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In the fall of 2001, top executives at IBM Corp. realized they had a major problem on their hands. Something was happening to their industry that the technology giant could neither control nor predict. When you're IBM, this is not a feeling that goes over well. Big Blue didn't get its nickname—or, for that matter, its $105 billion worth of assets—by going with the flow (all currency in U.S. dollars).
The problem soon landed on Joel Cawley's desk. In a company packed with brains, Cawley's job as vice-president of corporate strategy is to figure out new ways for IBM to think. He's like a mechanic wandering the aisles of a hardware store, searching for gadgets to fill out his tool box—except he has a budget in the millions and his store is the entire world.
That fall, IBM was watching the development of the Linux operating system with trepidation. Unlike previous threats to the dominant Windows system, Linux was a cheap and easy-to-use library of code being collectively assembled by programmers around the world. The goal was an operating system that no single company would own but all would use, providing free digital DNA for everything from servers to cellphones. It was an ambitious idea, and just the kind of disruptive force that spells sleepless nights for anyone invested in the status quo—in this case, not just IBM but also the likes of Sun Microsystems, Intel and Microsoft.
There were just too many dangling questions. Would Linux fly? And if it did, who stood to benefit most? Would any of the big tech companies muscle their way in and hijack the development? Or would Microsoft bog down the idea in legal wrangling?
Finding the answers to those questions quickly was crucial. If the concept took off and IBM hadn't invested properly in its own Linux-compatible technology, the company could find itself drastically behind, just as it had in the 1940s, when it famously decided not to back development of the first photocopier and ended up conceding crucial ground to an upstart called Xerox. Jump in too soon, and the company risked throwing money at a flash in the pan.
At IBM's headquarters north of New York City, Cawley picked up the phone and dialled Canada. He was acting on a suggestion a colleague had made: The next time they were in a strategic jam, they should try game theory.
Cawley's call went to Open Options Corp., a tiny Waterloo, Ontario, company that specializes in the discipline. In a stout, brown building, CEO Tom Mitchell and principal scientist Niall Fraser listened as Cawley described IBM's predicament.
Ten-year-old Open Options is one of a handful of companies in the world that devote all of their energy to using game theory to solve corporate problems. The firm counts five of the Top 10 companies on the Fortune 500 as customers, including IBM, Chevron and Ford, not to mention others further down the list, such as Xerox, Caterpillar and Boeing. (Most clients prefer to stay anonymous.)
The company's roots date to the late 1960s, when Fraser, newly graduated from high school, was contemplating what to do with his life. Much of what was being taught in university didn't appeal. "I was a hippie—a proud one," Fraser says. "Part of that ethic was to abandon conventional society, look for your own interests and build your life on your own terms. So I did that."
There followed five years of travel and sundry work like tobacco picking. What Fraser really wanted was to study strategic thinking from a philosphical point of view. After all, "the heart of life is how to make good decisions," he says. But the avenues for that line of study were limited. At the time, most business schools weren't pushing the boundaries on creative problem-solving. So Fraser avoided academia until the day he noticed that an obscure course was being taught in the University of Waterloo's engineering department. Game theory? Fraser wanted in. And since his father ran the department, strings were pulled to make up for a few high school grades that would have otherwise kept him from being admitted.
The way game theory works is simple—up to a point. A list is made of all the potential players in a particular situation—a game—and the options for each player are mapped out in as much detail as possible. Since one player can have several options, each one is given a numerical value to indicate its priority. However, those calculations become complex in a hurry: A situation with eight players, where each person or company has three potential options, can lead to 16,777,236 possible outcomes.
