Game Theory in Everyday Life

I've added reading notes on Game Theory in Everyday Life to my site. The notion of applying the principles of game theory to situations that are not generally recognized to be games, per se, interests me - but unfortunately, the book itself fell short of the mark.

By virtue of its name, "game" theory is too often dismissed as a frivolous field of study, presumably related to sports or leisure activities. But in essence, examinations of "game" consider a situation where two (or more) players each has a goal it seeks to accomplish by interacting with the other players, choosing a course of cooperative or competitive action in order to accomplish their separate objectives.

This is germane to many real-life interactions, especially in he business world, in which competing or cooperating with other people in pursuit of our goals takes place in a culture that provides "rules" for interaction and the availability of options, some of which are mutually beneficial, some of which benefit ourselves at the expense of others, and others of which are ultimately counterproductive to our purposes.

As such, it is of particular interest to developing a corporate strategy for interacting with other firms to "win" a larger share of customers in a competitive marketplace, as well as for interacting with individuals (superiors, subordinates, peers, suppliers, customers, etc.) in the business environment.

Unfortunately, this particular book isn't of much help: it doesn't do more than scratch the surface, "revealing" what a reasonably intelligent person could observe on their own, and is based largely on anecdotal and experimental evidence that, while seemingly reasonable, seems more incidental than indicative.

The (Sad) State of Social Media Marketing

In the wake of reading a book on social marketing, I considered "liking" a number of companies on Facebook to see what they were doing ... but after looking them up and checking out the posts on their walls, I decided against it. After about an hour of poking around, I couldn't find a single instance of a company (or even a nonprofit) that seemed worth engaging with.

I'll concede that, after a dozen or so, I was more in the mindset of finding reasons not to "like" firms, which may have skewed my perception and made me more sensitive to bad practices and less forgiving of their missteps. But even so, I think it's fair to say that it's a disaster.

And while there's a bit of good news - most firms seem to be exercising a bit of restraint when it comes to making overt sales pitches - the information they are posting is dull and not at all useful. It's largely image marketing and product announcements - things that the company is interested in saying about itself, but not necessarily anything that would be beneficial to the people who subscribe to their feeds.

Arguably, the same can be said of people in social media. Not many announcements have been made by friends, family, and colleagues have an immediate "benefit" to me - but I cut them a bit of slack. They are people with whom I share interests, and with whom I am interested in staying in touch, and they're definitely not posting comments with the subsumed motive to get me to give them money.

But worst of all is the gross volume of it. It seemed to me that many companies involved in social media post three to five times per day, which probably doesn't seem like much, until you consider that it's every firm doing that. If a person selects twenty companies that they really want to keep on top of, that would mean their personal "news feed" would contain between sixty and a hundred posts per day, the vast majority of which are complete fluff. So in that sense, companies are well on their way to doing to social media what they have done to e-mail: abusing it to the point where people will simply ignore them.

Back to the comparison to people in social media, companies are doing far worse. I don't have any acquaintances on Facebook who post three to five times a day on a regular basis. Every once in a while, someone gets bored and spends some time surfing the Web and posting a string of two or three funny/interesting articles, links, and videos - but that's rare. Most people are a bit more respectful of others' attention and, presumably, consider whether something is worth sharing before posting it.

Additionally, companies are not really interacting with the social network, just using social media as broadcast medium. When fans comment on a post, there is no response from the firm- even when a question is asked, the firm doesn't answer. In some instances, an unflattering remark would get a quick (defensive) response - but that's about it.

And back to the comparison to real people, I can't think of a single person who is that one-sided. If someone asks them a question, they always answer. And while they don't post a reply to every single comment (which would be a bit too chatty for my liking), there is the periodic acknowledgement or retort that lets you know they are there, and listening, and value your attention.

So in spite of the vast amount of attention and budget that social media has received in recent years, companies still seem to be getting it wrong, and have not quite figured out how to successfully engage with customers, or even behave properly in a social setting.

Social Nation

I've recently added reading notes on Social Nation to my site - with some reluctance, as it's tainted by a mercenary agenda: to convince readers that social media is good and that they should hire the author and his company to consult with them to take advantage of it. As such, it has to be approached with a careful eye, to consider whether what the author says is objectively valid, or is merely a sales pitch. Even so, there's enough helpful content to make the book a worthwhile read, so long as you understand its bias and consider the alternative argument - that social media isn't a panacea.

Taken out of the context of specific technologies, a "business" (company, corporation, firm, etc.) is not a collection of capital assets, but an group of employees who happen to use those assets to deliver value a group of customers. Each of these groups are social "nations" unto themselves, and value is created where one nation connects with the other, directly or indirectly.

By the traditional methods of business management, considerable effort is placed on preventing, rather than facilitating, interactions among the members of these groups as well as the interaction of one group with another - which is ultimately to the detriment of the firm. This is seen in the stem reaction of a firm when an employee strays outside of their "box" (their assigned role, tasks, and area of authority) and the terror and the prospect that customers might be listening to what anyone other than the official spokesperson has to say about the firm.

While this is not necessarily a consequence of technology, technology has done much to thwart the barriers that have been put in place among people: customers can now go to the internet for information about a firm (rather than having to reply entirely on advertisements to form an opinion), and employees are interacting with one another outside of the constraints of the org chart.

And the author's thesis, with which I am inclined to agree, is that this is a good thing - that the interactions among the "nations" of people who constitute a business surfaces ideas an innovations that were formerly squelched, in greater quantity and with greater frequency than had previously been possible. And more, that the company that leverages this interaction stands to gain significant competitive advantage over others that continue to resist.

The Trouble with Imitation

I got dragged into an annoying conversation a few days ago, and it's stuck in my craw since. The implication, which may have been unintentional, was that a company should look to its competitors for ideas - and if someone is doing something drastically different, the firm should move aggressively to copy it to prevent the originator from gaining competitive advantage.

In a way, that almost makes sense: competitive advantage is gained by doing something differently from the competition that causes your firm to offer a unique value to customers. If you copy an opponent's maneuvers, its offering is no longer unique, and it no longer has an advantage. That seems logical enough, but I have a sense that it's not a good approach to strategy, and not even a very good tactical maneuver.

But just because someone is doing something different doesn't mean that it's a good idea. Chances are, you don't have sufficient information to make an accurate assessment. As such, a tactic of aggressive imitation can lead a company to invest in a bad idea, or a half-baked one, if it proceeds without considering what they are trying to accomplish, or waiting to see if the action they have taken has any appreciable results. You could very well be copying a bad idea.

And even if time is taken to analyze the maneuver to make an educated guess at the motives and outcomes, based on what little information is available outside of the organization that pioneered a concept, my sense is that it's unlikely to be a good analysis. Frankly, if you're not smart enough to come up with a plan on your own, you're probably not smart enough to comprehend the rationale of someone else's plan, either.

That sounds a bit sharp, but I don't think it's at all unfair. The very act of imitation is based on the implicit acceptance that the party whom you are attempting to imitate is smarter, better, or more competent than yourself In the classroom, the smartest students don't make their marks by copying the work of those ho are duller - it's the other way around.

And if you choose the path of imitation, you implicitly choose to remain inferior to your competition. Your efforts can only be a wan reflection of theirs, crippled by a lack of understanding of their intentions, unable to assess whether your own imitation is successful because you do not understand the criteria for success.

More importantly, seeking to follow the competition's lead misdirects your own strategy and the application of your resources. Ultimately, success as a company is measured by market share, which in turns derives from the willingness of customers to purchase your product because it is better suited to their needs - which means that the proper field of investigation for gaining competitive advantage is not what the competition is doing, but what the customer's needs are. Only if you understand the needs of the customer can you figure out a way to serve them better.

Seen in that light, you might attempt to intelligently consider the maneuvers of your opponent, assessing whether they are likely to result in greater values. But to do that, you have to know what the customer values - and if you know what the customer values, chances are you don't need to look to your competitors to determine how to deliver it.

I have a sense this meditation is degenerating into a vicious circle - it may require a bit more thought to fully explore the problems with the notion of an imitative strategy, but I have a sense that I've struck upon the core of it.

Customer Loyalty: How to Earn It, How to Keep It

I've added reading notes on Jill Griffin's book, Customer Loyalty: How to Earn It, How to Keep It - and am delighted to finally encounter an author who recognizes that customer experience isn't a new idea invented by Web 2.0, but a very old one that predates not only the Internet, but the era of mass-marketing, which is only now being re-discovered by companies that realize mass-anything is an unfriendly experience, unappealing and increasingly unacceptable to the consumer.

Since the mid-twentieth century, the focus in manufacturing, retailing, and customer service has been on efficiency: to cut cost and increase profits by delivering to the customer not only a product that is standardized and undifferentiated, but also a relationship that is formalized, patterned, standard, and soulless. The experience of buying a product at one retailer was little different than buying it from another: mediocre and unsatisfactory.

It's difficult to tell whether the companies that proclaim "customer loyalty is dead" are bemoaning its loss or cheering their victory. After all, they are the ones who killed it: providing a level of service that delights customers was seen as an unnecessary expense, and every aspect of the buying experience that could be eliminated was pared away. Except for the logo over the door, one retailer is much the same as any other - and there's no reason to prefer one over the next.

But innovative firms have broken from the herd, discovering that providing a higher level of service might cost a little more in the short run, but over time, it attracts and retails a loyal customer base who are, by and large, immune to competitors promises of a (slight) discount. Other firms that seek to regain their competitiveness, jealous of the success of the innovators, have been seeking to imitate their tactics, without really understanding them.

In that sense, this book is an excellent read for marketers in all channels: it addresses some of the foundations of customer loyalty - and while I don't expect it provides all the answers, it provides a very good indication of the problems, and a solid theoretical basis on which to build a solution.

Innovation vs. Efficiency

The description of a proposed "efficiency innovation" has stuck in my craw - or more aptly, the description of an "innovative" idea that achieved greater operational efficiency rubbed me the wrong way, and biting my tongue to hold back the objection ("That's not innovative at all") has led me with a need to explore the conflict in the relatively safe environment of my notebook. And so ...

It seems to me that an "efficiency innovation" is a contradiction-in-terms. Efficiency is one thing, innovation another, and while they are not polar opposites, they are dissimilar enough that it would be extremely rare for a given proposal to be both an innovation and an improvement in efficiency.

To begin with core definitions: innovation seeks to create something that's altogether new, whereas efficiency seeks to streamline new processes - that is, efficiency seeks to reduce the costs of production, or to increase the output of production without incurring additional costs. In effect, efficiency does not create anything new.

As such, it seems to me that the creation of the new is the touchstone for determining whether a proposal is "innovative." If a proposed idea changes the task to produce more output with less effort (by reducing the number of employees, making existing employees more productive, gets customers to buy more of the same product, etc.), it will likely be a good idea, and potentially quite profitable, but it is not an innovation.

Both efficiency and innovation can lead to organizational growth - but again, it's not the phenomenon of growth, but the means by which growth is achieved, that differentiates efficiency from innovation. Specifically, growth as a result of innovation creates new products, new customers, new processes, and/or new positions (there may be other factors I am overlooking) - the organization "grows" by means of doing something it has not done in the past. Growth in an efficient organization occurs only from growth in existing markets, by adding people who do more of the same: if an idea results in selling more widgets, growth occurs when another production line or factory is added to handle the increased demand - but such growth is essentially replicating existing positions and processes to handle higher volume.

More so than their ultimate impact upon an organization, innovation and efficiency are distinguished by the way in which changes to the organization are conceived. Efficiency looks at history (what have we done in the past, and how can we do more with less?) whereas innovation looks to the future (what are we not doing now, that we could be doing?). As such, an efficient idea can be mathematically derived from historical data (a production ratio of X widgets per hours at a cost of Y dollars based on last month's figures); whereas innovation must be a complete supposition (there is no past data that can be used to project a future state).

As such, organizations tend to favor efficiency over innovation, because efficiency can be said to derive from "real" numbers and a more reliable method of projecting the future, while innovation does not yield to the same method of proof: innovation is based entirely on supposition with a lack of "hard evidence," and is therefore seen as being more risky and less dependable.

(I could go off on a tangent about how an innovator can struggle to produce historical proof, based on similar phenomena, but that is a very bad practice born of desperation to gain acceptance for innovation in a culture of efficiency, which is an entirely separate rant. I'll choke that back for now.)

This returns again to the notion of "the new." To come up with an idea to improve efficiency, one does not necessarily need to look outside the organization: merely consider existing operations to find an opportunity to streamline (cut costs, improve output). In some instances, it is possible to seek efficiency by looking outside the organization - chiefly for marketing efficiencies that seek to sell existing products to different markets, or get existing customers to purchase in greater quantity. It could be argued that this is "innovation" because it deals with "new" customers or "new" uses of an old product - but that seems to rather cheapen the definition of novelty.

The point I working toward is that to come up with an innovative idea, you must look outside the realm of what presently exists. Existing products or customers may be the place where the seed of an innovation can be identified, but an innovative idea very quickly leaves the real of what is familiar to explore notions that are "new" and have little correlation to the routines of existing operations and the parameters of existing relationships with external parties. The innovator must conceive of "that which could be" with very little assistance from "that which already is."

And to return to the implied thesis of the present rant: is it possible for an idea to be rightly called an "efficiency innovation" given the stark contract between efficiency and innovation? I am reluctant to say that such a thing is impossible, but only because those who say things such as "impossible" and "never" are often embarrassed by reality. And so, while I concede that it might be possible, I must state that I have never heard of such a thing, nor am I able to imagine a scenario that fits the bill.

Clarification

It occurs to me that contrasting two notions often leads to the sense that one is being extolled and the other denigrated - in this case, that "innovation" is good and "efficiency" is bad. To be clear: it's not my intention to create or give credence to such a notion. Both efficiency and innovation are valuable, and an organization must seek both innovation (to discover ideas for new operations) and efficiency (to be profitable in present operations) in order to have long-term success. Specifically, I am not saying efficiency is bad - but merely that efficiency is not innovative.

Payment Cards and the Supply/Demand of Money

t occurred to me that the prevalence of payment cards (debit more so than credit) have a potential unbalancing effect on the market, as they have the net effect of decreasing the need for individuals to hold physical currency by virtue of creating a method of tendering payment in exchange for goods that does not involve actual currency.

It's immediately evident in the tendency of individuals to carry less cash than they once did. As a general observation, I've noticed this change over time: at one point, people would withdraw from their bank enough cash to cover their short-term expenses, though the amount would differ among individuals: some people would carry a few hundred dollars around, others would carry less than twenty.

In effect, the need of individuals for hard currency has a major impact on the demand for currency as a whole. If you estimate a commercially active population (that is, people who are engaged in economic activity) of 200 million, and they carry with them an average of $200, then the total amount of currency in circulation is $40 billion; but if they decrease the amount they carry to only $50, the total amount in circulation is only $10 billion (a 75% reduction in the amount of currency).

Given that prices in the marketplace reflect not only the supply and demand for goods, but also the supply and demand for money, then it can be reasoned that the less money in circulation, the greater its scarcity, and the greater its purchasing power in exchange for consumer goods.

From the perspective of the individual, this may be negligible, if not entirely meaningless: an individual may well be indifferent to physical currency so long as they have money in the bank that can be withdrawn to pay for goods on an as-needed basis. In effect, whether you have $500 in pocket or $500 in the bank makes no difference if a payment card can be used to issue payment (having less physical currency does not mean having less purchasing power).

The difference, however, occurs at the bank itself, where hard currency is used as a reserve for loans, which have the effect of increasing the supply of money substitutes in the marketplace (in the "money" on loan is not money at all, merely a credit extended to the borrower that is exchanged for goods, but is redeemed for currency in future). The less currency demanded by individuals means a greater amount of currency on hand at the bank, and the greater the amount of loans they can write.

The net effect of consumer and banking behavior, then, is to create a marketplace in which the total "money" traded in the marketplace is significantly increased by an increase in the supply of money substitutes, but a decrease in the supply of hard currency.

I'm not sure where I'm headed with this - I'm merely observing a phenomenon and speculating on its outcome - but my sense is that the change in consumer culture to prefer payment cards over hard currency may have to do with the diminishing value of goods in the marketplace (by virtue of a shortage of hard currency in circulation) and, at the same time, the diminishing return on interest-bearing accounts (by virtue of the abundance of money substitutes).

In the end, I'm left with the distinct sense that there is a significant connection between the three phenomena, but don't feel entirely confident in my reasoning of what that connection might be. Which means it's probably time to pick up an economics textbook to sort things out for myself.

Built For Use

Over the holiday season, I read Built For Use, a book that champions the notion of user experience as a critical component of success in the digital media, primarily focusing on the Web.

The notion of user experience has garnered a great deal of scrutiny since the book was originally published (in 2002), but the fundamental principles remain unchanged: on the internet, where competitors offer similar value at similar prices, the primary means of competition is user experience. The companies that get it “right” will attract and retain a loyal cadre of regular customers, and those that don’t will ultimately fail.

Much of this is old news by now, but one concept the author discusses that many in the UX profession often overlook is the importance of mutual benefit. The focus these days seems to be exclusively on the user, but it remains true that the site operator must also gain a financial benefit in order that the site will be able to cover its operating expenses and generate sufficient profit to remain in business.

The book was written in the wake of upheaval, after many businesses collapsed for failure to consider that notion, so I expect it was a very salient point at the time – but it remains a valid consideration even today. While most site operators can be counted upon to think of their own profit first and the user experience second, ensuring that UX must battle even for a fair hearing, there advocates of experience may be pulling too strongly in the opposite direction … and would be well reminded of the necessity of financial viability.

Being as the book was published a decade ago, it suffers a bit from age. The notion of UX was very primitive at the time, so the concepts that the author explains are somewhat basic and not very well developed – and it doesn’t help that many of the sites held up as positive examples have since collapsed. It’s nonetheless a good read, as it helps to reflect on past notions to see what has persevered and what has fallen by the wayside.