Here is an excerpt from an article featured in The McKinsey Quarterly, published by McKinsey & Company, in which Marla M. Capozzi, John Horn, and Ari Kellen explain how and why leading companies use war games to focus better on their competitors, while improving the way they identify, shape, and seize opportunities to innovate. To read the complete article, check out other resources, sign up for email alerts, and learn more about the firm, please click here.

Source: Strategy Practice

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You thought you did everything right—gathered market research and consumer insights; brainstormed, prototyped, and tested a promising new idea; developed detailed financial models and a solid marketing plan. Yet your company’s new product or service didn’t perform as expected. What did you overlook?

If you answered “the competition,” you’re far from alone. In our experience, companies making decisions about developing and launching new products commonly fail to anticipate their rivals’ motivations and actions. [Note: Academic research supports this view. For example, a 2005 survey of business executives found that the expected actions and reactions of potential rivals almost never play a role in decisions to introduce and price new products. For more, see David Montgomery, Marian Chapman Moore, and Joel Urbany, “Reasoning about competitive reactions: Evidence from executives,” Marketing Science, 2005, Volume 24, Number 1, pp. 138–49.] Moreover, the failure often contributes to innovation-related disappointments, many of which are below the radar and quite insidious: your rival, for example, discounts prices to encourage customers to stock up on its product rather than try yours, ties up distributors so you can’t get shelf space, or duplicates your service to dissuade consumers from switching.

Unfortunately, in the heat of competition it’s extraordinarily difficult for players to identify such threats, because the tendency to overlook rivals is deeply ingrained in human behavior. Indeed, neglecting to think about competitors is one of dozens of natural human biases—along with excessive optimism and overconfidence—that subconsciously affect strategic decision making. Addressing the challenge requires tools and processes that help companies “debias” their decisions. [Note: To learn more about countering the effects of cognitive biases in strategic decision making, see Dan Lovallo and Olivier Sibony, “The case for behavioral strategy,” mckinseyquarterly.com, March 2010; and John Horn, Dan Lovallo, and S. Patrick Viguerie, “Beating the odds in market entry,” mckinseyquarterly.com, November 2005.]

Recognizing this problem, some companies are tackling it head on by integrating war games into their innovation activities. By simulating the thoughts, plans, and actions of competitors, these companies are improving their products and services, while gaining a deeper understanding of how their innovation assets compare with those of rivals—insights that help them better identify, shape, and seize opportunities.

In this article, we’ll look at how companies use war games to sharpen their products and services as they wrestle with three interrelated types of innovation decisions: those involving individual products, portfolios of offerings, and market-entry strategies. We’ll focus on situations involving medium-term innovations—new products or services expected within one to three years. While it’s obviously important to keep an eye on rivals at all times, competitive insights gleaned at this stage are particularly actionable, and a company’s ability to adjust its approach relative to competitors, and thereby to change the outcome, is high.

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To read the complete article, please click here.

Marla Capozzi is a senior expert in McKinsey’s Boston office; John Horn is a senior expert in the Washington, DC, office; and Ari Kellen is a director in the New Jersey office.