Strategic decisions have consequences

Organisations are not standalone entities, they operate in an environment where their actions affect the actions of others. Often, decisions taken for an organisation have long-term effects on the actions of competitors and the market environment.

We will have a look at analysing the environment in the next short course, but here we’ll illustrate the impact of strategic decision making by introducing you to a modelling technique referred to as ‘game theory’.

Game theory was developed by mathematicians John von Neumann and John Nash, and the economist Oskar Morgenstern, and models interactions between dependent, competing actors (people or organisations) in a social context.

To illustrate this, we will use an exercise adapted from something called ‘the prisoner’s dilemma’.

Your tasks

Read Game theory II: Prisoner’s dilemma for an introduction to the principle.

Then, watch the following video which applies the same theories to a business context (competitive decision making of McDonald’s and Burger King).

This is an additional video, hosted on YouTube.

If you cannot view the video, you may find this text-based alternative helpful.

Summarise your understanding of game theory and share it in the comments, then look at the posts from your fellow learners.

References

_{von Neumann, J., & Morgenstern, O. (1944). Theory of games and economic behavior. Princeton University Press. Locate link}

_{Nash, J. (1950). Equilibrium points in n-person games. Proceedings of the National Academy of Sciences, 36(1), 48-49. DOI: 10.1073/pnas.36.1.48}