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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