strategic gaming introduction · others’ moves •initial ... licensing negotiations in pharma 22...
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Strategic Gaming™
An Introduction
Contents◦ About Dragonfly
◦ Game Theory and Strategic Gaming
◦ Strategic Gaming Applications
Mar 2019 Strategic Gaming Introduction2
Background
Mar 2019 Strategic Gaming Introduction3
Our work has spanned the globe • Company &
Business Unit
Strategy
• Portfolio
Management
• Growth Strategy
• Investment &
Capacity Decisions
• Alliance & Joint
Venture Strategy
• Competitive
Positioning
• Market Entry
Strategy
• M&A and Licensing
• Strategic Sourcing
• Bidding Strategy
• Negotiation
Strategy & Tactics
• Product & Pricing
Strategy
• Governmental
Affairs & Political
Risk Assessment
We have helped
clients with a wide
range of strategic
challenges:
Our work has enabled our clients to capture billions of dollars in value from a wide range of projects
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Services and Capabilities
Strategy Support
DecisionTools
Coaching & Training
Process Development
Typically our work involves a combination of our services and capabilities; our leading game-theoretic approach provides our clients with a competitive edge…
Strategic Gaming™
Decision Analysis
Real Options
Portfolio Analysis
Political Analysis
War Gaming
Mar 2019 Strategic Gaming Introduction5
Contents◦ About Dragonfly
◦ Game Theory and Strategic Gaming
◦ Strategic Gaming Applications
Mar 2019 Strategic Gaming Introduction6
So, what is game theory?
Mar 2019 Strategic Gaming Introduction7
Game theory, the science of strategic thinking, is a tool that enables us to analyze interactive situations
◦ Should we compete or cooperate, and how?
◦ Provides a logical and clear structure of interactive (chess-like) situations
◦ Helps predict and prescribe optimal strategic behavior for a wide range of interactive situations
Since 1994, five Nobel prizes have gone to game theorists:
“…game theory has become a universally accepted tool and language.” Thomas Schelling
John Nash
Where does game theory apply?
Decision
Analysis
Game
Theory
Game
Theory
Influence Potential
Yes
Yes
No
No
Decision
Analysis
(with options)
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COORDINATION
COMPETITION
Prisoner’s
Dilemma
Deadlock
Battle of
the Sexes
Chicken
Assurance
COLLABORATION
Decision Theory and Game Theory:Small Changes, Big Differences
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Humans and chimpanzees share 98.5% percent of DNA, but there are big differences; decision theory and
game theory are analogous
In decision theory, we model other players’ choices as uncertainties
In game theory, we model other players’ choices as decisions, and their payoffs
Game dynamics are very common
• Competitive positioning
• Partnering/strategic alliance/JV choices
• Partner alignment
• Bidding
• Political /regulatory issues
• Licensing, acquisition or divestment
• Commercial negotiations
• Procurement/supplier management
INTERACTIVE ISSUES GAME DIMENSIONS
• Compete or cooperate?
• Others’ value drivers?
• Win-win space?
• Points of leverage?
• Messaging?
• Interpreting signals and bluffs?
• Timing of actions?
• Tactics for eliciting information and/or influencing others?
• Game changers?
• Contingency plans?
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Strategic Gaming™: A Practical Game Theory Approach
• Players
• Choices
• Sequence
• Uncertainties
• Structure
• Strategic thinking
• Qualitative
evaluation
• Provide direction
• Quantify
uncertainties
• Compute
payoffs
• Anticipation of
others’ moves
• Initial evaluation
• Evaluate game
changers
• Develop tactics
• Ensure alignment
• How to change the
game
• Effective signaling
• Dynamic road map
• NegotiationReady™
Steps:
Deliverables:
Dynamic
Framing
Strategy
Evaluation
Execution
Planning
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Framing interactions and uncertainties
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Beta accept?
Seek to buy out Gamma?
Gamma accepts?
Tech learning
Beta aligns?
Reservoir model only
Expand scope of studies
Imaging
Existing wells
Modeling results
Cooperate on tech studies
Yes
No
Choose preferred strategy
Cooperate or confront?
Conditional cooperation
Veto threats
Evaluation principles◦ Look forward and reason back
◦ Assume “rationality” (economic)
◦ A useful starting point; later, can relax the assumption
◦ Clients often say that another player is irrational; after inspection, it is seldom true
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Example: Identifying leverage
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Nash
Supplier
It turns out, there was a lot of leverage
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Nash’s value rises even if the supplier tries to walk away, and based on the supplier’s other opportunities, it is highly unlikely that the supplier can move more than 30
Supplier will be shooting itself in the foot if it walks away from doing business with Nash
Delta NPV to Supplier if Pulls All Rigs
0 10 20 30 40 50 60 70
Rigs Supplier Can Place With Others
10-50-90 range of estimates for what Supplier
could place with others
Delta NPV to Nash if Supplier Pulls Rigs
0 10 20 30 40 50 60 70
Rigs Pulled by Supplier
10-50-90 range of estimates for what
Supplier could place with others
Deal structuring & qualitative assessment
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This approach is often a useful first cut to framing the dimensions of a deal and qualitatively assessing where there are likely win-wins and misalignment; quantitative evaluation can and should, in most cases, follow from such an exercise
These 4 terms define the deal structure
By putting ourselves in the shoes and minds of
the players, we qualitatively assess
their preferences on each of the deal terms; here we see there will likely be alignment on
deal terms 2 & 4, misalignment on 1 & 3
Economic modeling (negotiations)
Cash flows for each party
Our and counterparty
payoffs, different metrics
Uncertainties
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Terms
Price of asset sale 330
Cash deal Yes
Cash up front 100
Financing 230
Years financing 5
Interest Rate 5%
Including uncertainties, we can evaluate the range of value from different deals
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100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
Deal 1: 30% chance of
negative NPV for Red,
large gap with Blue
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
Deal 3: A win-win in
which risk is minimized
for both parties
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0
Deal 2: 60%
chance of NPV
negative for Blue,
not realistic
By identifying and modeling key uncertainties and risks for each player, we can generate s-curves to show the
range of potential value. In this case the s-curves show Red would never accept Deal 1, Blue would find Deal 2
too risky and unfair, and Deal 3 would be a win-win. Such insights can be very useful in negotiations.
Projects deliver clear, detailed road maps
Such road maps are typically supplemented with detailed plans for key interactions and other action items
Explore Meetings
with Gamma
Assess swap
opportunities
Work a product deal
(connectivity to XYZ)
Talk with Delta
(use as threat with Gamma)
Reach out to Beta. Must bring ABC
connection. Asset swap. ABC contingent
deal. Protect/enhance (equity) trading
opportunities & opco needs.
Work a deal. Needs ABC connection.
Asset swap. Protect/enhance (equity)
trading opportunities & opco needs
Determine footprint that needs to be secured
contractually/tradeoffs for deal
Begin to build business (does not need to wait until 2017). Shift
blending operations away from Alpha.
Work on price increases & contractual
changes with customers
Verify there is a business case for
equity crude blending
Work the value of trading opportunities
Talk with Alpha (strong bargaining position if
ABC has failed; consider ways to block ABC
if it has not)
Interest
on
Product?
Interest on
Crude?
ABC: $0-25MM
Deal should be
ABC contingent.
ABC:
$0-25MM
No ABC:
$20-45MM
Deal should
be ABC
contingent.
ABC
fails
Deal
works
out?
Refine required footprint/tradeoffs
for deal
Delta
Ga
mm
aB
eta
Alp
ha
Inte
rna
l
Opco 1
Opcos 1, 2, 3
Opcos 1, 2
Opco 3
Other Opcos
Yes
Yes
Yes
No
No
No
Close
coordination
needed
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Contents◦ About Dragonfly
◦ Game Theory and Strategic Gaming
◦ Strategic Gaming Applications
Mar 2019 Strategic Gaming Introduction20
Forging Alliances in Alternative EnergyIn a consolidating industry and in the face of a
serious threat from a much larger rival, we helped
an alternative energy company develop a strategy
and tactics to successfully negotiate key alliances
without leaving value on the table.
As a result, the client:
◦ Became the clear market leader,
◦ Grew revenue 20 times in 2 years,
◦ Reduced its costs,
◦ Increased profit margins sharply.
Mar 2019 Strategic Gaming Introduction21
Nash Green Dog Red Dog
Licensing Negotiations in Pharma
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Mapping out each of the players’ possible actions over time, and taking into consideration chance event uncertainties, is the first step to being able to look forward and anticipate the downstream consequences of choices we might make and agreements we might negotiate.
Biotech BiotechBig Pharma
Phase III
results
Very good
Fail
Seek tiered deal
Seek flat % dealWait
Enhance sales & marketing
Not
Accept
Reject
Big PharmaCannibalize and promote strongly
Not cannibalize and promote weakly
Marginally good
Biotech
Seek tiered deal
Seek flat % deal
Big Pharma
Accept
Reject
If no prior deal
Focusing on one part of the larger tree, we see a Biotech-Big Pharma win-win from tiered deal terms, though still room for both parties to negotiate a better deal. For the Biotech, a flat deal should be avoided because it will not produce appropriate incentives for Big Pharma to promote strongly. For Big Pharma, there is room to negotiate more than $400 million of additional value from a tiered deal.
JVs in Oil & GasOn numerous occasions, we have used Strategic Gaming to help oil and gas clients understand how to better influence partners in JVs and compete more effectively with competitors.
These clients have captured or preserved hundreds of millions of dollars of value by developing bold strategies and tactics that:
◦ Enable them to exercise effective levers
◦ Gain alignment with partners on beneficial win-win terms
PartnerAdversarial relationship
developing (?)JV Exploration
Will they renew?• Play Studies
– Complete in
4 months
Niche PlayerInfrastructure & Technical
advantages
• New Play
– Open Acres
– Auction in 6
months
• Old Play
– Existing
infrastructure
Form new
partnership?
Go Alone or
with Partner?
Nash Oil Co. The Client
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Positioning Strategy in Gas & PowerWe used Strategic Gaming to help a company understand how to better position itself in the face of serious risks from two LNG competitors.
The client was in a complex game of “Chicken” with competitors, and we helped the client see how certain investments and customer deals could help them to move first with a credible commitment that would provide them with the upper hand.
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Sources of value-add across 50 projects that used Strategic Gaming™
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These sources of value have led to billions of dollars in value capture or savings versus clients’ momentum strategies
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Share of projects featuring each source of value-add
Better Understanding of the Game: 100%
Better Insights into Other Players: 90%
Better Organizational Alignment: 84%
New Game Changing Ideas: 84%
Better Tactical Ideas: 71%
To find out more…
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www.DflyStrategy.com
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