The Art of Strategy - Part 2
A Review of Dixit and Nalebuff’s Classic Within the Context of Project Management
We ventured into the foundational ideas of game theory and saw how strategic thinking can help us in decisions and shape interactions, in the first part of our review of the Art of Strategy.
In this second part, we journey deeper into the mechanics of strategy, examining the tools and techniques that make strategies credible and interactions effective. We will navigate along with the book to review the following subjects.
Making Strategies Credible,
Information Interpretation and Manipulation,
Cooperation and Coordination,
Bargaining and Negotiations,
Voting, and,
Incentives.
As in the first part, I illustrate the book’s principles by examining their application through the lens of a project manager navigating an urban light rail megaproject. This context, I hope, demonstrates how game theory serves as a compass in the often uncharted terrain of project management.
I hope this review inspires you to engage with the book itself. The Art of Strategy is the result of distilling several books through their writers' journeys into its finest version. As they rightly advertised, it serves as a guide for success in business, life, and, of course, project management.
Making Strategies Credible
Building on the previous section, strategic moves consist of two critical components: the move itself and the course of action that establishes its credibility.
Credibility is pivotal because even the boldest moves lose their impact if the opposing player doubts your ability or willingness to act.
As discussed earlier, when faced with threats, a sound strategy is to undermine their credibility, such as exploiting weaknesses in the opponent’s commitment mechanisms.
Another approach is to test and incrementally challenge the credibility of a threat through a concept famously theorized by Thomas Schelling as salami tactics. This involves taking a series of small, calculated steps that gradually push the limits of an opponent’s commitment. Each move is designed to appear too minor to warrant a disproportionate response, making retaliation seem excessive or unjustifiable. Over time, these seemingly inconsequential actions accumulate, effectively weakening the opponent's original threat and shifting the strategic balance.
Salami tactics enable one side to advance its position incrementally while forcing the other to either escalate dramatically or concede ground. By exploiting the opponent's hesitation to act decisively, this approach exposes the fragility of threats that lack robust and enforceable credibility.
On the other hand, when confronted with salami tactics, you might restrict your own choices by cutting off communication or delegating decision-making to an automated system. If you clearly communicate the existence of such a mechanism, this strategy relieves you of the burden of acting proportionally and strengthens your position by removing room for hesitation.
Dixit and Nalebuff classified the approaches to establish credibility for strategic moves into four category of tactics:
Changing Payoffs: Restructure the game to make compliance more attractive or deviation prohibitively costly. This includes writing enforceable contracts, and establishing and leveraging reputation.
Restricting Choices: Constrain the ability to reverse commitments by cutting off communication to limit renegotiation, or, burning bridges, such as removing fallback options to create an all-or-nothing scenario, or, delegating outcomes to chance or automated processes.
Incremental Moves: Break large commitments into smaller, manageable steps, fostering trust while reducing risks. This tactic also addresses the salami strategy by ensuring that each incremental action can still enforce discipline or resolve.
Using Agents and Teams: Enhance credibility through external enforcement such as mandated agents, or social and team pressure.
Automatic Escalation
As a project manager, you are often dealing with contractors struggling with delays and under high stress. Imagine in our urban light rail projects, the contractors frequently fail to submit intermittent progress commitments and often provide excuses instead of actionable plans, making it increasingly likely that the final deadline will be missed.
To address this, you may leverage the risk management function to create an automated mechanism that escalates delays to the project's higher management as material risks. These risks are configured to trigger when any contractors miss their specific milestones or fail to submit required documentation, such as updated work schedules or mitigation plans. Once triggered, the risk is automatically flagged in the project’s centralized dashboard, making it visible to all stakeholders, including higher management.
The system restricts your ability to personally intervene or renegotiate these escalations, effectively restricting your choices and creating a scenario where the contractors face the consequences of their delays without the usual mediation or leniency. This strategy removes fallback options for the contractors and signals the seriousness and the credibility your strategy.
Information Interpretation and Manipulation
In real-world strategic situations, it is common for one player or party to possess more information than the other, creating an imbalance in information, or, information asymmetry. This asymmetry—or even the perception of it—can be leveraged or manipulated to influence outcomes in favor of the more informed party.
To navigate these dynamics, mechanisms like signaling, screening, and signal jamming play a role in shaping how information is conveyed, interpreted, and controlled.
Signaling involves a player demonstrating attributes or intentions through observable actions, often to influence others’ decisions. For a signal to be credible, it must carry a cost or inconvenience that deters false representation. Cleanliness, for instance, is not a reliable signal of quality of a used car, as its relatively cheap to have any car cleaned. In contrast, car dealerships or companies may use signals such warranties to affirm product quality—implicitly showcasing their confidence by bearing the potential cost of defects.
Screening, unlike signaling, is initiated by the less-informed party to elicit private information from others. It involves designing scenarios where different actions reveal differences in underlying qualities or risk profiles. Devising screening mechanisms could lead to unintended effects. In insurance markets, for instance, policies with uniform pricing may attract disproportionately high-risk individuals while discouraging low-risk participants, this is called adverse selection. This is why screening techniques in such industries typically aim to predict individuals risk levels indirectly through their seemingly unrelated choices.
Finally, signal jamming is the strategic obfuscation of information to prevent others from accurately discerning one’s intentions. This tactic is common in competitive or adversarial contexts, where concealing true motives or capabilities can confer an advantage. Poker players employ reverse tells to confuse opponents. Many counter espionage operations such as Canary Traps, Honey Traps, or False Flags, are built based on deceptive signals to deliberately mislead.
Signal Jamming in Projects
Teams on a large transit project might engage in signal jamming by strategically repackaging their deliverables to highlight easy wins while masking the root causes of significant issues.
For instance, they could emphasize timely completion of auxiliary tasks, such as routine designs or minor installations, in progress reports while underreporting delays or overruns in core components like tunnel construction or station infrastructure.
This selective reporting shifts attention to areas of perceived success, deflecting scrutiny from critical challenges. By focusing on partial deliverables or separating problematic areas from successful ones in updates, teams create a misleading narrative that obscures the true status of the project. This makes it harder, if not impossible, for management to identify and address root causes of delays or budget overruns.
Earned Value Management (EVM) methods, while valuable for tracking project performance, are particularly susceptible to such signal jamming. Teams can inflate the earned value by showing progress on less critical, lower-effort tasks that contribute little to the overall project while neglecting high-impact activities facing delays or cost issues. Progressively, this will force teams to cut corners on other parts of the project to avoid exceeding budget or schedule constraints, leading to compromised quality. For example, materials or workmanship might be downgraded on less visible project elements to counterbalance overruns elsewhere, resulting in long-term operability issues.
Implementing proper incentive schemes, transparency measures, and commitment mechanisms can counteract these issues and discourage signal jamming. Review and updating the rules of credit for EVM analysis is of paramount importance.
Signal jamming happens on most large projects and to various extents because of piecemeal decision-making as discussed in the following section.
Cooperation and Coordination
As outlined in the first part of this review, individual decisions can collectively lead to suboptimal outcomes. And, there is no way to remedy that other than by changing the payoffs.
Success, in many domains, is a game of relativity rather than absolutes. Just as OPEC nations coordinate production limits to prevent a destructive price war, so too do industries. Over-competition, such as excessive studying for grades or excessive training in sports, leads to a collectively suboptimal outcome. True strategy, then, is not just about self-improvement but about understanding when to compete, when to cooperate, and when to redefine the game entirely. This can be thought as the inverse of the Prisoners’ Dilemma, when collective agreements (from Unions to Cartels) is often the winning strategy.
In many systems, small shifts in dynamic behaviors or conditions may cascade into significant, systemic shifts. This phenomenon is known as a tipping point—a critical threshold beyond which collective behavior changes dramatically, often locking the system into a new—extreme—equilibrium. For instance, in racially mixed neighborhoods, minor demographic shifts can set off self-reinforcing dynamics that result in complete segregation. Overcoming these tipping points requires deliberate, coordinated efforts to realign the system toward more favorable equilibria.
These small shifts can be agreed upon by all parties along the way. Often seemingly rational incremental steps, through piecemeal decision-making, can lead to unintended, collectively regrettable outcomes.
Imagine a system where individuals collectively determine promotion criteria, starting from a low standard and gradually raising it in small steps. Each decision appears logical to the majority: high-achieving members benefit from enhancing the group's perceived quality, while those who are excluded prefer a higher standard to blur their relative ranking among the rejected.
Over time, these incremental steps escalate to an extreme threshold where no one achieves promotion, leaving everyone worse off. Despite this outcome, each decision along the way was supported by most participants, illustrating how localized, self-serving choices can fail to account for their cumulative, detrimental effect on the group. This phenomenon is called of piecemeal decision-making or incremental rationality
Incremental Rationality and Piecemeal Decision-Making in Projects
Incremental Rationality is often mirrored in large projects with multiple sub-projects, where incremental change orders and scope adjustments occur. For example, within a construction megaproject, sub-project teams may propose minor design changes or additional features that seem beneficial and manageable in isolation.
Each change order, approved by the majority of project leadership and stakeholders, shifts the project slightly from its original scope. Over time, however, the cumulative effect of these changes can lead to significant budget overruns and delays, diverting focus from the project's core objectives. As these incremental decisions pile up, the project as a whole begins to lose alignment with its initial priorities, often with the benevolent approval or consent of all involved parties.
This collective approval sets the stage for signal jamming, shifting the narrative away from addressing systemic issues, creating a self-reinforcing loop where the group avoids acknowledging failures and instead justifies its actions through selective reporting or framing.
Avoiding piecemeal decision-making is critical, and may start with bundling potential changes (change orders) into comprehensive packages to allow stakeholders to evaluate their cumulative impacts—with transparency and accountability—rather than approving them individually.
Bargaining and Negotiations
Bargaining is a careful balance of strategy, where each side pushes for its interests while competing for shared resources.
Whether in scenarios like wage negotiations or contractual disputes, outcomes are shaped by critical factors such as the cost of delay, external alternatives, and the distribution of bargaining power.
Bargaining can be viewed as a sequential game of offers and revisions, where negotiators benefit from backward reasoning to secure agreements that maximize mutual gains while minimizing avoidable losses, such as those arising from strikes or prolonged disputes.
A central concept in bargaining and negotiation is BATNA (Best Alternative to a Negotiated Agreement), which defines each party’s fallback position if talks fail. BATNA serves as a baseline for determining the value each side can secure independently, heavily influencing the division of the "bargaining pie."
Successful negotiations hinge on creating value beyond the sum of the BATNAs, with the surplus divided according to each party's relative bargaining power. Strengthening one’s BATNA—or weakening the opponent’s—is a key strategy for gaining leverage in bargaining and negotiations. Effective negotiation requires precise assessment of BATNAs, anticipation of the other party’s actions, and creativity in expanding the pie to achieve outcomes that benefit all involved.
The Rubinstein Bargaining model offers a foundational framework for understanding these dynamics. This model examines negotiations over a divisible resource through alternating offers, assuming complete information for all parties. The model representation demonstrate that bargaining power is linked to the negotiators' patience. Patience, quantified as a discount factor (δ), indicates how much a party values immediate resolution versus future outcomes.
Greater patience in negotiations allows a party to hold out longer, increasing their chances of securing a larger share of the resource. In contrast, those with less patience feel more pressure to settle quickly, often making greater concessions to reach an agreement sooner.
Bargaining in Project Disputes
Consider a scenario where the delivery of train wagons for a large public transit project is delayed by the supplier.
The delay has resulted in three types of costs: the contractor’s direct costs (e.g., idle labor and machinery), shared mitigation costs (e.g., sourcing alternatives or accelerating work), and the owner’s indirect costs (e.g., reputational damage, penalties, and lost revenue due to delays).
The critical question becomes: who is more impatient in this negotiation—the contractor or the owner? The contractor’s impatience is shaped by their financial exposure, such as cash flow pressures and resource constraints. However, if the contractor has operational flexibility, such as reallocating idle resources to other projects their level of impatience may be reduced. Maintaining a healthy portfolio of active projects increases the patience of contractors in bargaining disputes.
On the other hand, the owner typically faces higher indirect costs, including public scrutiny, political commitments, and potential penalties, all of which create a stronger urgency for resolution. If the owner ends up more impatient than the contractor, bargaining dynamics will results with the owner bearing the majority of the shared mitigation costs.
Strategies to remedy the bargaining imbalance are crucial for project owners. The owner can strengthen their BATNA (Best Alternative to a Negotiated Agreement) by introducing penalty clauses in contracts that shift more risk to suppliers or contractors. But aside from contractual arrangement, the owners should diversify their supplier options to increase redundancy.
Voting
Voting, in any system, is inherently strategic.
Voters often realize that simply choosing their favorite candidate may not always lead to their desired outcome. Instead, they must consider how others will vote and whether supporting other options will better serve their interests.
This strategic dynamic becomes especially pronounced in elections with three or more candidates, where casting a ballot for one’s true preference can inadvertently lead to an undesirable result. Voters may choose to support a candidate who is not their top choice but stands the best chance of defeating an unfavorable alternative.
To address these challenges, ranked-choice voting has been proposed as a means to relatively mitigate strategic voting. This system allows voters to rank candidates in order of preference, enabling a more nuanced expression of voter sentiment. It effectively simulates runoff elections within a single voting round, reducing the risks of vote-splitting and wasted votes. Approaches like the Condorcet method—where the winner is the candidate who would prevail in all head-to-head matchups—are particularly robust but require ranked ballots to be practical.
In a one-dimensional political spectrum, candidates tend to gravitate toward the preferences of the median voter, as this position secures majority support. This convergence incentivizes truthful voting, as voters have no reason to misrepresent their preferences when outcomes hinge on the median. While effective in simpler, one-dimensional settings, the median voter theory becomes less stable in multi-dimensional contexts where issues are more complex and diverse. Nevertheless, the stability of median voter outcomes is a cornerstone of political and organizational systems.
Strategic Proposals
While voting may seem distant from project management, the principles of strategic alignment with stakeholder preferences—such as those in median voter theory—are directly relevant when crafting proposals for evaluation by decision-making bodies like private or governmental committees. These committees often represent diverse interests, weighing dimensions such as cost-efficiency, environmental sustainability, long-term economic benefits, regional equity, and public support.
Understanding and mapping these priorities allows for the identification of the "median position"—a balanced point that reflects the committee’s central concerns. Structuring a proposal to align with this median position maximizes its appeal.
To address fringe preferences without compromising the core strategy, thoughtful amendments can be included. For example, if a subset of stakeholders strongly advocates for more aggressive environmental measures, the proposal might integrate optional green enhancements, such as additional scope for renewable energy initiatives.
Beyond potential scoring systems for evaluating alignment with stakeholder priorities, factors such as credibility, technical rigor, the overarching direction advocated by a proposal play a pivotal role. A core consideration is ensuring that the proposal's priorities align seamlessly with the strategic objectives of the project owner organization. Nonetheless, strategically centering the proposal on the median position—reflecting the most balanced and widely shared priorities—while thoughtfully integrating concessions for outlier positions creates a compelling and adaptive approach.
Incentives
Incentives are another key mechanism for altering strategic situations and aligning individual efforts with desired outcomes. When designed thoughtfully, they can bridge the gap between individual motivations and organizational goals, particularly in contexts where tasks have a probabilistic nature.
Effective incentive systems balance fixed rewards with performance-based rewards, recognizing the imperfect relationship between effort and outcomes. For tasks influenced by factors beyond an individual’s control—such as sales or project-driven work—this balance is critical. A mix of base pay and bonuses tied to observable results encourages effort without unfairly penalizing for uncontrollable variables.
However, calibrating these incentives is a delicate task: overemphasis on performance-based rewards in uncertain environments can demoralize workers, while relying too heavily on fixed compensation risks dampening motivation. Tailored incentive schemes drive engagement and productivity by aligning rewards with the specific context of the work.
When tasks are interconnected, whether as substitutes or complements, incentives must be designed with these relationships in mind. Substitutable tasks, like balancing teaching and research, can compete for a pool of attention. If incentives heavily favor one over the other, it may lead to neglect of the less-rewarded task, requiring careful balance to avoid unintended trade-offs. Complementary tasks, such as beekeeping and orchard management, benefit from well-aligned incentives that reinforce their natural synergy, leading to greater overall productivity.
Requiring university professors to teach a research course in their research area is therefore a powerful strategy to align their incentives.
This logic also applies to organizational structure: grouping complementary tasks together fosters coherence and efficiency, while separating substitutable tasks helps reduce internal competition and misalignment.
Incentives for Project Managers
In project management, the role of luck cannot be overstated. From unforeseen weather disruptions to supply chain delays, numerous factors beyond the control of teams can significantly impact progress. Designing proper incentives in this context requires moving beyond a singular focus on project completion.
Overemphasis on final delivery often leads to compromised quality, safety shortcuts, and critical issues being hidden to meet deadlines. To counter this, incentives should be progress-adjusted for context, ensuring that teams are rewarded for effort and adaptability rather than raw outcomes alone.
Performance metrics should be carefully chosen to reflect achievements distant from the probabilistic nature of risk events, such as compliance with intermediate quality benchmarks, proactive risk mitigation, or maintaining team morale in challenging conditions. This approach fosters accountability and fairness, encouraging teams to perform at their best despite external uncertainties.
Equally important is addressing the inherent conflict between substitute goals such as quality, safety, and productivity.
When these achievements are at odds—such as prioritizing speed at the expense of safety—aligning incentives becomes a challenge. Separating rewards and even departmental responsibilities for these objectives can reduce misalignment. For instance, a safety team could be tasked solely with enforcing safety standards and rewarded based on incident-free days, while a productivity team focuses on delivering milestones on schedule. By decoupling these incentives and responsibilities, teams can excel in their areas without undermining the others. This structured approach not only minimizes counterproductive competition but also ensures that core project values like safety, quality, and efficiency are upheld in balance.
Question then Becomes
As we navigate the complexities of strategic decision-making, several critical questions emerge.
Are there ethical concerns with using commitment mechanisms, such as delegating decisions to automation, to establish credibility? As AI continues to evolve, this issue will become increasingly relevant, raising questions about accountability, fairness, and unintended consequences.
Similarly, how can organizations prevent or minimize signal jamming, especially in large projects where selective reporting is common? When teams manipulate information to highlight minor successes while concealing critical delays, decision-makers lose visibility into the true status of a project.
Politicians often capitalize on the intuitive instincts of their supporters, shaping narratives that resonate deeply. For instance, Donald Trump frequently emphasized the unpredictability of his strategies on certain topics, signaling—whether explicitly or subliminally—that his approach was designed to ensure victory for his party, often at the expense of opponents. Simultaneously, by projecting an air of absolute honesty and transparency, he conveyed the idea of a broader, inclusive victory, suggesting that everyone stood to gain. This dual signaling taps into the natural dichotomy of zero-sum and non-zero sum game dynamics in both his supporters and his enemies. Can you think of instances where he has employed this strategy?
These questions highlight the intricacies of applying game theory principles to real-world scenarios. Who else in your friends or colleagues would find these ideas useful?
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 2: A Review of Dixit and Nalebuff’s Classic Within the Context of Project Management”, EPM Research Letters.
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