There are two classes of problems that all businesses face. The first class is what I will call scientific problems. The second class we will call game theory types of problems. Each class requires a different approach.
Scientific problems are those that can be analyzed and studied and as we learn more about them, we can progressively become better at solving them. Many manufacturing problems fall into this category. Typical issues in in studying this kind of problem are making accurate measurements, defining what the key variables are, and understanding how the variables interact to affect the result.
The tools used include measurement devices, and statistical tools such as regression analysis, which estimates the relationship of variables. A key element of scientific problems is that any knowledge we gather remains correct. It does not go out of date or become obsolete. So, over time, if we do any kind of objective analysis, we will learn more and more about the problem.
Game theory problems behave very differently in one key area. Like scientific problems, we can use some of the same tools and statistical analyses. The key difference is that in game theory problems, there are opponents actively opposing our efforts. So, what we know is true today may not be true tomorrow.
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If we are making and selling a product, competitors may begin to make a sell a better or cheaper product. Complex pricing schemes used to maximize revenue will start to fail as consumers start to understand how to beat it to minimize their cost (like the airlines).
Or, consumer preferences will change. Gap was wildly successful selling a certain look of clothes until consumer preferences changed, and the company has been unable to find anything quite as successful.
Another example: Football teams design a defense to stop an offense. The offense changes to defeat the defense. The defense may go back to an earlier defense to counter the offense. Rookies in the NBA often look very good the first month or two in the league and then their production drops. Why? Opponents have studied their typical moves and have learned to counter them.
What is the application of all this to business? There are two key principles. The first is that your customers will change their wants, preferences and behavior in response to both outside influences and to your products and sales processes. Second, your competitors will actively attempt to counter your products and sales processes - and may become one of those outside influences.
You will need to constantly monitor what your customers want and what your competitors are offering. Don't assume that tactics which worked in the past will work again. Beware of how you position and sell your products.
Customers will learn from your practices and will change their behavior to maximize their return. This could result in negative changes in sales or profits. And it is clearly not a good idea to try to fool your customers in some way. They will find out eventually, and it will be very difficult to ever regain that trust.
Most knowledge in a game theory problem eventually becomes obsolete, so you will need to constantly be updating that knowledge.
David Arnsdorf is president of the Alaska Manufacturers' Association in Anchorage. He can be reached via e-mail at arnsdorf@alaskamfg.com.
