The Art of Strategy - Part 1

A Review of Dixit and Nalebuff’s Classic within the Context of Project Management

The Art of Strategy is the culmination of years of refining a text through several versions, by Dixit and Nalebuff, that distills strategic concepts into simple, accessible terms. In this review, I take a closer look at this timeless work, exploring its core ideas and their relevance to project management.

Strategic thinking, as Dixit and Nalebuff argue, extends far beyond boardrooms, political campaigns, or military battlefields. It is present in nearly every decision we make, shaping outcomes in interactions both monumental and mundane.

This review, the first of two-part series, distills the book’s key insights and delves into their application to the unique challenges faced by project managers. From navigating complex decisions to fostering collaboration and achieving strategic objectives.

To illustrate the book’s principles, I examine their application through the perspective of a project manager dealing with an urban light rail megaproject. I hope this context helps in uncovering parallels that demonstrate how game theory can inform daily decision-making in project management.

While this review seeks to introduce strategy and game theory to project management professionals with a passion for learning, its ultimate goal is to inspire you to engage with the book itself. The Art of Strategy is not just an insightful read for professionals—it’s one of the most important books you can read to enhance your understanding of strategy in project management.

Strategy and Game Theory

In the context of game theory, a game is any situation where the outcome for each participant depends on the choices made by all involved.

Unlike solitary decision-making, games are inherently interactive, involving players whose actions influence and are influenced by one another. From a simple pricing competition between businesses to the negotiation of a project timeline, these games are structured by rules, objectives, and the players’ strategies. Each player seeks to achieve the best possible outcome, often requiring careful anticipation of others’ moves.

Strategic situations arise when these interactions compel players to think beyond their immediate choices and consider the motivations, constraints, and potential actions of others. For project managers, strategic situations are embedded not only in major project shaping moments, but in everyday decisions—balancing contractor incentives, resolving stakeholder conflicts, or allocating resources efficiently.

The hallmark of a strategic situation is interdependence: your success hinges not only on what you do but also on how others react. Therefore, you need to, proverbially, put yourself in others’ shoes.

Sequential Games

Many games unfold step by step, with players taking turns to make their moves—chess being a quintessential example. In sequential games, success often hinges on the ability to anticipate the future and plan accordingly, that is, backward reasoning.

Backward reasoning involves starting at the desired outcome of the game and working backward to determine the best decisions at each step. It requires players to visualize the game tree, a branching diagram of all possible moves, and strategically prune options that lead to suboptimal outcomes.

Games fully solvable by backward reasoning are characterized by a clear sequence of moves, where each player's choices and outcomes are transparent, and there is no uncertainty about the rules or objectives.

In project management contexts, backward reasoning proves invaluable in structured scenarios like project planning or contract negotiations, where understanding the chain of interdependent decisions can guide a project manager to the most favorable outcome.

Resourceful Project Manager

Situations where backward reasoning is essential are abundant when managing a project. Often, the sequence involves only a few moves, making the optimal strategy relatively clear. However, strategic decisions may as well involve long chains of moves. You may start by describing the final desired outcome and branch back to your initiating decisions. From scheduling critical tasks to negotiating contracts, understanding how early decisions influence your later choices and outcomes is a daily necessity for a project manager.

Consider a simplified but realistic example: You are leading one of two excavation contractors on a construction site for an underground station of the described LRT Project. The ongoing arrangement requires both contractors to take turns excavating over 11 weeks, with the rules stating that each turn allows a choice of 1 or 2 weeks of work. Both companies believe that the control over the final week (Week 11) is particularly valuable as it offers leverage for the next project phase. Through a draw you are selected to pick the first working schedule. Which one would you take 1 or 2 weeks, knowing that the sequence of choices determines who ultimately controls the last week? (Look for the answer in the comments section)

Situations like this may seem far-fetched, but arise regularly when aiming to allocate your strongest resources across different tasks. As the proverb goes, “ Being resourceful is not just having resources.”

Simultaneous Games

Not all games are sequential; simultaneous-move games involve players making decisions simultaneously at each step, without knowing what others have chosen. Here all players act at the same time, making their choices based on anticipated strategies of others.

Unlike sequential games, where one player’s move informs the next, simultaneous-move games require participants to think ahead, considering how their actions interact with others' decisions. Game trees and branches will still help to represent the game, but not to represent a sequence of moves.

The structure of simultaneous games often reveals a tension between individual and collective incentives. In a pricing war between two companies, for example, each firm may lower its prices to gain a competitive edge, but if both do so, profits shrink for both parties.

Central to these games is the concept of equilibrium, a state where no player can unilaterally improve their outcome by changing their moves (i.e., their strategy). In price competition games, for instance, equilibrium is reached when each player selects the best response to the others’ expected actions, leading to a stable, self-reinforcing outcome. While there are many different types of simultaneous-move games, the book highlights two main types of games, Prisoners’ Dilemma, and Coordination Games for very good reasons.

Prisoners’ Dilemma

In Prisoners’ Dilemma all participants (game players) have incentives to do something that collectively leads to a suboptimal outcome for all.

In the classic description, two prisoners (John and Ali) must independently decide whether to cooperate with each other and remain silent, or to defect and confess against each other. If both cooperate (and remain silent), they achieve the best collective outcome—one year sentence each—that reflects mutual benefit. However, if one defects (confess) while the other cooperates, the defector gains a higher payoff—of walking free— at the expense of the cooperator, who suffers the worst possible outcome—of 3 years sentence. When both defect, they each receive a lower payoff than if they had cooperated—each two years sentence. The main point here is that regardless of what the other do, they have the best incentive, or the dominant strategy, to defect.

\(\begin{array}{c|c|c} & \text{Ali Cooperates} & \text{Ali Defects} \\ \hline \text{John Cooperates} & -1, -1 & -3, 0 \\ \hline \text{John Defects} & 0 ,-3 & -2, -2 \\ \end{array}\)

The payoffs for the two-person simultaneous game can be represented in a matrix form as above were the first and second number in each cell corresponds to the row and columns players respectively.

Similar scenarios arise in many real-world situations where individual incentives conflict with collective well-being. In joint projects, as mundane as cleaning a communal kitchen or monumental as joint venture megaproject, each person or party benefits from cooperation, but the temptation to let others do the work leads to defection and neglect.

In price competitions between firms, cutting prices may attract more customers individually, but if all competitors undercut each other, profits dwindle across the board.

Similarly, when exploiting common resources—like regulating carbon emissions to combat climate change or maintaining sustainable hunting practices—the incentive to overconsume benefits individuals in the short term but harms the collective in the long run.

Achieving cooperation often involves addressing the incentives to defect, especially in multi-round games. Enforcing penalties for defection (e.g., regulatory fines) or rewards for compliance (e.g., performance bonuses) help align individual incentives with collective goals. Clearly defined rules, effective monitoring, and penalties foster adherence and mitigate overexploitation. Social norms and reputation concerns also play a crucial role, as individuals are more likely to cooperate when their actions are visible and relationships are ongoing, i.e., repetition.

Coordination Games

Another important type of game is coordination games, which highlight situations where players achieve the greatest benefit by aligning their actions with each other. Unlike the Prisoners’ Dilemma, coordination games may lack a single dominant strategy for each party, requiring participants to anticipate and align with others’ choices.

Consider that Ali and John hope to work together on a joint project. If they both go to office, they will achieve the best outcome, however, if one decides to stay home the other will be worst off, having to stay in traffic and commute to office. If they both work from home, they will get work done but perhaps to a lower quality that may require rework. The matrix below represents the payoffs of their coordination game.

\(\begin{array}{c|c|c} & \text{Ali Works from Home} & \text{Ali Goes to Office} \\ \hline \text{John Works from Home} & 1, 1 & 0, -1 \\ \hline \text{John Goes to Office} & -1 ,0 & 2, 2 \\ \end{array}\)

In coordination games often multiple equilibria exist, deciding which equilibrium to pursue becomes a key challenge—going to office or work from home. In such cases, players must rely on mechanisms to converge on a mutually beneficial equilibrium.

This convergence often happens on outcomes with cultural, historical, or contextual significance, helping players coordinate in the absence of explicit communication. These outcomes are called focal points. For example, when strangers must meet in a large city, iconic landmarks often emerge as natural focal points. Similarly, focal points often manifest as shared standards or norms, such as using universally recognized metrics, adhering to fiscal calendars, or coordinating around well-understood conventions. These focal points ensure alignment and guide players toward outcomes that—hopefully—maximize collective benefit.

There will be a significant scope for leadership in coordination games. Leaders can guide players toward a mutually beneficial equilibrium within coordination games.

Changing the Game, a.k.a, Kobayashi Maru

Much of your role as a project manager and leader involves reshaping games and adjusting payoffs. This includes identifying versions of Prisoners’ Dilemmas where individuals’ incentives will lead to collective suboptimal outcomes and try to achieve coordination, or all together, change the game into versions of coordination games. Much of the discussion around different contracting strategies within projects can be viewed through the lens of designing mechanisms to change Prisoners’ Dilemmas into coordination games at different scales.

Lets go back to the two excavation contractors on the underground LRT station job. Joint projects can be versions of Prisoners’ dilemma as if both contractors cooperate, the project progresses smoothly, but each incurs minor additional costs. If one defects while the other cooperates, the defector benefits by completing their tasks at the cost of cooperator. If both defect, bottlenecks occur, leading to major project delays and penalties for both.

Let us assume you are the project manager from the owner to oversee their cooperation. you have two main strategic tools. One is achieving cooperation through increase in monitoring, also you may appoint a fulltime compliance officer at the site, or increase penalties for defection. You can also emphasis on the repetitive nature of this project and that their reputation will lead to future scopes for both contractors.

Moreover, you can design mechanisms to transform the game, this may include Shared Milestone Bonuses, or Resource-Sharing Agreements, where equipment downtime for one contractor is leveraged by the other.

Early in the conceptual stages of large engineering projects, there is a critical step often referred to as project shaping or anchoring. This process involves thoroughly examining the incentives and motivations of all stakeholders and strategically aligning them to ensure the project’s overall success. In modern projects, where Environmental, Social, and Governance (ESG) considerations play an increasingly significant role, the importance of effective project shaping cannot be overstated. Proper project shaping requires a practical understanding of how Prisoner’s Dilemma arise and, more importantly, how to transform such scenarios to align the interests of all parties involved.

Mixed Strategies

On July 17th, 1994, Italy faced Brazil in the finals of the FIFA World Cup. Roberto Baggio stepped up to take Italy’s final penalty, a moment that would become one of the most emotional and memorable in the sport’s history.

Not all games have clear dominant/dominated or equilibria strategies like the Prisoner’s Dilemma or coordination games. In many games, players’ strategies are in direct opposition, creating a zero-sum game, where one player’s gain is achieved at the expense of the other’s loss.

A classic example of this dynamic is Rock-Paper-Scissors, a game where each move has an equal chance to win, lose, or draw against another, as illustrated in the following game matrix.

\(\begin{array}{c|c|c|c} & \text{Ali Chooses Rock} & \text{Ali Chooses Paper} & \text{Ali Chooses Scissors} \\ \hline \text{John Chooses Rock} & 0, 0 & -1, 1 & 1, -1 \\ \text{John Chooses Paper} & 1, -1 & 0, 0 & -1, 1 \\ \text{John Chooses Scissors} & -1, 1 & 1, -1 & 0, 0 \\ \end{array}\)

In this setup, no single move consistently dominates. The optimal choice depends entirely on the opponent’s action. Winning in Rock-Paper-Scissors requires adopting a mixed strategy—randomly selecting moves in certain proportions and prevent opponents from predicting your choices. This unpredictability transforms the game into a equilibrium of proportions of strategies where neither player gains an advantage through strategic adjustments.

The same principles apply to penalty shootouts in football (soccer). Both the kicker and the goalkeeper must randomize their actions to maximize success or minimize loss. Setting aside errors and the intensity of the moment, the kicker ultimately decides whether to aim left or right, while the goalkeeper must choose which side to defend. If either consistently favors one side, their opponent can exploit the predictable pattern.

The concept of randomization is the hallmark of strategies in zero-sum games. This was first formulated by Thomas Schelling in his seminal work The Strategy of Conflict. Schelling demonstrated that randomization keeps opponents uncertain, maximizing strategic advantage. Equally, in non-zero-sum games—where mutual gains are possible—Schelling emphasized the importance of communication and clearly defining boundaries to foster cooperation and avoid conflict.

Randomization can be utilized effectively for compliance and enforcement to ensure adherence while reducing monitoring costs. By making detection unpredictable, organizations create a deterrent effect even when enforcement is infrequent. Tax audits, drug testing programs, and parking meter violations, are all instances of zero-sum games where fines are designed high enough to create an equilibrium where the low probability of being caught offset the defectors’ gain. Similarly, spot safety checks on construction sites and surprise quality inspections in manufacturing serve as effective mechanisms to maintain compliance without exhaustive oversight.

Lastly, mixing strategies can help in various coordination games too, particularly when incentives are not equally aligned. Recall the previous game of going to office versus working from home. If John and Ali have slight preferences, then a randomization device can help to coordinate players on repetitive plays, e.g., come heads, we go to office, etc.

Promotions are Zero-sum

The zero-sum nature of randomization and mixed strategies may seem far removed from the leadership role of a project manager, but not all zero-sum games involve fierce competition where someone wins at the expense of others.

Consider the scenario where, as a project manager, you aim to establish a reward system to encourage some organizational wide behavior. While certain team members may consistently perform at a high level, introducing an element of randomization in awarding such recognition ensures inclusivity and fairness.

Similarly, a project manager often faces tough, critical conversations with stakeholders, contractors, or team members. Adopting a randomized strategy in how you approach these situations—for example, alternating between direct, firm stances and more collaborative, flexible approaches—introduces an element of unpredictability. This unpredictability ensures that stakeholders or team members cannot exploit a fixed strategy to manipulate outcomes in their favor.

Strategic Moves

Having covered the basics of game theory and strategy, Dixit and Nalebuff, move to the actual art beyond strategy in the second part of their book.

Build your opponent a golden bridge, so they can retreat. - Sun Tzu

Strategic moves involve actively shaping the game itself to influence outcomes and the behavior of others, and, can be categorized into three core types: commitments, threats, and promises.

Strategic moves consist of two critical components: the move itself and the course of action that establishes its credibility. The effectiveness of all these strategic moves hinges on these both, the move and the credibility.

Commitments are unconditional actions that restrict one’s own choices to compel a response. Commitments, in particular, are powerful tools that can bind opponents to a specific course of action. Yet, undermining an opponent’s commitment strategically can pave the way for de-escalation and negotiation.

Hernán Cortés famously "burned his ships," during the 1519 conquest of Aztec Empire. While the historical accuracy of this account is debated, the event is cited as a metaphor for total commitment, leaving no option to retreat. The other side of the commitment idea, as Sun Tzu alluded, is that undermining the commitment of an opposing army often requires building them—maybe not literal, but—a golden bridge.

In contrast, threats and promises are conditional moves with distinct dynamics. Threats deter undesirable actions by imposing negative consequences and are inherently open-ended, often lacking a specific expiration date, and is protecting the status quo. Promises, on the other hand, incentivize desired actions by offering rewards, aiming to disrupt and improve the status quo.

While the action is the visible—such as making a threat, promise, or commitment—it is the underlying credibility that determines its effectiveness. For example, a project manager might threaten to impose penalties for delayed work, but the threat only influences behavior if the team believes it will be enforced. Without credible follow-through, even the boldest strategic move risks being dismissed as a bluff. Clear communication about stakes and consequences can influence behaviour, but vague or excessive threats or promises can backfire, and undermining credibility.

No Shortcuts to Safety

An ever present task of a project manager within the construction industry is to improve the safety performance at construction job sites—a critical challenge in ensuring not only compliance but also fostering a culture of vigilance and responsibility. To achieve this, you have three powerful tools/strategic moves at your disposal: threats, promises, and importantly, commitment.

Threats serve as deterrents to prevent unsafe practices. For instance, failure to wear mandatory PPE (Personal Protective Equipment) could result in immediate removal from the site. These measures are not punitive for their own sake but are designed to signal zero tolerance for neglecting safety protocols.

At the same time, promises should be used to incentivize positive behaviors. For example, implementing a reward system for teams that submit well written and comprehensive incident reports can encourage proactive safety practices. Rewards could range from monetary bonuses to recognition during management meetings.

However, the cornerstone of this strategy is commitment. If site supervisors and project managers are seen strictly adhering to PPE requirements and actively participating in safety meetings, it reinforces the seriousness of these initiatives. Finally, to signal credibility, you may hire a third-party auditor to conduct random audits and transparently report the results regardless of job site hierarchies.

Question Then Becomes

This marks the end of the first section of this book review. In the second part, together with the authors, we will delve into more in-depth applications of the concepts introduced here, such as manipulating and interpreting information, balancing cooperation and competition, and structuring incentives.

As evolved beings, we possess a natural, intuitive sense of strategy—one honed through countless interactions and conflicts over millennia. From navigating social dynamics to resolving disputes, our instincts often mirror the principles of game theory: anticipating others’ actions, weighing risks and rewards, and finding equilibrium between collaboration and rivalry.

Many of the ideas explored in this book, and highlighted in this review, may resonate as reflections of strategies we already employ. At the same time, they offer a clearer framework to guide our decisions and actions moving forward.

The question then becomes: Has any part of this review prompted you to rethink your approach to strategic situations or the utility of different actions? Or has it all aligned with your previous understanding of your strategies and decisions? Let us know in the comments.

Notes

This book review is a reading material for the “Strategy in Project Management: Game Theoretic Approach,” course at the University of Calgary, Department of Civil Engineering.

Refer to this article as below:

• Zangeneh, P. (2025), “The Art of Strategy - Part 1: A Review of Dixit and Nalebuff’s Classic Within the Context of Project Management”, EPM Research Letters.

Join the EPM Network to access insights, influence our research, and connect with a community shaping the industry's future.