the blue circle of strategy

game theory, of a sort

short Friday post - in the book, the editor let me get away with precisely one uncheckable and probably indefensible claim because I whined so much:

“Pricing problems which might be considered too easy for the brand managers’ graduate training program at Proctor and Gamble would be way beyond hope of computational tractability if expressed as equations”

Might not be sustainable in an academic work, but as metaphor, hyperbole and in the final analysis, a joke - I hope you’ll allow it. On a similar theme, I’m reminded of an anecdote from business school.

We were studying strategy, and the prof was an economist (I think Paul Geroski but it might not have been). He brought in a guest lecturer, who had previously been the head of strategy at Blue Circle, the cement company.

Cement is a really good industry to use as an example in some models of industrial organisation, because it involves making very very big capital investments in things that can’t be used for anything else. And once you’ve made the huge investment, your cost of producing each bag of cement is pretty small and you can produce huge amounts of the stuff. So it’s a matter of commitment; once someone has built a cement plant in a given area, it’s likely that they “own” the market in that area - in principle someone else could come in and compete the price down, but in practice that would be a daft thing to do. If you’re interested, then at business-school introductory course level, what we’re talking about is the “Dixit entry-deterrence model”

The cement guy took us through the Dixit model, then explained a few circumstances in which it might break down and price wars start, how technological change could set off strategic battles by changing the return on investment calculation and so on. He related some of these things to his experience in the cement industry. But then as the lecture was coming to an end, he said something which has stuck with me for years.

“There was a particular situation in the Nordic countries [1]. Lafarge[2] had a joint venture with a Norwegian company, and they were big suppliers to the offshore platforms. We were always worried that they would start investing in Sweden and supplying the construction market; they were presumably always worried about us making a move for their offshore customers.

“So one of the things we did … we built a big silo in Oslo. This silo wasn’t particularly well suited to marine concrete, we just kept a few tonnes in it to sell to local builders. Most of the time it was more or less empty; hardly anyone worked there except the maintenance people, but they kept it spick and span in the corporate colours.

“But the value of this silo was that every time my opposite number at Lafarge came for a meeting with the joint venture partners, he would sit down in their boardroom, with a lovely view across the Oslo harbour. And as he was discussing strategic plans, just out of the corner of his eye, it would always be right there … a blue circle.

“Try making a game theory model out of that!”

[1] I am almost certainly misremembering a lot of the details and this might be one.

[2] This might be another, also “Norwegian”, “offshore”, “Swedish”, basically any specific thing