To Develop a
Winning Strategy, Know Who You Are Fighting
Remember, strategic planning
isn’t just about you. A winning plan also takes time to analyze what your rival
might likely do. Yuval Atsmon shows you how to outfox your rivals.
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Business strategy is all about using uncertain
information to make unalterable choices that best create and capture economic
surplus. A successful strategist must find and exploit opportunities that
establish and protect a sustainable advantage. Otherwise, the economic surplus
will be snatched up by other industry players such as competitors, suppliers,
channel drivers, and customers.
This is about beating the competition as military
strategy most vividly demonstrates. It doesn’t mean you need to become the No. 1
player to succeed (although such a goal can inspire organizations
more than a profit target), but you must be better at something so that you can
offer the best value to a defined set of potential customers.
It used to be quite clear who the chief rivals are in
most industries, but companies now have an increasing variety of unique
competitors, making the playing field harder to define. It is easier if the
competitor is a sleepy incumbent, especially if it needs to decide whether it
should disrupt itself or hold on to the current business model. But if you are
the incumbent looking to fend off attackers or are facing fierce competitors,
beating them is easier said than done.
With all this in mind, you would expect to see boards
and management teams collecting and analysing competitive data, spawning
insights that guide every strategic discussion. Think again. My experience
suggests management is inwardly focused, and the effort to study and anticipate
competitors’ moves is remarkably superficial.
Our research shows in this exhibit that managers are
much more likely to focus on their own organizations’ strengths and weaknesses,
on trends and economic drivers and on risks and uncertainties, than on their
competitors'.
Do you think you are doing better? Do you wonder how to?
Here are five practices that can improve your competitive
readiness and your organizational culture and agility.
1. Understand your
rivals’ economics
Consider
how often you and your management team formally and informally talk about
competitors’ economics. Compare that with the depth of data some use to discuss
sports: game results, detailed player statistics and so on. Further, I bet that
someone on your team is heavily engrossed in Fantasy Football. Now, imagine
that energy focused on analysing competitive data and potential moves.
Insight
into how your rivals’ competitive economics differ from yours is one of the
hardest and most important things to understand. How does scale help if they
are much bigger? If their assets or personnel productivity is higher, how far
can they reinvest it in pricing against you? Is their sales mix more favourable
across portfolios, geography, channels and the like? What’s their real
marketing spend, and how does that influence your customers’ willingness to pay
for their products?
Test
yourself and your team with an important product or service you sell. Would you
and a competitor earn the same profit for the same price? If not, can you
explain the five biggest drivers and not limit yourself to the linear thinking
a recent HBR article aptly criticizes? (Misperceiving, for example,
that even a small reduction in price may require significant improvement in
volume to balance profitability.)
Retail
businesses are great examples. A lot is observable by visiting competitors’
stores. Traditional retailers - even mighty Wal-Mart - are being disrupted by
online players. But some innovative brick and mortars also compete differently.
Costco charges an annual fee; Wal-Mart doesn’t. Costco’s large package sizes
attract bigger baskets, require less replenishing time and allow faster
checkout, which drive significant efficiency and help sales per square meter,
making more of fixed costs. Aldi has another way to disrupt many giants. It has
real scale for each SKU it manages by focusing on fewer SKUs and only some
branded ones. Aldi also limits fresh produce that requires more service and
costly cold-supply chains with higher shrink. It standardizes the simple look
and feel of the stores, which are cheaper to build and maintain. Differences
such as these allow the likes of Costco and Aldi to offer customers lower
prices than bigger supermarkets with greater purchasing power can.
2. Look forward, not
backward
Your
competitors will not stand still. They will improve their value proposition by
the time you upgrade your products or launch a new service offering. While you
consider an attack on their best profit pool, think whether they are likely to
attack yours and ask how strong of a defence you can mount. Look for supporting
evidence once you have a hypothesis about where a competitor may be headed.
As
you can see in the exhibit below, research shows that future competitor
reactions are widely ignored even in the two areas you’d want them to be best
studied: product and price decision. More on price below.
3. Put yourself in their
heads
It
is just as common to see companies overestimate the risk and speed of
competitive responses as it is to see them ignore the risk. The most vivid
example is when you are considering a price change relative to a direct
competitor. Will it follow? Understanding
its economics will give you part of the answer to whether it
could or should follow suit. You may have better margin to afford a cut and
have deeper pockets to sustain a price war. Or your brand may have higher
loyalty that allows you to increase prices with lower volume risk. But rational
game theory is not enough because behavioural biases may thwart rationalism. A competitor may
not match a price cut due to pressure to meet short-term targets, difficulty to
align internally or dismissiveness about risk. They may react strongly if their
managers’ incentives are heavily influenced by market-share target improvement.
4. Synthesize into
threats and opportunities
Most
large companies have a competitive-insights function that collects data on
competitors, provides regular reports and helps achieve some benchmarks. Senior
managers follow competitors’ results and announcements, and they hear titbits
from suppliers and customers on what competitors are doing or planning. But
they are slow in putting that all together to identify opportunities and
threats. This is even harder when the competitors have new and disruptive
models. For example, how worried should cable players be about the increase in cord-cutting?
If channels will de-bundle, is the move a threat to all content providers or an
opportunity for some?
Such
synthesis should be an input for all major strategic decisions - on branding,
product portfolio, and pricing architecture - without which managers are
hit by a “Sixth Sense” moment of the full situation
becoming clear only too late.
5. Be willing to act
more boldly
Even
in fairly extreme cases - when a competitor may have a massive setback like a
product-safety scandal, product fraud, massive service failures or loss of customer
data - the response tends to be timid. This is not to suggest that the response
should be to poke directly at a competitor by goading about their shortcomings.
Rather, by applying the combined practices, understanding the impact on their
economics and anticipating their ability to respond could mean now may be the
time to go after prized key accounts or channel partners, launch an aggressive
marketing campaign. or offer a bold service guarantee. Consider Apple’s
recent launch of its
“Switch” website, encouraging potential customers to move from Android
devices to the iPhone 7.
One
of the greatest strategists in history, Sun Tzu, is quoted as having said “If
you know yourself but not the enemy, for every victory gained you will also
suffer a defeat.” He is also credited with saying “If you know your enemies and
know yourself, you need not fear the result of a hundred battles.” I bet Sun
would’ve done well in Fantasy Football.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/to-develop-a-winning-strategy-know-who-you-are-fighting?cid=other-eml-alt-mip-mck-oth-1707&hlkid=b9f1db663d904e93afee6bd198edab5f&hctky=1627601&hdpid=34d0c1fa-47f1-44f3-a541-a07e07579e94
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