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.