Archive for the ‘Competitive Analysis’ Category

About your bold strategic move … how is your competitor likely to respond (if he does)?

November 24, 2009

TakeAway: How to assess a competitor’s response to your strategic moves?  Game theory is often too complex and too assuming to fit the real world.  Intuitive-based war gaming is often skewed by personal biases and hidden agendas.

So, McKinsey proposes a practical approach to predicting competitive behavior that “stays close to the theoretical rigor and accuracy of game theory but is as easy to apply.

A prior post outlined why — at least 1/3 of the time — competitors do not respond at all to their rivals’ strategic moves .

This post outlines what moves — if any — a competitor might actively consider and most likely choose.

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Excerpted from HBR: Predicting Your Competitor’s Reaction, by Coyne and Horn, April 2009

 
The McKinsey approach involves distilling all possible analyses of a rival’s response to a particular strategic move into a sequential
consideration of three questions, the first of which is “Will the competitor react at all?”

Once it is concluded that a competitive response is likely, it’s time to project the the nature of the response. Specifically, (1) What options will the competitor actively consider? and (2) Which option will the competitor most likely choose?

Although competitors may discuss many response options, they seriously investigate only a small number.

Even if companies consider multiple response options, most will have a clear preference for one or two.

And, the most common option competitors analyzed was “the single most obvious counteraction” (e,g. introducing a me-too product or matching a price change).

Of the options your adversary seriously considers, he will choose the one that is most effective (according to his analytic technique) within the constraints of his trade-off between short-term and long-term pain.

And, managers find it difficult to trade the certainty of short-term expense for the uncertainty of long-term gain.

To understand how competitors will respond to your move, evaluate the situation in their terms — not yours.

Companies often mistakenly assume that everyone measures success in the same way. This explains why many of our clients claim that their competitors are “irrational.”

Ask yourself: has your competitor chosen this moment to take leave of his senses? Or is he simply pursuing a strategy that looks poor according to your preferred measures but looks very clever according to his?

Most companies use simple, short-term measures.

In our survey, only about 15% of respondents used NPV to evaluate their options; 37% focused on market share; 38%  focused on earnings.

And again,  managers usually find it difficult to trade the certainty of short-term expense for the uncertainty of long-term gain.

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Bottom line: A rigorous analysis of competitors’ behavior doesn’t have to involve a lot of math and talk of Nash equilibria.

The key is to focus on understanding how a competitor actually behaves rather than on the theory of how everyone should behave.

By studying your competitor’s past behavior and preferences, you can estimate the likelihood of his responding at all, identify the responses he is likely
to consider, and evaluate which will have the biggest payoff according to his criteria.

This information can give you an accurate idea of what your competitor is likely to do when you make a strategic move.

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About your bold strategic move … will your competitors even notice?

November 16, 2009

TakeAway: How to assess a competitor’s response to your strategic moves?  Game theory is often too complex and too assuming to fit the real world.  Intuitive-based war gaming is often skewed by personal biases and hidden agendas.

So, McKinsey proposes a practical approach to predicting competitive behavior that “stays close to the theoretical rigor and accuracy of game theory but is as easy to apply.

” * * * *

Excerpted from HBR: Predicting Your Competitor’s Reaction, by Coyne and Horn, April 2009

The McKinsey approach involves distilling all possible analyses of a rival’s response to a particular strategic move into a sequential
consideration of three questions:

  1. Will the competitor react at all?
  2. What options will the competitor actively consider?
  3. Which option will the competitor most likely choose?

The first step in analyzing competitor reaction, therefore, is to address the likelihood of no reaction.

To determine this, you must ask four subquestions. If the answer to any of them is no, the chances of a response are low.

1. Will your rival see your actions?
Even if an action appears obvious to you, your competitor may not recognize it.

First, most companies rely on incomplete data to assess changes in the marketplace, e.g. market research that only survey certain segments, markets, or channels.

Second, if your strategic move will affect several of your competitor’s business units, it may not register as significant to any one unit and so may be
overlooked.

2. Will the competitor feel threatened?
Even if your competitor sees your actions, he may not feel threatened—and, accordingly, will not think that mounting a response is
worth the expense and distraction.

That is, the competitor may not consider the strategic move to be statistically significant to their in place plan.

3. Will mounting a response be a priority?
Your adversary probably already has a full agenda before you make a move. On it are product launches, marketing campaigns, reorganizations,
major acquisitions, plant openings, and cost reduction efforts—some or all of which must be curtailed in order to react to your move.

Therefore, to the degree that your adversary has already committed to plans that will fully occupy his attention, he will be reluctant to shift priorities.

4. Can your rival overcome organizational inertia?
Even if top management wants to react, the organization as a whole may resist.

First, if reacting requires the company to make major organizational changes, it is very unlikely to do so unless the threat is immediate and deadly.

Second, managers are generally reluctant to abandon their success formula, and if they decide to go ahead and make a change, they are very poor at doing so.

Third, companies have great difficulty mounting a response that requires the cooperation of third parties, which may not share their sense of urgency.

For example:

In the late 1980s, a small U.S. pizza delivery chain called Papa John’s noticed a change in consumers’ perception of the quality of Pizza Hut and Domino’s (the top two chains) and used the opportunity to create a differentiated value proposition captured in the slogan, “Better ingredients. Better pizza.”

Papa John’s expanded rapidly throughout the 1990s and became the third largest pizza chain in the country, while the two bigger rivals stagnated.

Unable to mobilize their franchises around quality until the threat became undeniable, the big chains did not respond with better pizzas of their own until 2000.

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Punch line: Competitors do not respond to their rivals’ moves at least 1/3 of the time.

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Upcoming: What if your competitor does respond ?

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