Podcast 7 - Game Theory

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A full transcript of this podcast is reproduced below.

Hello, I’m Ruth Rowan, I’m Head of Global Propositions and Marketing for BT Global Services and I’m going to talk about game theory.

So, what is game theory, let’s start there? Game theory provides an analytical tool for examining strategic interactions amongst two or more participants. By using simple and quite often numerical models to study complex social interactions, game theory can illustrate the potential for, and the rest associated with, cooperative behaviour, particularly amongst potentially distressful or unknown participants.

We’re mainly familiar with the prisoners’ dilemma game which illustrates the potential for cooperation to produce mutually beneficial outcomes. This cooperation, that requires that both players compromise, also means that they potentially forego their individual maximum pay offs.

In compromising each player also risks complete loss if their opponent decides to seek his or hers own maximum pay off and rather than risking total loss, players tend to prefer the less productive outcome.

So what does this mean for big corporations and can and do we use game theory to gain a business advantage? Whether that's collaborating with suppliers that we work with to complement each other’s assets or potentially to analyse and predict the reactions of customers to new corporate strategies.

A couple of examples I’m going to use to investigate how organisations can use game theory. The first is around CRM (Customer Relationship Management) and how organisations interact between themselves and their customers and the second, an example around new product entry and how organisations can use game theory to predict a market response to a new product that’s being launched.

So let’s start by looking at CRM, essentially the relationship between an organisation and its customer. CRM is a precise science and game theory has been used extensively to help get the right balance between customer satisfaction and the optimum trading model, or cost to serve that customer, for the supplying company.

As more and more business starts to move online, and consumer trends mean that customers are beginning to use these new channels to interact with the organisations, game theory has been deployed in order to get the right balance between customer satisfaction, customer service and the cost to serve those customers to drive profitable business.

Businesses need to predict, spot or gain potential first mover advantages or decide to adopt a fast follower technique in using some of these channels to interact with the organisations. Where consumers and organisations meet, whether it’s in a store, on the internet, or in a contact centre there’s an opportunity for a win-win situation between both organisations and their end customer.

BT Global services recently surveyed over a thousand consumers in both the US and in the UK to talk about their attitudes to new contact channels and self serviced technologies particularly with often highly desirable for consumers and also for organisations.

Customers realise that there is a compromise required when they interact with organisations today, particularly in today’s depressed economic environment and the opportunity for them to use self serviced provides both the win-win for the customer who gets quick interactions with the organisation and win win for the organisation.

On average to handle voice calls an organisation will pay approximately £6.50 compared to handling a self service transaction whether that’s speech recognition over the phone or an internet transaction will be approximately £0.70. So a 90 per cent cost saving in actually providing a self service transaction to a customer, whilst at the same time the customer gets the opportunity to serve themselves very quickly 24/7 without the need to necessarily speak to an agent. So customers really starting to use game theory now in terms of managing this balance between serving customers and managing their costs.

So let me move on now to the second example. When we talked about market entry, new product development entering new markets, am going to use an example here from BT’s own experience in entering the Unified Communications and Collaborations markets or as we call it UCC.

This is a far less well defined market for us and there are many areas of new competition. Customers generally are very confused about the business benefits of UCC, who the key players are and exactly what they should be doing today, and in the medium term, in terms of getting their organisation ready to adopt a unified communication strategy.

In complete contrast to the Business to Business market, the Consumer market for unified communications and collaboration technology is exploding particularly with the Web 2.0 offerings. Services are spreading virally and many consumers are gaining confidence in starting to set their sights on new technology and the organisations that are serving these customers are really beginning to gain speed.

The use of game theory for service providers currently in the UCC market is absolutely essential. Firstly to attempt to identify exactly where the new competitive threats will come from, particularly from those players serving the consumer market. And secondly, to pre-empt any disruptive strike from the new competitors and finally, to change the model from traditional to disruptive in a new competitive environment, should we at BT as a service provider continue to sell in a traditional fashion and gain a small piece of this new and emerging market place or should we go for an innovation and exploitation of some of these services disrupt and potentially take a larger market share.

We’re really using game theory to address these prisoners’ dilemma to help us identify to right strategy for us to enter into the new UCC market place. So this is the ultimate prisoners’ dilemma for us in BT Global Services. We’re looking at whether we’ll ultimately need to share our market with a larger number of competitors potentially leading in less overall market share. We’re looking at assessing whether we need a disruptive strategy to go and grab land share/market share and is that the best option for us to get ahead?

We’re already seeing collaboration provided greater transparency between our business partners and in this new competitive environment we’re also aware that these business partners could very quickly become our competitors.

There’s a need for better collaborative tools and working practises between our key partners and particularly relevant for us in BT that plays in the message of software worlds, as the messages and software worlds start to merge. We’re working with independent software vendors like Microsoft and IBM who are also looking to compete with Telco equipment provider Cisco and Nortel who are our current partners. All of these players are beginning to move into each others’ spaces and all our sights on a traditional base. Using game theory will bring some of these partners like Cisco and Microsoft together and jointly integrating and creating integrated offers giving them a win win and also us at BT a unique position in this competitive market place.

So, in conclusion, game theory clearly provides an opportunity for organisations ato improve their strategic performance in a range of different contexts in a world of increasingly complicated ecosystems for businesses being able to take a step back and consider where a win win or winner takes it all strategy is serving the interest of the organisation and perhaps where it does not can help improve performance. It will also help us prepare for a world after recession, so now is the time to be thinking about how game theory can apply to more areas of our decision making.

Ruth Rowan is Head of Global Propositions & Marketing, CRM for BT Global Services, with responsiblity for driving the go-to-market strategy for the company’s CRM business across the European, US and Asia Pactific markets. Rowan has an honours degrees in Human Sciences from the University of Oxford and joined BT from Siebel Systems in 2005 where she was Director, Integrated Marketing, EMEA.

www.globalservices.bt.com