopted by the
Governments of developing nations, and the reluctance
to replace it by an export promotion strategy,
fearing social repercussions.
The change of status from an Analyzer Strategy
to a Defender Strategy appears to be a characteristic
of a number of Business Groups which initially
take risk by venturing into new fields of operations,
but later demand protection. Many of them are
currently unstable financially due to poor financial
management in addition to the limited experience
of the owner-managers in managing unrelated fields.
They may even slip into the reactor category if
they fail to manage their financial problems.
Many of these Groups started initially with a
small equity base and obtained huge credits from
banks. Poor financial management, right from the
start, would threaten the company's ability to
maintain its analyzer strategy.
Financial management is essential at the formation
stage where appropriate capital/debt ratio is
applied to avoid early demise of the project due
to lack of liquidity and to safe guard against
delinquency behavior of creditors especially that
of the government. While the institutional void
exemplified by the inefficient banking system
may create a tempting situation for businessmen
to have a lower capital/debt ratio, the results
are disastrous, if a sudden recession hits the
country. Companies which have followed a conservative
financial policy, had operations abroad or an
export activity have gained while others which
rely heavily on imports and the local market have
lost. (Ref 7:Samir Youssef)
In conclusion we can say that in a developing
nation, Government behavior is unpredictable and
inconsistent. In a poor economy the government
finds it difficult to relinquish its welfare function.
In the mean time it is under pressure to observe
efficiency and the rules of the market. Businessmen
can still benefit from tax exemptions and imperfections
of the market still existing in the transition
stage. While companies may try to take advantage
of the institutional void in a transition stage,
to survive in the long run they need to develop
their internal capabilities and preferably develop
an export orientation. Due to the absence of an
anti-trust law, achieving market dominance appears
to be a favorable choice among businessmen. Lacking
enough long-term business orientation, businessmen
tend to plan in a linear fashion without giving
enough considerations to the possibility of an
economic slow down ,which could be severe in a
developing country due to immobility of resources.
Application of sound financial management in the
early stages of a project is a good safeguard
against imprudent expansion. This will help the
businessman in being proactive rather than reactive
in his strategies.
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