There are many things that can mess up a strategy or new product. The hardest one to prepare for is the behaviour of rivals. Big discounts, imitation, and a variety of other unexpected tactics can throw off even the best idea.
Behavioural biases, including the tendency to overlook competitors, over-confidence and over-optimism mean that companies often don't effectively prepare for what others might do.
An article in the McKinsey Quarterly outlines a new strategy companies are starting to take — running "war games" to simulate "the thoughts, plans, and actions of competitors", so they can better seize opportunities and be prepared to respond to what competitors do.
Here's one of the article's examples of how a war game played out, and how it changed a company's strategy:
"A financial-services firm wanted to determine which of a handful of promising new services had the greatest potential to reach global scale quickly and thus should be fast-tracked. Company executives were particularly keen to test one technology-driven service that they felt had the potential to catch rivals off-guard, and to capture additional revenues from much-coveted business customers.
"The company ran a series of simulated launches pitting itself against three rival teams, whose members began the games unaware of the new service. Executives were surprised to learn how quickly and convincingly the opposing teams reacted to the offering and developed a version of their own. Worse, in some cases, an opponent team's offering appeared superior to the company's, or at least close enough that company executives felt it would be tough for business consumers to differentiate between the two. 'If we go to market with this offer,' said one team-member, "we'll get creamed'.
"This exercise had a sobering effect on the executives, who began to recognise that over-confidence and excessive optimism had clouded their thinking. The company has since gone back to the drawing board and is using many of the observations gathered from the war game to help improve the new service and its market positioning."
Companies tend to overestimate how innovative their products are, and underestimate how quickly others can reproduce them. In the above example, the war game prompted the company to add more barriers for those attempting to imitate them, and it now plans to do the same in future products.
Running a war game is a way to show how competitors can reduce the value of a project, and come up with strategies useful for individual projects and best practices for the future.