This strategic interdependence implies that the ability to anticipate your competitors’ strategies is essential. Yet a recent survey of business executives found that the actions and reactions of potential rivals almost never play a role in, for example, decisions to introduce and price new products.1 An important reason for this neglect, we believe, is that strategic-planning tools, such as game theory and scenario planning, are of limited use unless a company can correctly define the key elements of the strategic game, especially the strategic options and objectives of competitors. This is no easy task. Rare is the company that truly understands what its competitors and their decision makers care about most, how they perceive their assets and capabilities, and what all this means for their strategies. A company with such insights could reverse-engineer the moves of competitors and predict what they were likely to do. In a credit crunch, for instance, such a company would be well positioned to buy financial and nonfinancial assets at attractive prices if it knew that poorly capitalized competitors would avoid new risk and therefore not bid for these assets.
Getting inside your competitor’s head is difficult because companies (and their decision makers) usually are not alike. At any time, a company has assets, resources, market positions, and capabilities it must protect, leverage, and build upon. Different endowments imply different strategies even in the same general market environment. What’s more, even a competitor with similar endowments may pursue different strategies if its owners, stakeholders, and decision makers have a different objective.
So if you want to anticipate rather than react to strategic moves, you must analyze a competitor at two levels: organizational and individual. At the organizational level, you have to think like a strategist of your competitor by searching for the perfect strategic fit between its endowments and its changing market environment. At the individual level, you have to think like the decision makers of the competitor, identifying who among them makes which decisions and the influences and incentives guiding their choices. This approach moves you beyond the data-gathering efforts of most competitive-intelligence functions, toward a thought process that helps turn competitive intelligence into competitive insights. While our approach won’t eliminate surprises, it will help you better understand your competitors and their likely moves and eliminate some of the guesswork that undermines the development of strategies in an increasingly interdependent business world.
When your competitor resembles you, chances are it will pursue similar strategies—what we call symmetric competition. When companies have different assets, resources, capabilities, and market positions, they will probably react to the same market opportunities and threats in different ways—what we call asymmetric competition. One of the keys to predicting a competitor’s future strategies is to understand how much or little it resembles your company.
In the fast-food industry, for example, two leading players, McDonald’s and Burger King, face the same market trends but have responded in markedly different ways to the obesity backlash. McDonald’s has rolled out a variety of foods it promotes as healthy. Burger King has introduced high-fat, high-calorie sandwiches supported by in-your-face, politically incorrect ads. As the dominant player, McDonald’s is the lightning rod for the consumer and government backlash on obesity. It can’t afford to thumb its nose at these concerns. Smaller players like Burger King, realizing this, see an opportunity to cherry-pick share in the less health-conscious fast-food segment. Burger King competes asymmetrically.
Companies can determine whether they face symmetric or asymmetric competition by using the resource-based view of strategy: the idea that they should protect, leverage, extend, build, or acquire resources and capabilities that are valuable, rare, and inimitable and that can be successfully exploited. Resources come in three categories: tangible assets (for example, physical, technological, financial, and human resources), intangible assets (brands, reputation, and knowledge), and current market positions (access to customers, economies of scale and scope, and experience). Capabilities come in two categories: the ability both to identify and to exploit opportunities better than others do.
In the video-game-console business, the strategies of Microsoft and Sony, which are attempting to dominate next-generation systems, are largely predictable—based on each company’s tangible and intangible assets and current market position. Although the core businesses of the two competitors will be affected by video game consoles differently, both sides see them as potential digital hubs replacing some current stand-alone consumer electronic devices, such as DVD players, and interconnecting with high-definition televisions, personal computers, MP3 players, digital cameras, and so forth.
For Sony, which has valuable businesses in consumer electronics and in audio and video content, it is important to establish the PlayStation as the living-room hub, so that any cannibalization of the company’s consumer electronics businesses comes from within. After the recent victory of Sony’s Blu-ray standard over Toshiba’s HD-DVD, Sony stands to realize a huge payoff in future licensing revenues. The PlayStation, which plays only Blu-ray disks, is thus one of the company’s most important vehicles in driving demand for Blu-ray gaming, video, and audio content.
Microsoft has limited hardware and content businesses but dominates personal computers and network software. Establishing the Xbox as the living-room hub would therefore help to protect and extend its software businesses. For Microsoft, it is crucial that the "digital living room” of the future should run on Microsoft software. If an Apple product became the hub of future "iHome” living rooms, Microsoft’s software business might suffer.
Sony and Microsoft therefore have different motives for fighting this console battle. Yet the current market positions (existing businesses and economies of scope), tangible assets (patents, cash), and intangible assets (knowledge, brands) of both companies suggest that they will compete aggressively to win. It was predictable that they would produce consoles which, so far, have been far superior technologically to previous systems and interconnect seamlessly with the Internet, computers, and a wide variety of consumer electronics devices. It was also predictable that both companies would price their consoles below cost to establish an installed base in the world’s living rooms quickly. The competition to win exclusive access to the best third-party developers’ games, as well as consumer mind-share, will also probably continue to be waged more aggressively than it was in previous console generations. For Microsoft and Sony, the resource-based view of strategy helps us to understand that this battle is about far more than dominance in the video game industry and thus to identify the aggressive strategies both are likely to follow.
Nintendo, in contrast, is largely a pure-play video game company and thus an asymmetric competitor to Microsoft and Sony. The resource-based view of strategy explains why Nintendo’s latest console, the Wii, focuses primarily on the game-playing experience and isn’t positioned as a digital hub for living rooms. The Wii’s most innovative feature is therefore a new, easy-to-use controller appealing to new and hardcore gamers alike. The Wii has few of the expensive digital-hub features built into the rival consoles and thus made its debut with a lower retail price.
Applying the resource-based view of strategy to competitors in a rigorous, systematic, and fact-based way can help you identify the options they will probably consider for any strategic issue. But if you want to gain better insight into which of those options your competitors are likeliest to choose, you have to move beyond a general analysis of their communications, behavior, assets, and capabilities and also think about the personal perceptions and incentives of their decision makers.
Since the objectives of corporate decision makers rarely align completely with corporate objectives, companies often act in ways that seem inconsistent with their stated strategic intentions or with the unbiased assessments of outsiders about the best paths for them to follow. So if you want to predict the next moves of a competitor, you must often consider the preferences and incentives of its decision makers.
The key to getting inside the head of a competitor making any decision is first identifying who is most likely to make it and then figuring out how the objectives and incentives of that person or group may influence the competitor’s actions. In most companies, owners and top managers make divestment decisions, for example. Strategic pricing and service decisions are often made, within broad corporate guidelines, by frontline sales personnel and managers.
The objectives of the person or group with a controlling interest in your competitor probably have a major influence on its strategy. Sometimes, personal preferences are particularly relevant: it’s likely that Virgin’s pioneering foray into the commercial space travel industry partially reflects the adventurous tastes of its charismatic founder, Sir Richard Branson. For family-owned or -controlled businesses—public or private—family values, history, and relationships may drive strategy. A competitor owned by a private-equity firm is likely to focus on near-term performance improvements to generate cash and make the company more attractive to buyers. While every private-equity firm is different, you can often forecast the tactics any given one will take by studying its history, since many such firms often repeat their successful strategies.
Other stakeholders may also profoundly influence a company’s strategy, so it often pays to get inside their heads as well. You can’t evaluate any large strategic moves GM or Ford might make without considering the interests of the United Auto Workers and how those interests might check or facilitate such moves. The importance of nonowner stakeholders in driving a company’s strategy varies by country of origin too. If you compete with a Chinese company, the Chinese government is often a critical stakeholder. In Europe, environmental organizations and other nongovernmental stakeholders exert more power over corporate decision making than they do in the United States.
Since the owners of companies hire top-level management to pursue the owners’ strategic objectives, a Martian might think that management’s decisions reflect those interests. Earthlings know that this may or may not be true. That’s why you must study your competitor’s top team.
First, that analysis provides another source of insight into the objectives of the company’s owners. When James McNerney arrived at 3M in 2001, for instance, he brought along his belief in GE’s "operating system,” a centralized change-management methodology that inspired GE’s successful approach to Six Sigma, globalization, and e-Business. If you were a 3M competitor, McNerney’s history suggested that he would try to turn 3M, which had traditionally favored a fairly loose style of experimentation, into a more operationally accountable company. His hiring signaled the 3M board’s intention to focus more aggressively than before on costs and quality. It surely came as no surprise to 3M’s board or to the company’s competitors that one of McNerney’s first strategic moves was to launch a corporate Six Sigma program.
And of course, senior executives aren’t always perfect "agents” for a company’s owners, whose personal interests and incentives may differ from theirs. Such agency problems quite commonly bedevil even companies with the best governance practices, so it often pays to focus on the objectives of senior leaders as well.