Organisations missing out on the power of game theory

posted by Danny Mitchell, Sponsored Content
9 October 2017

While 90% of users of game theory say using it creates value for procurement, only 9% of procurement professionals use game theory in their work, according to a recent CIPS and TWS Partners  survey.

The results were revealed at an exclusive event for procurement leaders, hosted in London by SM Insider and TWS Partners.

TWS Partners director Sebastian Moritz said it was interesting that 80% who don’t apply game theory today believe it can create value for those working in procurement.

He added that the level of adaptation was likely to grow. Almost two-thirds (63%) of senior professionals who took part in the survey said they believed their organisations would use game theory in the near future.

Game theory is the modelling of interactions between different parties each pursuing their own interests. Based on mathematical theories of rational behaviour, it can be applied in business to interactions between decision makers doing business in competitive situations, such as clients and their suppliers.

TWS Partners founder and CEO Marcus Schreiber said game theory could be a “game changer for the way a company sees procurement”.

He explained that businesses typically think from “left to right” whereas a game theorist considers all possible outcomes first and questions whether he wants to end up in one of those scenarios before proceeding. Only after having done this analysis, a strategy is defined to achieve the most favourable outcome. If a different outcome is more favourable, then what strategy should be applied to achieve it?

Schreiber said that applying game theory techniques makes procurement more of a strategic partner. “One thing is the result but the other thing is the journey of procurement from being the service provider to the next step of becoming the owner of the entire sourcing process,” in order to “lead instead of being led” he said.

In the panel discussion, Mark Roberts, continuous improvement director at the Government Commercial Function, called game theory “the best kept secret in procurement”. “It’s great opportunity for us as a profession to open our eyes and have a wider understanding of the possibilities,” he said. “It’s such a rich application. It’s not just strategic sourcing, this is strategic sourcing based on Nobel prize-winning research.”

Abhinay Muthoo, professor of economics at the University of Warwick and a game theory expert, said everyone was a game theorist, “but you just don’t know it”.

He added: “Another way of saying game theorist is being strategic. The tools of game theory are to sharpen you as a strategist. Game theory could mean getting 1% better on a deal that translates into millions or even billions.”

Global purchasing director of Jaguar Land Rover Neil Marsons said much of the automotive firm’s success after it was sold to TATA Motors in 2008 can be attributed to the methodology. He said the application of game theory had contributed to “millions” in savings.

For game theory to be successfully implemented into procurement strategy, Marsons said investment, commitment and collaboration were key ingredients.

He said internal buy-in was also critical. “If you think you’re going to do it on your own from a standing start, then you will fail,” he cautioned. “There are lots of internal influences within big organisations that will invariably conflict with the application of game theory. The support and the commitment from the leadership, right up to the CEO, must be in place.”

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