Wharton@Work

November 2015 | 

The Essential Metric (Almost) No One Is Measuring

The Essential Metric (Almost) No One Is Measuring

“Whenever I ask executives whether competitor analysis is important in their companies,” says Wharton management professor Nicolaj Siggelkow, “not surprisingly, everyone says ‘yes’. But when I ask whether they’re doing it, almost everyone says ‘no’.” Siggelkow, who teaches in the Competitive Marketing Strategy program, says there are a number of reasons why companies are foregoing this critical competitive analysis.

“First, many simply don’t know how to do it, and they are unclear about the benefits. Second, there are often organizational barriers in the way. It might not be clear who should be doing it, and it hasn’t become a function within the firm, with dedicated resources. You can’t do it on a moment’s notice, or even in a couple of hours. Gaining in-depth knowledge about your competitors must be an ongoing practice.”

Siggelkow shows the executives in the program a systematic framework for collecting data on their competitors, and then using that data to understand how their competitors could react to a move (such as introducing a new product or entering a new market). “Being able to anticipate a competitor’s reaction is key to setting the right strategy. There is a sequence, with one action leading to a response, which leads to another response. You see this clearly in price wars. If you can be relatively sure about how others will react, you can plan your first and future moves more deliberately.”

Once the organizational barriers are removed (that is, your company decides who will do the analysis, when, and within whose budget) the process starts with data collection. “In Competitive Marketing Strategy we discuss an in-depth competitor profiling exercise that shows participants how to gain a good understanding of their competition, including what their options and incentives are, and how they make decisions.”

“What are your competitors trying to achieve? What are their financial goals?” says Siggelkow. “Determine whether your actions could hinder them, and how much. If your actions won’t get in their way, they probably won’t react.” Participants are also encouraged to examine the widely shared beliefs and backgrounds of their competitions’ top management. “What do they believe about their positioning? Are they the cost leader, the market leader, the maverick? Did they come from marketing or finance? What image are they working to uphold? When they look at various options, do they take big risks or limit themselves to small risks?”

Armed with that data, Siggelkow then shows participants how to marry that in-depth qualitative study with a structural modeling of the situation. He uses a framework based on game theory to help them map out their competitor’s various options. “Reason your way forward and then backward,” he explains. “If we make this move, our competitor is likely to [fill in the blank]. Then, our next move would be [fill in the blank]. Sketch it out, and try to anticipate what might happen. Then reason back and determine your optimal move,” he says.

Ultimately, you should be able to answer three simple questions (which are not simple to answer):

  • If we engage in an action, will our competitor react or perceive us as threat?
  • If they react, what might they do?
  • Which option are they most likely to choose?

For Siggelkow, creating a strategy without competitor analysis is creating a big risk. “Without anticipating your competitors’ responses, you leave yourself wide open to implement a strategy that will only backfire.”