A Beautiful Grind

Overcoming the Prisoner’s Dilemma

and globally suboptimal Nash equilibria
in the pursuit of enterprise alignment

Dr. Michael Ali

Michael.ali@att.net
 Enterprise Alignment: Real World Stories

• Divisions A, B, and C agree to standardize on a plant systems tool from Vendor X. Divisions A
and C agree to do the first implementation. Division B decides to wait. Partway into
implementation, Division A loses confidence in Vendor X. The enterprise council agrees not to
standardize in the plant systems space. Division A reverts back to its in-house tool. Division C,
further along in its implementation, cannot revert. Division C must now move forward with
Vendor X without the leverage associated with an enterprise initiative. The sucker’s payoff.

• Group Vice-President in charge of 3 divisions A, B, and C, wants a common ordering system for
customers of all 3 division’s products. The cost per division is high due to the level of integration
and change to business processes in addition to the software development costs. Division C does
a cost/benefit analysis and declines to join the initiative. Group Vice-President says declining is
not an option. Punishment for defecting greater than temptation to defect.

• Divisions A and B must start joint product development work with Division C, recently
purchased by the parent company. Division C should therefore adopt the processes and tools used
by A and B. However, the processes and tools used by Division C are superior to those in A and
B, and are responsible for the superior performance of Division C. The benefits of Division C
doing joint development with A&B do not completely cover the impact of making Division C less
efficient. Temptation to defect is greater than the reward of cooperating.

What do these stories have in common with the Prisoner’s Dilemma?

 The classical Prisoner’s Dilemma

Two suspects, you and your accomplice, are arrested by the police. The
police have insufficient evidence for a conviction, and having separated the
both of you, visit each of you and offer the same deal: if you confess and your
accomplice remains silent, he gets the full 10-year sentence and you go free.
If he confesses and you remain silent, you get the full 10-year sentence and
he goes free. If you both stay silent, all they can do is give you both 6 months
for a minor charge. If you both confess, you each get 6 years.

You deny You confess

He denies Both serve 6 months He serves 10 years,

you go free
R T

He confesses He goes free, you Both serve 6 years

serve 10 years S P

The temptation (T) to confess (go free) is greater than the reward (R) for denying (6
months), which is better than the punishment (P) if you both confess (6 years), which is
better than the sucker’s (S) payoff (10 years) : T > R > P > S

What will you do (strategy) and what will be the result (payoff) ?
 The Prisoner’s Dilemma and the Nash Equilibrium
DEFINITION: Nash Equilibrium If there is a set of strategies
with the property that no player can benefit by changing his
strategy while the other players keep their strategies
unchanged, then that set of strategies and the corresponding
payoffs constitute the Nash Equilibrium.
From the movie, “A Beautiful Mind”

You deny You confess

He denies Both serve 6 months He serves 10 years,

you go free

He confesses He goes free, you Both serve 6 years

serve 10 years

The Nash
The Prisoner’s Dilemma has one Nash equilibrium: when both players confess. The
Equilibrium "both deny" strategy is unstable, as one prisoner could do better by confessing while
their partner continues to deny. Alternatively, if one prisoner denies while the other
confesses, it is better for the denier to change his plea (gets 6 years instead of 10).
The Nash equilibrium strategy (both confess) is suboptimal for both because the
payoff is 6 years vs. a best case 6 months. Both prisoners are making the rational
choice, but, as Ian Stewart says, "sometimes rational decisions aren't sensible!"
ttp://en.wikipedia.org/wiki/Nash_equilibrium
 The Prisoners Dilemma and enterprise alignment

The Prisoners Dilemma is choosing between collaborating (denying) and defecting

(confessing)

Enterprise alignment is the problem of choosing between local and enterprise solutions
(products, processes, services)

Divisions face the Prisoners Dilemma with enterprise alignment--should they:

collaborate by automatically choosing the enterprise solution
defect by choosing the optimal solution for the division (which may or
may not be the enterprise solution)
 The Enterprise Alignment Problem, pictorially

Local Solutions Division B Enterprise solutions

(services, tools, processes)

Given a selection of local and enterprise solutions, the rational choice for the division is “which
solution is best for me?” This approach does NOT imply that the local solution will always be the
best choice for the division. Rather, every division will make the best choice for itself (i.e.
optimize locally). As a result, a division will tend to contain a mix of local and enterprise
solutions.
 The Enterprise Alignment Problem, pictorially

Local Solutions (A) Division A

Local Solutions (B) Division B Enterprise solutions

(services, tools, processes)

Local Solutions (C) Division C

If there is more than one division in an enterprise, and every division makes the same
rational choice to optimize itself, their selections will vary, so the effect is……
 The Enterprise Alignment Problem, pictorially

Local Solutions (A) Division A

Local Solutions (B) Division B Enterprise solutions

(services, tools, processes)

Local Solutions (C) Division C

……to decrease the number of enterprise solutions, which leads to……..

 The Enterprise Alignment Problem, pictorially

Local Solutions (A) Division A

Local Solutions (B) Division B Enterprise solutions

(services, tools, processes)

Local Solutions (C) Division C

……even fewer enterprise solutions, creating more fragmentation between divisions.

 The Enterprise Alignment Problem, summary

• A Division will behave rationally, which is to select between

the local and enterprise solutions based on what’s best for
them, but Division B

• multiple Brands, making the same rational choice, leads to

fewer enterprise solutions available to any one Division and
more fragmentation between Brands
Brand A Brand A

Brand B Enterprise solutions Enterprise solutions Brand B

(services, tools, processes) (services, tools, processes)

Brand C Brand C
 The Enterprise Alignment Problem, in game theoretic terms

PROBLEM: A division has to choose between always selecting the enterprise solution (collaborating)
or making the optimal choice between the enterprise solution or a local solution (defecting). The
choices have the following payoffs:

T is the temptation to defect from the enterprise solution (preserve your right to choose), and
R is the reward for always selecting the enterprise solution, and
P is the punishment due to lack of enterprise solutions and fragmentation across the divisions, and
S is the “sucker’s payoff”– i.e., your division is alone in using the “enterprise” solution

IF: T > R > P > S

THEN: The equilibrium strategy is for each division to locally optimize, which will have the effect of
reducing the number of enterprise solutions available to all divisions and increasing fragmentation
across the divisions.

PROOF: The problem as stated is equivalent to the classical Prisoner’s Dilemma. Therefore the local
optimization strategy (and corresponding suboptimal enterprise payoff) is the Nash equilibrium
strategy for this game.
 Enterprise Alignment and the Nash Equilibrium
T is the temptation to defect from the enterprise solution (preserve your right to
choose), and
R is the reward for always selecting the enterprise solution, and
P is the punishment due to lack of enterprise solutions and fragmentation
across the divisions, and
S is the “sucker’s payoff”– i.e., your division is alone in using the “enterprise”
solution
From the movie, “A Beautiful Mind”

Always pick the Choose between local and

enterprise solution
Always pick the Easier for divisions to work
together, many enterprise
enterprise solutions available, but your
solution division may be suboptimized.
enterprise solutions
Your division gets to optimize
selection based on division needs, the
other division has to suboptimize in
R some cases. T

Choose between The other division gets to optimize Everyone makes the optimal choice
selection based on division needs, for themselves, leading to fewer
local and you have to suboptimize in some enterprise solutions to choose from,
enterprise cases. and less ability to work across
solutions S divisions P

The Nash Equilibrium

(if T>R>P>S)
 Solutions to the ‘Enterprise Alignment Dilemma’, Part I

T is the temptation to defect from the enterprise solution (preserve your right to choose), and
R is the reward for always selecting the enterprise solution, and
P is the punishment due to lack of enterprise solutions and fragmentation across the divisions, and
S is the “sucker’s payoff”– i.e., your division is alone in using the “enterprise” solution

Since T > R > P > S creates the Prisoner’s Dilemma, don’t allow T > R > P > S!
 Solutions to the ‘Enterprise Alignment Dilemma’, Part II

1. Change the payoffs (make R & P > T)

A. Increase the reward for choosing the enterprise solution (‘carrot’)
i. lower the cost of enterprise solutions
ii. raise the benefit of cross-division cooperation and defragmentation
B. Reduce the temptation to locally optimize (‘stick’)
• strong central governance
• peer pressure

• Agree that if R is within, say, 10% of T, then the enterprise solution will still be selected
(make it easier for R = T)

• If one division takes the enterprise solution that the others rejected, the other divisions have
to pay compensation (i.e., reduce the sucker’s payoff, S, to zero)

• Create regional solutions as an intermediate choice between local and enterprise solutions
(reduce T, raise R)

• If R > T translates into $ savings for some, use that money to offset T > R for the others

• Communicate: let the other divisions know your choices (avoids creating a sucker, and
enables open discussion of T, R, and P)
 Conclusion

Recognize that making the best choice for your division will inevitably
lead to fewer enterprise options and more fragmentation. The rational
choice (looking out for your division) is not the sensible choice (looking
out for the enterprise).

Always pick the Choose between local and

enterprise solution enterprise solutions
Always pick the Easier for divisions to work Your division gets to optimize
together, many enterprise selection based on division needs, the
enterprise solutions available, but your other division has to suboptimize in
solution division may be suboptimized. some cases.
Choose between The other division gets to optimize Everyone makes the optimal choice
selection based on division needs, for themselves, leading to fewer
local and you have to suboptimize in some enterprise solutions to choose from,
enterprise cases. and less ability to work across
solutions divisions

Where we want to The Nash

be (sensible) Equilibrium
(rational)