All too often during negotiations, buyers will think only of their own needs and requirements without trying to understand the needs of the supplier. A simple “put yourself in their shoes” is warranted to fully understand everything that is happening in the situation. What will the supplier gain from this relationship? Are they really looking for a long-term collaborative partnership, or just a one-time transaction?
Game theory is an academic concept that has been slowly making its way into everyday business decisions, especially after Russell Crowe made it famous through his portrayal of brilliant mathematician John Nash in the 2001 film A Beautiful Mind. It has been called the science of strategy. Game theory suggests that, given rational decision makers, players will make the most optimal decision for themselves based on what they believe the most optimal decision is for the other players.
The most widely used example of game theory is the prisoner’s dilemma:
Two prisoners are arrested for committing a crime, and they are interrogated separately. They can either confess or plead the fifth. Each prisoner’s outcome is dependent on the other’s unknown action. This leads to an equilibrium of (confess, confess) where the officer wins, even though both prisoners would have been way better off if they both kept their mouths shut.
How can a sourcing manager take tips from these games and use them to their advantage? By studying the bid patterns of suppliers during a negotiation, buyers can more effectively figure out the supplier’s floor price.
Buyers can navigate all possible scenarios of a negotiation outcome by applying game theory payoff matrices. Decide the desired outcome, and work your way backward to understand what would lead suppliers (if you believe them to be rational) to make these decisions. Understanding which tactics to use for each situation will help influence the supplier’s decisions.
Capgemini has developed many approaches to help clients better predict and shape the competitive dynamics of procurement negotiations. Understanding game theory can help sourcing managers gain deeper insights into interests and objectives of suppliers, and ultimately influence the buyer’s most desired outcomes.