Practical Competitive AnalysisHaving had the unsettling experience of working with a strategic planner at a large company who had a remarkably unenterprising approach to competitive analysis, I was glad to see the helpful advice Kevin Coyne and John Horn offer in an article published in the April issue of the Harvard Business Review.
Based on their experience at McKinsey (Coyne is an alum now teaching at Emory University's Goizueta Business School, Horn is a consultant at McKinsey's Washington DC office), and on a survey of some 1,825 senior executives at a cross-section of companies, Coyne and Horn offer a practical approach to competitive analysis that requires careful thought, but is not onerous in terms of the amount of information that needs to be gathered and processed.
Specifically, Coyne and Horn address the issue of how to go about taking account of likely competitor reactions to a "major initiative." A major initiative was defined in their survey as a move at the strategic level, i.e., a move "with 'the potential to significantly affect' the [survey] respondent's view of her company's competitive position." Two types of initiative were considered: a product or service innovation, and a change in pricing.
The Coyne-Horn approach involves answering three questions concerning a major initiative:
- Will the competitor(s) react at all? Coyne and Horn found that 17% of their respondents answered No when asked if they had responded to a competitor's most recent major initiative.1
Your answer to this question will be Yes only if you answer Yes to all four of the following subquestions. If any of the answers is No, you are done; you don't need to proceed to questions 2 and 3.
- Will your rival see your action? Coyne and Horne found that only 23% of the managers they surveyed learned about a competitor's new product or service early enough to respond prior to the market launch. Only 12% learned about a price change in time to take pre-emptive action.
- Will the competitor feel threatened? Coyne and Horn suggest that if the competitor can stay on plan in the face of your initiative, they very possibly will keep on doing what they're doing rather than adjusting to the new state of play.
- Will mounting a response be a priority? Coyne and Horn point out that the competitor may be disinclined to shift its attention from its current activities to react to your move.
- Can your rival overcome organizational inertia? Coyne and Horn suggest that if substantial changes in strategy and/or established processes would be needed to mount a response, the competitor may very end up ignoring your move (at least until the pain resulting from the changed market situation compels a response).
- What options will the competitor actively consider? Coyne and Horn found that only 25% of companies that examine ways of responding to a competitor's major initiative consider more than three options. Also, the options considered tend to be "the most obvious ones: matching a price change or introducing a me-too product."
- Which option will the competitor most likely choose? Coyne and Horn argue that, as a rule, the competitor will choose the option "that is most effective (according to his analytic technique) within the constraints of his trade-off between short-term and long-term pain."
To apply this rule, you need to consider two subquestions:
- How many moves ahead does your competitor look? Coyne and Horn found that "fewer than 10% of the managers surveyed looked at more than one round of response by more than one competitor."
- What metrics does the competitor use? Coyne and Horn suggest deriving an answer to this questions by asking the related question, "What measure would have led my competitor to his recent decisions?" They caution that any "long-term" metrics (e.g., "long-term" market share) be evaluated in light of the fact that only 15% of companies look more than 4 years out when assessing the likely "long-term" costs and benefits of options under consideration.
mimic your adversary's decision-making process by applying his metrics and analytic techniques (including the rounds of competition) to the options you think he will look at in order to see which one (or ones) seems best.To carry out this final step in the competitive analysis, you need to attain an understanding of
the patterns the CEO or relevant executives have displayed in prior decisions ... Talk to people who have worked with those executives and learn about the units they have led. Look at the history of the competitor's other units as well.The Coyne-Horn approach is practical and doable because it focuses "on understanding how a competitor actually behaves rather than on the theory of how everyone should behave." The above summary outlines what you'll find in the article, but reading the whole piece is highly recommended.
1 Coyne and Horn emphasize that there is significant variation in competitor behavior across locations and industries. Therefore, the average responses reported in the article are suggestive but are not represented as applying precisely to any particular location or industry.