Profiting From Uncertainty: Strategies for Succeeding No Matter What the Future Brings by Paul Schoemaker

Author:Paul Schoemaker [Schoemaker, Paul]
Language: eng
Format: azw3
Publisher: Free Press
Published: 2012-12-25T05:00:00+00:00

Use Competitive Simulations

While the reaction of customers determines the total value generated by a given option, the reaction of competitors determines how that value will be divided. In assessing the consequences of options, managers need to carefully assess the impact of the reactions of rivals. To do this right, you must engage in game theory, which quickly gets complex.10 Fortunately, competitive simulations, using computer-based models, can elucidate the complexities and provide insights into players’ reactions and their overall impact on your share of the pie.

For example, a major oil company that was contemplating a shift in its strategy in the U.S. market decided against the move after playing out a competitive simulation. The company was considering the option of expanding its presence by creating many self-service pumps at convenience stores and other locations. This would offer twenty-four-hour access in many more locations without adding staff. Using a sophisticated computer-based simulation, the company assessed both customer and competitive response in ten key markets using dynamic modeling and customer surveys. The results showed that the initiative would be very successful—adding $315 million in profits in the test market—but only if the company’s competitors sat idly by and watched it happen. When the reactions of competitors were added to the simulation, the model indicated that a “pump war” would ensue and the company would lose $133 million compared to not pursuing the strategy.11

In industry after industry, price wars and other competitive reactions undermine what initially appear to be brilliant strategies. The use of simulations, either the very formal processes used by the oil company or less formal war rooms and role playing, can provide valuable insights into competitive responses to your strategic options.

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