Archive for February, 2013|Monthly archive page

Game theory for the real world

Many companies are turning to game theory to help make strategic decisions.  GT is the use of advanced mathematical models to analyze different game scenarios (read: strategic decisions) available to different parties (e.g., competitors, suppliers, regulators) in order to predict potential outcomes.  GT is not new.  Economists, political scientists and the military have used its principles since the 1950s. In the 1980s, businesses began using GT to help them make pricing, product, M&A, and labour negotiation decisions. While the math can appear arcane and divorced from corporate reality, we know that the GT principles – when stripped down to their essence – are powerful decision support tools.  This value was clearly illuminated in one of our 2012 strategy projects.

The client, situation

The CEO of a medium-size company engaged us to help navigate some crucial choices.  The firm needed to decide whether to undertake a game-changing acquisition of a similar-sized, private company with complementary assets. The target company had put itself in play due to ineffectual (though not fatal) financial performance.  Our clients viewed themselves as either buyers or bystanders.  They wanted to understand possible competitive moves, the implications of these moves as well as what and how to bid. There was also a chance a foreign buyer or a firm from outside the industry would enter into the fray and make a bid.   To assist management, we deployed our GT model.

Enter Game Theory

M&A transactions involving multiple participants and bidding strategies are ideal applications for GT since these decisions blend both strategic and financial inputs and considerations.  Potential M&A deals typically employ sequential games that would be played out over a given period of time.   In this case, the number of potential players and the actions they could take would generate thousands of possible outcomes for management to consider. To cope with this complexity, we used a sophisticated, but easy to understand, software algorithm that models what decisions a company should take — considering the likely behaviour of others –- to attain its goals.

Our first step was to assemble all the critical information relevant to the deal.  GT methodology focuses on collecting a variety of inputs including: possible players, aims of each player and conceivable actions of these players.  Our goal was to get into the heads of each player to understand their strategic objectives, economic incentives and likely behavior. We collected this information through an extensive competitive intelligence process including ‘what if’ scenario development and client role playing. At the end of the information-gathering phase, we input all the information into the algorithm and began the mathematical modeling.  The number crunching yielded potential outcomes by player for each one of their and the other player’s possible moves.

Business outcomes

The results of the analysis were illuminating for management, both from a transaction, stakeholder-alignment and competitive-intelligence perspective.  Not only did the model suggest the optimal course of action and its payoffs but it also highlighted opportunities for the firm to cooperate with foreign competitors (some with very different business aims) and partner with third parties through win-win strategic alliances.  Furthermore, it gave management insights around how the negotiating process would play out as well as potential bids from unforeseen actors.  Overall, use of GT ensured executive buy-in and documentation of the current state while improving alignment around the new M&A strategy.

Although some executives are reluctant to admit they use the tool, many organizations such as Microsoft, BAE Systems and Chevron have publicly acknowledged its value in helping make complicated, high-risk decisions.  Despite its many benefits, GT does have its share of detractors who complain about its complexity and disconnect from familiar decision-making practices.

These negatives are over-stated.  Complex math or software packages aren’t necessary to perform comprehensive modeling when Microsoft Excel will do.  Secondly, though GT does assume player rationality, it need not be a default assumption in the model.   Our methodology factors in the innate irrationality of many people’s actions, especially in situations like negotiations where management bias and hubris can skew decisions.  Finally, executive expectations need to be calibrated early on. GT is not a strategy panacea but merely another tool that should be used with other decision-making approaches like strategic planning and discounted cash flow analysis.  It should never replace good judgment and financial analysis.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Measuring social media ROI

Deploying winning social media programs is a top priority for most companies.  While its early days with these initiatives, management being management still wants quantifiable value and ROI.   How do you determine if your social media program is delivering the goods?

Social media may be the brave new world of marketing but the tools to measure its returns are too often anachronistic.  Traditional approaches to measuring ROI calculate the returns in terms of short-term goals (e.g., sales increases, new product awareness) to their program expenditures. In many cases, measurement frameworks are solely based on traditional advertising metrics such as reach and frequency.  The customer’s digital behavior is usually ignored. This narrow focus has two problems. First, it is fixated on the short term (“show me how my company’s Facebook ‘likes’ will improve market share next quarter”). Secondly, traditional ROI methods ignore more qualitative factors — such as the value of a tweet about a brand — that flow from the unique characteristics of the internet and have no obvious equivalents in analogue media metrics.  Many leaders still do not fully appreciate that they are entering into interactive “conversations” with customers that takes time to cultivate. There are always several objectives in using social media so its important to declare in each strategy/tactic what the primary objective is so the focus is there

Since the digital world is so different, returns from social media investments will need to be measured in terms of customer brand engagement (i.e. relationships) tied to particular social media applications — as well as in dollars. Engagement with a brand includes obvious measures such as the number of visits and time spent with the application as well as rich conversations, such as the influence of blog comments and Twitter pages.

To evaluate their social media programs, it’s imperative to bring ROI into the 21stcentury by adding the impact of long-term customer engagement in the financial analysis.  This method takes into account not only short-term goals such as increasing sales in the next month via a social media marketing campaign or reducing costs next quarter due to more responsive online support forums, but also long-term relationship value due to social media investments. Marketers who don’t understand and can’t measure how this relationship influences a customer’s behavior will be unable to get a true picture of social media effectiveness and program ROI.

Fact is, it is very difficult to directly link social media performance metrics directly to business results. Therefore, we recommend managers use measurable social objectives as a bridge between social media performance and business results.  To do this, managers would initially identify social objectives like brand awareness, brand engagement and word-of-mouth impact.  These would explicitly measure the value of operating in the social media environment as well as tie directly to existing marketing objectives.

To undertake the analysis, managers would link social media performance metrics (e.g., Likes, Comments, Shares) to each social media objective.  These objectives would then connect (or bridge) to strategic marketing objectives like purchase intent or improved brand image which can then be linked to real business results like sales lift.  Rogers Communications Inc. is pioneering this approach.

“There are always several objectives in using social media so its important to declare in each strategy/tactic what the primary objective is so the focus is there. Its usually a combination of traditional reach/frequency, online metrics such as click throughs, and new metrics such as positive-negative-neutral mentions, reposts, likes, etc,” says John Boynton, chief marketing officer of Rogers Wireless. To further drill down into the true value of a social media initiative, marketers could use a variety of online tests, control groups and other testing tools to validate the social media results and compare to other analog marketing tactics. Not surprisingly, calculating the ROI of a sophisticated social media campaign is not easy.  The challenges range from matching online customer profiles with offline purchases to determining the size of the test and control samples.

“The hardest part of evaluating social media variables with a test and control approach is isolating some variables such as geography and business results. Rogers works deeply with a few select strategic partners in this area like Facebook and Google to solve this over a period of time while remaining committed,” says Boynton. Yet, even modest social media programs will benefit from plugging-in, segment-level estimates and proxy measures to quantify how the customer actions translate through brand awareness, brand engagement and word of mouth to impact purchase behavior and, ultimately, the bottom line.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Reinventing customer service

These days, regularly delivering a great customer service experience is table stakes. Poor performance in this area has been linked to higher customer turnover, lower margins and hidden revenue leakage.  Not surprisingly, service concerns are rising to the top of the corporate agenda.  However, addressing these issues has never been so difficult due to the systematic nature of the problem.  In particular, customers have become more demanding and fickle; channels have proliferated triggering coordination and integration challenges and; operations are groaning under the weight of product and supply-chain complexity.  A recent article in the Harvard Business Review outlines a new innovation framework that seeks to reinvent service delivery by challenging basic operating assumptions.

Prudent leaders can no longer ignore the potential gains in improving customer-service performance.  Enhancing service delivery (especially for profitable customers) can deliver “more value for less,” by: driving revenues (increased loyalty, cross-selling rates), reducing costs (lower customer acquisition costs, increased operating efficiencies) and improving the brand image (increased market differentiation, support premium pricing).  Many firms like Nordstrom, Zappos and Apple have used customer service strategies to outflank competition and drive superior financial results.

Time to innovate?

The authors of the study, Kamalini Ramdas, Elizabeth Teisberg and Amy Tucker, spent four years studying innovation in financial services and health care — two American industries that have substantially redefined service delivery.    They identified four customer-service warning signs that catalyze the need for reinvention:  1) a backlog of paperwork; 2) scapegoating IT; 3) the use of humour or satire to describe the service experience and; 4) a lack of service-related content within informal employee communications.

To trigger breakthrough innovation, the authors developed an analytical framework around how service is defined and delivered, based on the following four dimensions.  Considering each dimension requires a detailed analysis of customer, partner and end-user needs, internal skills & processes and partner roles & responsibilities.

The structure of the interaction
Service is usually delivered in one of four different ways:  by a single or many (internal or external) providers to a single or many customers. Managers will need to understand the trade-offs between these four approaches and design the optimal interaction that maximizes delivered value (as defined by internal metrics and external validation) at the lowest cost.  Service redesign should be guided by two factors: the degree to which sharing information adds value for customers (e.g. reduces cost and service time, drives consistency) and the need for coordination among individual or group providers (e.g. share best practices, ensure integration).

The service boundary
In many sectors, service is not delivered according to customer needs but rather to what is defined by formal service boundaries.  Many banks, for example, deliver wealth management services through branches, asset managers, and commercial bankers.  This “siloed” delivery is often burdensome and expensive for customers and frequently cumbersome for providers.  Defining where those boundaries exist internally and with partners — and the degree of integration and coordination it entails — has major implications on service levels, costs and performance.  To find the right service boundary, managers need to consider two questions: do many customers use the same complementary services? And, do problems with those services significantly hamper their outcomes?

The allocation of service tasks
Service delivery can be dramatically improved when there are requirements to add or change the service responsibility.   These triggers could occur when internal ownership shifts, capabilities and skills are benchmarked or new products are launched.  The optimal task ownership should depend on the fit between employees’ tasks and their expertise and the prevalence of tacit assumptions about who does what, when and how.

The delivery location
The location of a service has an important bearing on the quality and timeliness of that service.  For example, diabetes care providers often operate out of different physical locations.  Although each centre and individual can deliver excellent care, in totality, it can be a hassle for the patient. The optimal location profile may require relocation, co-locating with complementary services or a shift to more web-based delivery.  Key questions to consider are: does the location hinder access or outcomes for customers? Have their communication and information needs changed?

In our consulting experience, reinventing service delivery works.  However, the four dimensions of innovation cannot be considered in isolation as they are often interdependent.  In general, the more wide-ranging the service redesign the more likely it is to involve changes along multiple dimensions.  Furthermore, managers need to pay as much attention to change managementbehavioural psychology and linking service to business metrics as they do task realignment and process redesign.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Gamification success stories

Many North American companies are in a funk.  It has become difficult to wring more cost savings out of operations and incremental revenues from customers. In a globalized world, just being efficient and having a good product is no longer a winning formula. In some mature sectors like financial services, telecom and IT, the only remaining differentiator may be higher worker productivity and brand loyalty, manifested through the engagement and enthusiasm of customers and employees. This is where Gamification comes in. This approach leverages game design principles and techniques in a business environment to affect behaviour.  Many dynamic companies like Microsoft, Commonwealth Bank, Nike and SAP are already using the principles of game playing to improve business and financial performance.

Fundamentally, Gamification looks to turn disengaged individuals into active and productive participants using fun and social competition, instead of binary rewards and punishment.  It is about using games within an organizational environment to get a person to experience a brand or change behaviorally, rather than simply hearing a one-off message in a passive way.  Regularly living this experience, whether in an on- or off-line environment, can indelibly imprint a memory of the brand promise or the desired change on the person. Gamification works because it gets to the essence of human behaviour, blending behavioural economics, motivational science, and the alignment of individual drives and rewards with corporate goals.

The roots of Gamification can be found in the 40-year-old, $70B-billion video game industry, a sector that knows something about hooking and keeping an individual’s interest and getting him or her to do things he or she may be reluctant to do. Playing games is a natural human activity that traces its roots back to prehistoric times. Hundreds of millions of people regularly play on and offline games around the world including 42% of Americans, 52% of UK residents and 66% of Germans (source: 2011 National Gaming survey).   Game playing has been successfully used globally to boost customer acquisition rates, spark internal innovation, improve call centre performance, foster increased collaboration and catalyze long term change.

Below are two examples of how simple Gamification programs has been used effectively:

Microsoft
The company faced a testing challenge releasing Windows 7 in multiple countries and languages.  It had to make sure the dialogue boxes worked well in every language. This manual process required motivated and conscientious testers who could consistently perform a mundane but important task without getting bored. Recognizing the potential of using games to improve their quality-assurance performance, management established a simple competition for employee teams across different geographies.  The objective of the game was to find as many errors as possible in the localized dialogue boxes. Interestingly, testers were given no financial rewards. They were motivated by the excitement of finding the most coding errors, being good corporate citizens and being the most successful office on the published leaderboard.

The results were impressive. The employees reviewed approximately 500,000 dialogue boxes, and found hundreds of bugs and errors in the localization that hadn’t been discovered in the original translation.  Microsoft is committed to Gamification.  According to Ross Smith, director of test, Windows Core Security at Microsoft, “Productivity games and virtual worlds are 21st century business processes, not gimmicks, something we’ve seen for years at Microsoft.”

Commonwealth Bank
In 2011, Australia’s Commonwealth Bank developed Investorville, a property-investing game that looked to improve the real estate literacy of potential home buyers. The game featured an online simulator allowing players to dabble in real estate investing without risking their equity. Working with a company that maintains residential property information and economists, the bank created a financial snapshot of every suburban housing market in Australia. By choosing an investor-profile (first time investor, more experienced, etc.), players learn about investment strategies, rental returns, and interest rates.

“Making the leap from owning your own property to buying an investment property can seem quite daunting to a lot of people,” claimed Mark Murray, general manager of Commonwealth Bank Consumer Marketing. “Investorville helps to break down common misconceptions and show the practicalities of property investment. The really beneficial part of Investorville is that users can, in the true sense of the term, try before they buy.” According to a September 2012 report from InvestorDaily, the Investorville game generated about 600 loans within one year of launch, behind an investment of around $400,000.

As the above cases illustrate, game playing has the potential to change the nature of work and customer engagement. Exploring this brave new world, however, is not for the impatient or unprepared.  Introducing game playing into a company’s fabric obliges senior managers to first align around their core business objectives & metrics and then study how other organizations have successfully (and unsuccessfully) implemented Gamification.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.