The Game Maven of New Haven - instructional media + magic

The Game Maven of New Havenby Michael V. Copeland

from strategy+business issue46, Spring 2007 reprint number 07108

© 2007 Booz Allen Hamilton Inc. All rights reserved.

strategy+business

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The GameMaven of New Haven

by Michael Copeland


by Michael V. Copeland

Yale professor Barry Nalebuff brought game theory from the ivory tower to

the executive suite — and to his own thriving company, Honest Tea.

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Barry Nalebuff has a hankering for ice cream. Not just any ice cream. He wants a particular organicrecipe, developed by a startup with a stall located some-where in the maze of booths in the BaltimoreConvention Center at a trade show called NaturalProducts Expo East. An economist and professor at YaleUniversity’s School of Management, Nalebuff is also thechairman of Honest Tea, an organic beverage companyhe started in 1998 with former student Seth Goldman.That role has brought him, in October 2006, toBaltimore to meet with buyers, investors, and distribu-tors. What he seems to enjoy most at the show is his roleas booth “hunk” (as his staffers call it) — pouring teaand answering questions from all comers. It’s the kind ofthing that clearly goes better with a little ice cream.“Let’s get a snack,” Nalebuff says to a visitor, and he’s offinto the chaos of the convention hall.

Honest Tea’s chairman, 48, looks like a stereotypicalabsent-minded professor, with curly hair sprouting fromhis head and green-accented spectacles perched on hisface. But he is also a hard-edged business analyst.Walking the aisles at the convention center, he stops atevery food business he passes to ask questions of the pro-prietors. What is the sourcing? Who designed the pack-aging? How is it distributed? Does it taste good? Givenan opening, he almost always has a suggestion for tryingthings differently or looking at a challenge from a newperspective. Meanwhile, between booths, he describesthe equity structure of Honest Tea and the debt it owesto the mathematical field called game theory. His refer-ences range from Donald Trump to economists JamesMirrlees and William Vickrey, who shared the NobelPrize in 1996 for their work in applying game theory toincentive problems.

Barry Nalebuff is a rare breed: a working economistwho also runs a business. He made his name in aca-demic circles with two related ideas. The first was theapplication of game theory to business strategy. The sec-ond was “co-opetition”: a strategic way for managers towork with rivals, balancing the tension between growinga pie together and competing to get the biggest piece.The theme tying together his academic work is thedetermination to apply game theory to ignite innovationand tackle real business problems — a practice he haspursued in consulting stints with Columbia ForestProducts, Eli Lilly and Company, Johnson & Johnson,and General Electric, among many other companies. Heis one of the enviable handful of “creativity consultants”corporate leaders bring in to shake up calcified thinking,tease out innovative solutions, or game out the possiblepermutations of a deal in the offing.

“Barry has this particular intellectual agility thatallows him to reduce business problems to their practi-cal essence,” says Lydia Micheaux Marshall, who sits onthe board of Nationwide Insurance with Nalebuff and who hired him as a consultant to Sallie Mae. “But at the same time he is able to tie in lessons of eco-nomic theory.”

Nowhere has Nalebuff ’s creative and practicalapproach to economics been more deeply integratedinto a company than in his own. Both literally and fig-uratively, Honest Tea puts Nalebuff ’s theories on dis-play. For starters, the labels of its lightly sweeteneddrinks — the products that launched Honest Tea —spell out the rationale for the sugar content, including achart illustrating the decreasing marginal utility ofsweeteners. This little chart educates tea drinkers in theNalebuff Approach, in which solutions lie in examining

Michael V. Copeland([email protected]) is a seniorwriter at Business 2.0 in SanFrancisco. He received a 2006 Business Journalist ofthe Year award from the WorldLeadership Forum.


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problems from new perspectives and calling on eco-nomic theory to bolster the response. In other words,how can you get great taste without a lot of calories? Notby eliminating sugar, but by skimping on it. A littlesugar adds taste (marginal utility), whereas a lot of sugaradds only calories (declining marginal utility).

“You will notice that we did not pick the point onthe curve where the flavor was maximized,” Nalebuffsays. “The reason was that by backing off the sweetnessfrom there we lost very little in terms of flavor, while sav-ing a good amount in terms of calories.” Honest Tea’sperformance suggests that the theory holds water: Theslightly sweet beverage is the number one brand in suchpremium chains as Whole Foods.

The professor brings that same practical approachto the classroom. In his business school classes on negotiation and strategy, he leans heavily on his experi-ences building Honest Tea into a thriving operation.Meanwhile, he has coauthored three well-regardedbooks that popularize his approach to problem solving,wherein the ability to achieve good results depends onthe ability to recognize marginal gains and probabilisticoutcomes. “There are nonbelievers out there who thinkthat game theory is an interesting academic subject thatdoesn’t have much to contribute to business,” Nalebuffsays. “I believe that a game theory perspective has wideapplications. A better understanding of game theory can lead to more successful business, politics, and everyday life.”

As suggested by the titles of his books — ThinkingStrategically: The Competitive Edge in Business, Politics,and Everyday Life; Co-opetition: A Revolutionary Mind-set That Combines Competition and Cooperation. TheGame Theory Strategy That’s Changing the Game ofBusiness; and Why Not? How to Use Everyday Ingenuity toSolve Problems Big and Small — Barry Nalebuff regardspracticality as an absolute requirement for any theory.The most practical ideas are those that serve the greatergood by helping individuals observe their environmentmore keenly. “A key lesson of game theory is to lookahead and anticipate the moves and countermoves ofothers,” says Nalebuff, while striding through the con-vention center aisles. “Many of our current struggles inshaping the world come from a failure to anticipate thereaction of others to our strategy.”

Nalebuff stops in front of HappyBaby, a new pur-veyor of frozen organic baby food. After pronouncingher pears “delicious,” he peppers Shazi Visram,HappyBaby’s founder and CEO, with questions and

unsolicited advice. “The challenge with this is that it’sfrozen,” Nalebuff says. “Frozen distribution is incrediblychallenging, and the hard part for you will be rampingup production.” He gives Visram a contact for aCanadian company that has nailed the manufacture anddistribution of frozen foods. The two then moan aboutthe body aches associated with long days at the booth.“We were thinking of holding a yoga class in the aisle,”Visram says. Nalebuff immediately shifts into a one-legged pose, his arms thrust forward. That lasts only afew seconds; then, with a flourish and a smile, he headsdown the aisle in search of his ice cream.

Boundaries and IncentivesBarry Nalebuff first visited Yale in the mid-1970s as aprospective student during his senior year of highschool. Egged on by friends, he entered the college’s ora-tory contest, a competition normally confined to Yaleundergrads. Never mind that he wasn’t a student there;he hadn’t even prepared a text. He won. Yale offered himadmission, but he decided on MIT instead. “I thought Iwould be a mathematician,” he says. “Then I realized Ididn’t quite have it, and the world doesn’t need any morepretty good mathematicians.” He says his curiosity andhis facility with numbers drove him to study economicsand then game theory, which he pursued at OxfordUniversity as a Rhodes Scholar.

Game theory is the science of interactions.Introduced more than 60 years ago by John vonNeumann, the father of modern computer architecture,and economist Oscar Morgenstern, game theory is amathematical tool used to anticipate possible scenariosand develop appropriate strategies to deal with them. Itis based in part on the premise that the decisions madeby any players in a game change the nature of the play-ing field for everyone. For example, a basketball playeron a winning streak changes the nature of play for theentire team; the opposition, because it must devote itsattention to guarding the star player, can no longer coverthe whole court effectively. This in turn gives othermembers of the star player’s team a better chance ofbecoming stars themselves. In pure game theory, win-ning strategies involve learning to understand the mind-set and likely moves of key players, and thenanticipating their impact as everyone else reacts. Forbusinesspeople, an effective game theory–based strategymight mean examining all the players in an industry andteasing out how a move in any particular direction willaffect everyone else. The British navy pioneered game


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theory in World War II to help the Allies track GermanU-boats across the Atlantic. Game theory was lateradapted in academic settings to analyze games likepoker, football, and chess. (That history was depicted inSylvia Nasar’s book A Beautiful Mind, about mathe-matician John Nash, and in the film made from that book.)

From the 1950s through the 1970s, game theoristsbecame increasingly abstract and mathematical, basingtheir conclusions on equations rather than real experi-ence. Barry Nalebuff set out to reverse that trend andreconnect game theory to the real world. Although it is a widely accepted approach now, extending game theory to business required an intellectual leap. AsNalebuff explains, there are two reasons for that. Thefirst is the original emphasis on “zero-sum” games: Forsomeone to succeed in poker, football, chess, or evensubmarine warfare, someone else has to lose. “In busi-ness, your success doesn’t require others to fail,” he says.The second reason is that there are no explicitly definedrules in business. Indeed, nothing defines the bound-aries of a “game,” or even whether the same game isbeing played by all competitors. And that’s where boththe peril and the potential lie. “In business, you canwork incredibly hard and your efforts won’t be rewarded if you are playing the wrong game,” Nalebuffsays. “But you also have the opportunity to change thegame, rather than just play it. Success comes from play-ing the right game.”

Nalebuff bases many of his ideas on the thinking ofNobel Prize winners William Vickrey and JamesMirrlees (published in the late 1940s and mid-1970s,respectively). Their work illuminated how business andgovernment leaders can make decisions on such matters

as contracts and taxation even when they’re workingwith incomplete information. They looked at how dif-ferent incentives would affect the outcome of decisions.Mirrlees’s work on optimal income taxation led him tochange his political views — from the belief that thegovernment should tax the rich heavily to help the poorto the belief that, because taxes affect every individual’sincentive to earn, the optimal rate for everyone shouldbe just 20 percent. Vickrey’s work in “congestion pric-ing” suggested that pricing on toll roads and commutertransportation should rise during rush hour; thisapproach has become common for electrical utilities andairlines. (See “Lights! Water! Motion!” s+b, Spring 2007).

According to Nalebuff, in a globalized businessenvironment with instant communication and thereforenear-limitless options, game theory provides a way forcorporate leaders to consistently make better choices.“Because the world is changing so fast, we can’t count onlearning by doing or experience,” he says. “By the timewe have moved up that learning curve, we are in a newgame. And in the activity of shaping that game, we needto have tools that predict what it is that we are creating.”

But Barry Nalebuff hit a pothole in the late 1980swhen he tried to teach game theory. “The studentsweren’t seeing how it was directly applicable to busi-ness,” he says. The 1991 book Thinking Strategically,which Nalebuff wrote with Princeton economistAvinash Dixit, was his response, and a well-receivedeffort to bring game theory solidly into the real world.But Nalebuff wanted to take his ideas further. “I realizedThinking Strategically was sort of like Apollo 13, a suc-cessful failure,” he says. Co-opetition, written in 1996with NYU economist Adam Brandenburger (when bothwere at Harvard), was a further step, synthesizing

“In business, you can work incredibly hard and play the wrong game. But you also have the opportunity to change the game.”


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research in and out of the classroom to apply game the-ory to business.

The Game Changer’s RewardThen, while consulting to Fortune 500 companies inthe mid-1990s, Nalebuff developed his method forapplying game theory in business decisions. The processbegins with writing down and categorizing all the ele-ments of a game: the players, the rules (e.g., laws andgovernment regulations), people’s perceptions, theboundaries of the game (the market), and the linkagesamong all the elements. With that level of detail inhand, the player then spells out the consequences of achange to any of the elements. The approach helpsCEOs make better strategic moves by offering a morecomplete picture of the consequences of their decisions.More importantly, says Nalebuff, it can help leadersunderstand the games of their industry well enough toreframe the business. “ ‘Philosophers have only inter-preted the world. The point, however, is to change it,’”Nalebuff says. “Karl Marx said that, and I am probablyone of the few professors who still quote Marx, but hehad a point: The action is in changing games rather thanplaying games.”

Consider Holland Sweetener Company — a casethat Nalebuff teaches at Yale’s School of Management.In the late 1980s, Holland Sweetener was looking totake a swing at Monsanto’s NutraSweet business.Monsanto’s patent on aspartame, the sweetener in DietCoke and Diet Pepsi, was set to expire in 1992, andHolland Sweetener invested $50 million to build a plantand enter the aspartame “game.”

But Holland Sweetener was playing the wronggame. Rather than embrace a second supplier and bring

it into the business, Coke and Pepsi used Holland’s entry into the market to squeeze Monsanto for a $200million savings on NutraSweet. “And what did Hollandget? Diet Squirt,” Nalebuff says. “I want to argue thatthat was completely predictable. Coke and Pepsi didn’twant to switch; they wanted to use Holland to get alower price.”

So what does game theory suggest HollandSweetener should have done? “They should have gottenpaid for changing the game rather than playing thegame,” says Nalebuff. “They should have said to Cokeand Pepsi, ‘Before we build this plant, give us a contract.And if you are not willing to give us a contract now, whyin the world would you be willing to give us a contractafter we build the plant?’”

Holland Sweetener also might have asked Coke andPepsi to help pay for the cost of the plant. Or even bar-gained for a percentage of the savings that the new plantwould make possible. “They failed to see that they hada lousy product to sell in aspartame, but they were amonopolist in selling competition,” Nalebuff says. Inshort, selling competition — offering Coke and Pepsinew leverage in negotiating deals for its sweetener —was the game Holland Sweetener should have been play-ing. “Companies are too quick to give away competi-tion,” Nalebuff says. “I want to suggest that competitionis valuable. When I take on this activity I know what’s init for you, but I need to understand what’s in it for me.I want to make sure that I am going to be rewarded forchanging the game.”

After the plant opened in the late 1980s, HollandSweetener lost so much money that the company’s exec-utives decided to exit the aspartame game. But as a last-ditch move, says Nalebuff, “Holland Sweetener went toCoke and Pepsi and said, ‘Guys, we’re about to leave,unless you give us a contract.’ They used that threat toexit to expand the plant. So although they didn’t getpaid to play, they got paid to stay.”

For Nalebuff, a company must understand thenature of its leverage in order to understand how to playor change the game. “Before you go through the expenseand time, you need to discover in advance how muchthey value you. When you discover that they don’t valueyou, you need to do something else. And when you dis-cover that they do value you, then you can change thegame to make sure you are going to get more of that business.”

Perhaps the ultimate expression of Nalebuff ’s driveto popularize his ideas was an episode of the ABC pro-


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gram Primetime that he hosted in March 2006. In oneexample, six pairs of people, total strangers, had to findone another somewhere in the five boroughs of NewYork City. By thinking about what the other pair wasthinking, they all found each other within hours. Now,Nalebuff and Yale Law School Professor Ian Ayres (thecoauthor of Why Not?) are developing a reality televisionshow based on their book about driving innovation. It’sanother attempt to reach as broad an audience as possi-ble, but the goal isn’t just ratings, it’s change. “This isreality television with a higher purpose: to improve theworld,” Nalebuff says. In each episode, the swashbuck-ling professors will set out to solve a real-world problem.Viewers will see their process of problem solving, andthe implementation of the idea in real time.

The Anti-Dilbert PrincipleBarry Nalebuff is standing in front of a roomful of Yaliesat a recent alumni gathering where he’s the guest lec-turer. Because he’s not working the natural foods crowd,his dress is a more professorial shirt and tie. Still, he isnever far from using food to illustrate a point. He picksup a banana. “How do you peel a banana?” he asks thegathering of high-powered financiers, attorneys, andother mover-and-shaker types. A few members of theaudience shout out, “From the stem.”

Nalebuff smiles. Holding the banana stem up, heslowly rotates the banana, until the stem points at thefloor. “Bananas grow like this,” he says, positioning histhumb over what most people would consider the “bot-tom” end of the banana and peeling down. “What youwill discover is the banana peel comes away in twopieces, there are no strings, you’ve got this built-in han-dle, and your first bite is perfect.” The crowd chuckles.Nalebuff chews and gives them the punchline. “If youhad any doubt this is the right way to eat bananas. . .” hesays, his voice trailing off, as a photo of a monkeyappears behind him eating a banana the very same way.“My point is not to teach you how to eat a banana bet-ter or get you extra potassium, but to remind you thatwe get complacent,” he says. “We get into this habit thatthere is one right way to do things, and often the oppo-site way might be right.”

The topic of Nalebuff ’s lecture is innovation, and ithas been the focus of his recent research and writing. Hisapproach is summed up in the 2003 book Why Not?How to Use Everyday Ingenuity to Solve Problems Big andSmall. Indeed, since publishing the book, Nalebuff andAyres have established a two-man media operation, ofwhich their proposed reality television show is just onepart. They cowrite a column in Forbes, make jointappearances on NPR, and run a Web site that asks usersto offer and modify fixes to problems submitted byother users. Their goal is to shake people and companiesfrom their complacency and cynicism, and to help themgenerate new ideas. The theme of Why Not? is the powerof new ideas to foster new companies, new markets, andultimately, new games.

“I want to be the anti-Dilbert,” Nalebuff says.“What I want to bring together is this Yankee ingenuity,old-fashioned problem solving, ‘no engineering degreerequired’ approach. We’ve lost some of this approach —the ‘how can we do things differently and better?’ part.Part of our response has been to hibernate, to go backinto our shell. I am suggesting that we are not going tosolve our problems that way.”

Nalebuff then describes four essential techniquesthat he uses for promoting innovation and idea genera-tion in his consulting work and in the classroom. Thefirst is to look at problems from the point of view of aperson with all the power and money in the world — inother words, a person without constraints. The goal is toremove the individual’s internal editor, the nagging voicethat raises all the reasons not to pursue a new idea, andreplace it with the voice of the customer. “Instead offocus groups or market research, look at this customer inyour head, look at how they would solve the problem,and then go make it practical.”

What, for example, would Donald Trump do tosolve the problem of a fax machine calling your bed-room phone at 2 A.M.? “He’d hire an apprentice toanswer the phone for him,” Nalebuff says. “It’s a greatsolution, but it’s not affordable for us. But who do weknow who is up at that time, who can screen our callsfor free?” The caller. Nalebuff suggests a simple auto-mated voice response when the call goes through, but


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before the phone actually rings and wakes you up:“You’ve reached the Trumps. Press 1, and the phone willring. And it better be good.” As Nalebuff explains, “Thefax machine won’t know how to get through, but animportant caller will.”

The second approach is to look where incentives arepoorly designed, and then correct the problem. BarryNalebuff brings up the example of Blockbuster Video.When it was founded, the company bought tapedcopies of movies at $99 a pop from the studios; thismeant Blockbuster had to rent out each tape 50 times torecover costs. The result was a shortage of stock, leadingto dissatisfied customers who often could not find themovie they wanted. “How do you correct that incentiveproblem? How do you allow Blockbuster to have lots of

tapes?” Nalebuff asks. The answer: “Pay per play, or rev-enue sharing.” Blockbuster negotiated a deal in which itpays only $10 per movie, but shares $1 per rental with the studios. “Changing that incentive allowedthem to switch to guaranteed-in-stock, no late fees,much higher customer satisfaction, and much higherprofits,” Nalebuff says. “That switch saved their busi-ness. It may not save them from video-on-demand, butas they say, seven fat years are good preparation for sevenlean years.”

Turning things upside down is the third technique.Nalebuff can point to countless small shifts, like thebanana trick, that can often make big differences. Doyou put coffee in your milk, or milk in your coffee? Ifyou do the former, you know the milk gets mixed


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automatically as the coffee is added. So what? “Dunkin’Donuts made the switch at its outlets,” Nalebuff notes.“It is able to get rid of countless plastic stirrers and savemoney.” On a grander scale, Priceline.com took thepower to set airline ticket and hotel prices away from thesellers and gave that power to the buyers, building a $1+billion company in the process.

The fourth Nalebuff technique is asking where elsea product or an idea could work. Someone else has surely thought of your idea before you. Has the ideaworked in other industries, other countries? What canyou learn from other people’s investments? As an exam-ple, Nalebuff holds up a Spin Pop. The brainchild oftwo postal workers, the Spin Pop is a lollipop that spinson its motorized base when you push a button. The twoinventors of the motor-powered candy sold it for $15million — a pretty good outcome. John Osher, whoheaded Cap Candy, the company that bought the SpinPop, figured there was more that could be done with it.After walking the aisles of Wal-Mart for inspiration,Osher saw the expensive electric toothbrushes anddecided to create a $5 spinning toothbrush using SpinPop’s motor. Osher later sold it to Procter & Gamble for$475 million, and today P&G is using the same motorto power yet another product, the Dawn Power DishBrush, which sold in the tens of millions in 2006. “Thesuccess in every case was based on finding the rightproblem that their existing answer had already solved,”says Nalebuff.

“Barry is able to use game theory to quickly dissectthe tactics that a particular business uses in the market-place, and is able to reveal the underlying strategies andmotivations for these tactics,” says Howard Weissman,a former Warner-Lambert executive with whomNalebuff worked on the launch of a diabetes drug.“Working with Barry and his unique approach allowsbusiness managers like myself to either preempt a competitor’s next move or at the very least respond tocompetitors in a way that is beneficial to one’s ownbusiness.”

Lightly Sweetened ValuationsHonest Tea has been the one place where BarryNalebuff has explicitly put all his thinking about gametheory into practice. The idea for the company emergedafter years of teaching Coke versus Pepsi to his studentsand ruing the dearth of not-too-sweet options on themarket. “I was stuck for 10 years by not having theright product,” Nalebuff says. “I was stalled at mixing

orange juice with club soda, or cranberry juice with clubsoda, but I knew there was a market to serve adults.”

After a 1998 trip to India, where he drank vats oftea, Nalebuff came up with the idea for a lightly sweet-ened tea that he believed could wedge itself into theultracompetitive beverage market. Around the sametime, Seth Goldman, who had studied with Nalebuff asan MBA student and who was working for a sociallyresponsible mutual fund, returned thirsty from a run inCentral Park one day and found himself frustrated thatthere was nothing to drink that wasn’t sickly sweet. Soonafterward, the professor and student happened to talk;this led to a classic why not? moment, and with$500,000 collected from friends and family, the com-pany was born.

The formula with which Nalebuff and Goldmancapitalized the company was pure game theory.Normally, startups have to gin up a valuation for a com-pany that doesn’t yet exist. “Rather than try to defendsomething that we pulled out of thin air, we created avaluation that was based on our subsequent perform-ance,” Nalebuff says. The early investors came in with azero pre-money valuation, but the founders got warrantsat two times, three times, and five times valuations.Once the stock price doubled, the initial investorswould be diluted. Once they had tripled their money,they would get diluted again. They would be dilutedone more time when they had received five times theirmoney. Nalebuff had created a contingent valuation.The effective initial valuation ultimately depended onhow well Honest Tea did. “The game theory lesson hereis that when two sides disagree about something, ratherthan try to convince the other side that you are right,agree to a bet,” Nalebuff says. “If we did as well as wehoped or expected, then our initial valuation wouldprove to be high. But if not, then we would not dilutethe initial investors.”

To survive as an independent in a fiercely competi-tive market, Barry Nalebuff has time and again turnedto tactics grounded in game theory. For example, whereas most commercial tea producers use crushedleaves and dust to make their products, Honest Tea fig-ured out how to brew its product from whole leaves.When a larger rival came up with its own whole-leafbrewing technology, Nalebuff saw a real threat: Thatrival, with its superior marketing and sales muscle, wasgoing to grow the pie without cutting Honest Tea in onthe growth. By sharing its technology with yet anotherrival in the form of a private-label arrangement, Honest


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Tea was able to help grow the pie and enjoy a bigger sliceof it. “It allowed us to position the private-label productsagainst a rival’s lineup,” he says. “And prevented themfrom doing it to us.”

Of course, game theory cannot yield answers to allthe challenges that Honest Tea faces. It cannot help inthe cutthroat competition for shelf space, for example.As Seth Goldman, the CEO and natural sales and mar-keting chief, describes it, Nalebuff hit a brick wall whenhe went to argue with a retailer for more display spacefor his product. “He has a very rational approach,”Goldman says. “He’ll go to a store and find out we havea product that is selling well for them, and just expectthat they’ll understand that they need to carry more of that product.”

That retailers behave irrationally in the face of suchlogic baffles Nalebuff. “Sometimes people don’t see whatis in their best interest,” he says. “You have to work hardto make your business idiotproof — and you’ll still beamazed at what you see in the market. For example,we’ve had stores that don’t put our tea in the coolerbecause, they say, ‘Your product sells so fast that we’dhave to restock the cooler before lunch and we don’thave the staff to do it.’”

Nalebuff is on a roll now. “Barry isn’t always thebest person to handle sales,” Goldman says, laughing. “Iremember a conversation he had with Yale’s cateringservices that ended in a lot of phones being slammed.”Still, Honest Tea will ring up about $10 million in salesin 2006. Recent deals with Sam’s Club and Costco andwith a handful of large distributors suggest that HonestTea is poised for growth.

“Economic theory often predicts that the firm withthe lowest price or best product will capture the market,

but inertia is a powerful force to overcome,” Nalebuffsays. “Unless you are vastly better than everything elseout there, as a small company, you can never get past themistakes you make and get noticed enough for people tocare about what you’ve done.”

Back at the Honest Tea booth, Nalebuff is simulta-neously serving tea, chatting with the husband of a for-mer student, and guzzling Brazilian coconut juice. “Thisis a fantastic product,” he says, turning the bottle to findthe name of the distributor. Nalebuff glances off to theside, and you can see that the wheels are turning. Whoare the likely partners? Will the overall market grow?How would it be divided? How would manufacturinghappen? Would customers even like it? “I wonder howwe could combine it with our tea,” Nalebuff finally says.“Why not?” Why not, indeed.

As with so much in Barry Nalebuff ’s world, thequestion here is, What is the game? And how can youthink about it a little bit differently — to give yourselfthe edge to win? +

Reprint No. 07108

“Economic theory predicts that the firm with the lowest price or best product will capture

the market, but inertia is a powerful force.”

Resources

Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition: ARevolutionary Mind-set That Combines Competition and Cooperation. TheGame Theory Strategy That’s Changing the Game of Business (Doubleday,1996): One competitor doesn’t have to fail for the other one to win.

Avinash K. Dixit and Barry J. Nalebuff, Thinking Strategically: TheCompetitive Edge in Business, Politics, and Everyday Life (W.W. Norton,1991): How to apply game theory to problems of all sorts, includingthose in business.

Barry Nalebuff and Ian Ayres, Why Not? How to Use Everyday Ingenuity toSolve Problems Big and Small (Harvard Business School Press, 2003): Aguide to automating the process of innovation.

strategy+business magazine is published by Booz Allen Hamilton.To subscribe, visit www.strategy-business.com or call 1-877-829-9108.

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