Using Game Theory to Brew A Bigger Cup of Tea

There's a great profile (though a bit long-ish) on Barry Nalebuff, economist and chairman of organic beverage company Honest Tea, in this spring's Strategy+Business. The article discusses how Nalebuff used game theory, "a mathematical tool used to anticipate possible scenarios and develop appropriate strategies to deal with them," in his work as a business consultant and entrepreneur.

Game theory has often been regarded as too overly-philosophical for business strategies, but Nalebuff saw practical ways to apply it in every industry. The example of Honest Tea shows Nalebuff's strategy in action:

"Whereas most commercial tea producers use crushed leaves and dust to make their products, Honest Tea figured out how to brew its product from whole leaves. When a larger rival came up with its own whole-leaf brewing technology, Nalebuff saw a real threat: That rival, with its superior marketing and sales muscle, was going to grow the pie without cutting Honest Tea in on the growth. By sharing its technology with yet another rival in the form of a private-label arrangement, Honest Tea was able to help grow the pie and enjoy a bigger slice of it. 'It allowed us to position the private-label products against a rival’s lineup,' he says. 'And prevented them from doing it to us.'

So far Nalebuff's strategies have worked well for his company. It's the top selling tea brand at Whole Foods, and sales for the company hit $10 million for 2006. Call it a win-win for all the players involved.