One of the basic roles of a manager is decision making. Game theory is a study that focuses on optimality in not only the cost-benefit evaluation of alternatives but also the strategic interactions between players for strategic decision-making. Analysis of the relation between players goes beyond mere evaluation to prediction of each participant’s best possible decisions out of the many possible decisions. The two chief divisions of game theory include the cooperative and non-cooperative game theory (Brandenburger and Nalebuff 58).
Game theory can be applied in strategic management in several specific ways. This is because of the fact that it provides critical information in their simplest form to enhance effective and strategic decision-making to perpetuate strategic management. It reduces uncertainties and makes it easier for managers to make informed decisions that make them go miles ahead of their competitors. Strategic management requires managers to rely on the often ignored aspects, which game theory provides insight because it does not overlook even the simplest details available (Brandenburger and Nalebuff 59). Consequently, this enhances strategic management through premeditated decision-making process among managers. Besides, in circumstances where interdependence of firms is reflected on, game theory builds up an outline to scrutinize decision making to ensure that the optimal strategy is achieved at any point in time.
Despite the several advantages that accrue to game theory, it has its disadvantages as far as its application is considered. It is impractical to assume that players do not know their own trade-offs and that of their opponents. Besides, the theory assumes that all the competitive problems can be analyzed with the aid of the game, which again is unrealistic, as this is not possible (Brandenburger and Nalebuff 66).
Brandenburger, Adam M. and Barry J. Nalebuff. “The right game: Use game theory to shape strategy.” Harvard Business Review (1995): 58-71.