Know your competition

Volume 9 Letter 8

“Wisdom is the anticipation of consequences” Anon.

When the European Union was coming together companies were mandated to resize their packaging to conform to standard units of measure. One company who had to resize their product packaging triggered some unexpected consequences. To meet EU standards the company meticulously planned their repackaging strategy. Machines were retooled, shipping boxes resized, labels reformatted to fit the new container etc. As part of the strategy they needed to rid the market of the “old” size product and they lowered the price in anticipation of clearing the old inventory before restocking their distributors’ shelves. Unfortunately the price drop had unanticipated consequences. One competitor read the price cut as an attempt to muscle in on their market with an aggressive pricing strategy. Feeling under attack the competitor immediately lowered prices setting off a long term price war that had devastating financial consequences for both firms.

Part of any good strategy must include the anticipation of competitors’ moves. Will they launch a new product? How will they react to our price change? Will our move into their market cause a reaction? The reality is that less than 10% of managers have ever considered a competitor’s reaction when building their business strategy1. It appears the task of analyzing the competition is so overwhelming that instead of digging in, many choose to pay competitive analysis superficial lip service.

When prices change or a new product comes to market most often competitors see these as small changes in their market surroundings and do nothing, but as our story above illustrates, the financial consequences of avoiding a proper competitive analysis can be devastating. To anticipate a competitor’s reaction it is important to do some homework. Ask around; talk to your customers and competitors and often your direct competition will ‘tip their hand’. To understand how they might react to your competitive move look to the past. It is helpful to know how your competitors have reacted to similar situations in the past.

If you’re launching a new product or changing price ask:

  1. Will the competitor react at all: Studies show only 23% of execs learn about a competitor’s new offering in time to do anything about it and less that 12% learn about a change in pricing before it actually happens.
  2. Will your competitor see your actions as a threat: Most companies do yearly financial plans – if they don’t see your actions as throwing them off plan most likely there won’t be a reaction.
  3. What options does your competitor have: The answer is hundreds but the reality is that most competitors rarely consider more than two options; “lowering price” to match your price and launching a “me too” product to compete with your new product launch. At minimum develop plans to deal with the obvious ones.
  4. How and when will your competitor respond: Analysis shows that many companies will look to what they did last time in the same situation. Use market analogs to predict likely competitive reactions.

Sophisticated tools like Game Theory Analysis and War Gaming do exist and I encourage you to use them in times where the success of the launch is critical to the future of the business. For most situations doing a good competitive analysis need not be a long process but it absolutely must be done. Anticipating competitive moves and mitigating competitive reaction to your moves will help ensure the success of your strategy. Remember wisdom is the anticipation of consequences.

1. For more info see K. Coyne & J. Horn “Predicting Your Competitor’s Reaction” HBR April 2009 P 90 – 97

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