The Game Plan
Starting with an expectation of a good potential fit, let us see how Tata and Corus have together won out. Visualise a two-dimensional (X-Y) space with Tata’s objective function along the horizontal axis (X) and Corus’s along a vertical axis (Y). The essential requirement for this analysis is that there is an objective function, i.e. a line that measures increasing overall benefit, which can be defined separately for each party along one of these axes (Figure 1). We may surmise that Tata’s primary concern was to pay no more than reasonable compensation for Corus in order to result in a profitable combination, shown as a percentage cut from a notional asking price on the horizontal axis. Corus’s objective function could be the retention of maximum sustainable benefits with employment participation (assuming that the management and union are in sync). This is shown as a percentage on the vertical axis. Mapping Tata’s and Corus’s responses in terms of the percentage cut in price and percentage benefits retained, we get one set of points for Tata and another set for Corus. A line through the first set represents Tata’s response function or strategy, and a line through the other set represents Corus’s response function. For a given cut in price, Tata favours fewer benefits than Corus expects, and for a given benefit level, Corus wants less of a price cut than Tata.
Still, the take-away is that the model helps us understand aspects of reality by abstracting some of its elements, so we can better focus on them. Its usefulness is in the insights into the rationale for going beyond our self-imposed barriers in seeking better solutions, and these are necessarily collaborative solutions that can take us beyond non-cooperative equilibrium. “It begins to seem that the only zero-sum games are literal games that human beings have invented … for our own amusement. ‘Games’ that are in some sense natural are non-constant sum games.” *
This has wide applications in a variety of real-life situations far removed from macroeconomics, where the Hamada diagram originated, and can work for public-private partnerships as well as for private sector alliances or acquisitions. Take the recent airlines association formation, or the standoff between Delhi Metro versus the rest: the champions of the Bus Rapid Transit Systems, the High Capacity Bus System, etc. There is every reason to jettison silo mentalities and dogmatic arguments, and instead seek coordinated solutions drawing on abilities beyond adversarial contention, polemic and disputation. The first requirement is diverse skills and domain knowledge in the group evaluating situations and developing workable solutions. Good intentions are desirable, but expertise is absolutely essential. The next is to focus, first of all, on the fundamental objective. Presumably, this should be defined in the public interest. Finally, even if Pareto optimality is infeasible, the need is to design and develop a pragmatic, best-feasible-solution work plan, and execute it well.
* Roger McCain, “Game Theory: A Non-Technical Introduction to the Analysis of Strategy”: http://william-king.www.drexel.edu/top/eco/game/game-toc.html
The author was formerly M&A Head for India at Citibank.