Predicting your competitor's reaction, by Ken Favaro, Tim Romberger and David Meer, Harvard Business Review, April 2009

This article covers some fascinating research by McKinsey which challenges some of the conventional wisdom around the ways that managers assess competitor reaction to new innovations and initiatives. It starts by quantifying what we have often observed in our work with a range of companies - that very few of the managers surveyed recalled having brought competitor reactions into their decision-making processes.

Many of the more sophisticated companies would respond by pointing out their use of game theory and War Games as evidence of their practice of predicting competitor reaction. However the authors are sceptical of both these approaches; in the case of game theory this is because they say it becomes unmanageable in the real world, particularly when there are multiple competitors with multiple options.

The criticism of War Games is that the assumptions are inevitably arbitrary and are likely to miss out on the subtleties of politics and personalities involved in real-life decisions. A more valid point in my view is the fact that War Games may over-estimate the likelihood of significant response, because there is an implied assumption that the innovation will be noticed and reacted to.

Maybe this is because there is a tendency for companies to think that they are bigger players than they really are. McKinsey’s research confirms that, despite what companies expect, many innovations are not noticed at all by competitors, which would of course make for a short and boring War Game session!

The article does disappoint by being less good at putting forward solutions compared to knocking down other approaches. It does however suggest four fundamental questions that may seem blindingly obvious but which are a good discipline and structure:

- Will the competitors see your actions?
- Will they feel threatened?
- Will mounting a response be a priority?
- Will they overcome organisational inertia?

It then goes on to suggest that the analyst should try to assess the options open to the major competitors, the extent to which they look ahead and the metrics they use. They stress that most competitors are likely to see the world quite simply and to restrict the number of options being considered. There is a danger that sophisticated companies think that every other company looks to maximise net present value, just because they think that way.

I know that our strategy and War Game specialists will look at this article and say that it is merely repeating the thinking that should go into all strategic assessments and War Game designs. They would nevertheless benefit - as every reader will - from the challenges to conventional assumptions and the survey evidence that the decisions of many companies are often less logical and rational than we think.


To access this article go to http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R0904H&_requestid=13084