The Strategy of Conflict

A great analysis of the strategy of conflict grounded in the framework of Game Theory. Thomas Schelling applies Game Theory to deconstructing cold war negotiations and other fairly well structured "conflicts". As such, he offers the student of history a very interesting set of tools. However, it is unlikely that one can apply any of the outcomes to today's environment as more contemporary communication tools (instantaneous, distibuted, portable and user generated) are absent from a book written in 1960.

"The Strategy of Conflict" changed the development of game theory in several ways, but none was more important than Schelling's focus on real life examples, situations or games that are relevant to what we encounter in our daily lives. Before Schelling, game theory analysis was abstract and mathematical; it focused on zero-sum games, where interests were purely conflicting and there were no incentives to cooperate. Game theorists built convincing abstract models for these types of games, but its application was limited, since most interactions were a mixture of conflict and mutual dependence. In other words, analysis focused on pure conflict, a limiting cases of real world interactions, while in "The Strategy of Conflict" Schelling attempts to generalize game theory analysis to richer games that are `played' in the real world. His generalization introduced the concepts, commitments, threats, promises, communication systems, focal points, and randomization of strategies into game theory (chapters 1~8), which was then used to analyze the its applications in national security (chapters 9 and 10).

If you are studying game theory, this book is a must read. If you are just interested in game theory, I'd recommend reading this book too.

Along with Dixit & Skeath, Schelling is a great intro read for anyone interested in game theory.

The 2005 Nobel Prize for Economics was awarded to Robert Aumann and Thomas C. Schelling. Schelling is professor of Economics at the University of Maryland and applied game theory to conflict. His focus was on the weapons issues but his ideas have been applied to a host of business issues.

In this review, we will apply some of Shelling's concepts to how companies fire employees.

Schelling says "uncertain retaliation is more efficient than certain retaliation" when bargaining and "the capability to retaliate is more useful than the ability to defend." Now let's get practical.

GOODBYE SCENARIO

As a verb, "goodbye" is the act of parting. It is also an acknowledgement of parting. A goodbye scenario assumes that once employees physically leave the building, they will never be a factor for the company's future. The relationship was transactional and the transaction is now over.

If the firm defines the termination as a goodbye scenario, the firm should be guided by a business model that says, "What's the least expensive way of terminating this relationship?" And Board members should ask tough questions about paying too much.

AUWIEDERSEHEN SCENARIO

"Auwiedersehen" is German for "Until we meet again." It has a more open-ended quality than the English "goodbye." In an auwiedersehen scenario, the assumption is that once employees physically leave the building, they may continue to be a factor in the firm's future. But it is unclear what that factor may be.

After their non-compete contracts are over, they may join a smaller competitor and become potential allies or opponents in your firm's efforts to develop strategic alliances or acquire the firm.

They may join firms that touch your industry and become potential referral sources of new business for you or a potential source of caution to others about using your company.

They may attend alumni programs at their schools and encourage/discourage graduates from joining your firm.

Each of these scenarios assumes capability of retaliation plus uncertainty of retaliation.

The best practical defense in terminating employees under these conditions is "Treat people with dignity on the way out because the assured costs of such positive treatment are less than the potential downside retaliatory risks.

AUWIEDERSEHEN VS IT'S NICE TO BE NICE

We work with companies that treat departing leaders with dignity
on the grounds that "it is good public relations and good for morale if we help former employees achieve a `soft landing.'" This positive rationale works only in cultures supportive of such a rationale.

The Schelling rationale does not depend on an organizion having a specific culture for treating people with dignity.

It develops a contingency approach to management based on a risk assessment.

There may be times when a "goodbye" scenario does indeed make good sense. There are other times when "auwiedersehen" makes better economic sense.

In applying Professor Schelling's theories, management's failure to take defensive measures with those possessing abilities and options to retaliate is is just bad economics. One sees it at work every day.



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Since its first publication in 1960, the strategy of Conflict is still relevant today. His concepts of strategic moves and random strategy can still be applied to the increasing complicated international affairs. It's definitely a timeless classic for game theoretical study of international relations.