Zero sum game in business


  • Business
  • Saturday, 07 Jul 2012

YESTERDAY I realised that being good with numbers does not necessarily mean that you are equally good in mathematics. Earlier, I came across a maths problem which started as a = b and after a few equations ended up as 1 = 2. Completely baffled for a few days, I eventually gathered sufficient courage to ask my eldest boy for an explanation.

Having just completed his first tertiary year majoring in Mathematics, he patiently explained to his old man that the answer was wrongly derived because you should not divide by zero in mathematical equations. Huh? I am now totally completely puzzled.

Slightly agitated now, he gave an example in the simplest term. Assuming you have RM30bil divided by 30 people, you will get RM1bil each. If you divide RM30bil by zero persons, you end up with zero RM.

30/0 = 0. In multiplication, 30x0 = 0 too. This is pure magic as RM30bil just disappeared ... to nobody!

Wow. For a moment, I had great hopes that this mathematician son of mine has the potential to be a great politician. Nah... he is just too straight and he has excellent memory.

Entrepreneur wannabes should try to grasp the game theory of zero-sum games and non zero-sum games so that you can understand the complexities of negotiation within each industry. In a zero-sum game, one party gains at the expense of the other party. All the gains minus the losses is equal to zero. This is a competitive game, you either win or you lose.

In a non zero-sum game, the total gains or losses will add up to be more or less than zero. This could be a competitive or non-competitive game. This mathematical game is also known as economic theory as you have economic benefits shifting from player to player and the economic pie is either enlarged, shrunk or remains the same.

To illustrate a zero sum game, say a factory produces a football that costs 30 bucks and ends up with you, the consumer buying it at the fixed recommended price of 100 bucks. The value chain created a value of 70 bucks which is shared by the distributor and the retail shop on an equal basis. Then with the influx of so many brand competitors, the retail shop managed to squeeze an additional 10 bucks from the distributor but still sells the football at 100 bucks, then we have a situation of zero sum game. The retailer has won additional economic benefit from the distributor even though the value created through the value chain remains the same.

So if you are involved in a business that is highly competitive with many other choices, chances are the retailer will always have the one up over the distributor in the negotiation process. The distributor will continue to see his margins being depressed over the long run.

Then when other sport shops start a price war on footballs, this retail shop follow suit and now offer the same football at 80 bucks. So he squeezes the distributor for another 5 bucks and now we have a non zero-sum game in play. The value chain margin has decreased from 70 to 50, the retailer margin has gone down from 45 to 30 and the poor distributor has seen his margin drop from 35 to 25 to 20. Now it is below zero-sum and it is a competitive environment where both players ended up losers. This is the most common scenario prevailing in many industries at the moment. From airlines to consumer products to other industries and all players along such supply chain suffers.

On hindsight, you will be better off being the Chinaman (unbranded) garlic importers and wholesalers at this particular moment where the garlic price has gone up three times from RM5 a kg to RM15 a kg. Riding on a supply shortage, they have played the non zero-sum game magnificently, raising the value chain substantially and enjoying extraordinary profits together in the spirit of cooperation and collusion. Just like past MAS and Singapore Airline's monopoly on the KL-Singapore route where we poor consumers paid twice the fare compared to a KL-Bangkok flight which took twice as long to fly to.

If you see your margins being eroded no end, I suggest you put on your creative cap and figure out some new products, rebrand or try any new strategies that can add more value to your value chain. If you find that too hard to do, then I recommend that you create value on paper. Like buying a football field, recreation land at RM25 per sq ft and through magical mathematical equations, convert it to commercial land and resell that piece of land title paper to the original owners at 10 times the original value, thus mastering the non competitive non zero-sum game. But you will have to collude with the whole army of slick paper merchants, work with dirty greasy hands and have the ability to swallow your guilt, conscience and pride in one big gulp.

The best part is that you do not need a mathematics degree from Cambridge University or MIT to play this zero-sum game in this murky business world. I am however worried that my son has indicated to me that he has elected to read Game Theory in his second year maths course.

I can only pray that he stays hungry for knowledge and may the odds be ever in his favour.

>The writer is an entrepreneur who has run a successful business. Now semi-retired, he is eager to share his collective knowledge and experience. He can be reached at thtan@alliancecosmetics.com

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