War games


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War games

  1. 1. M A R C H 2 0 11 Bill ButcherS T R A T E G Y   P R A C T I C EPlaying war games to win John Horn They can be a powerful business tool—but only if you get the design right. As the global downturn kicked in, a been anticipating. Moreover, while high-tech company’s senior there would probably be industry executives decided to run a war mergers and acquisitions, as the game to prepare themselves for the company had expected, the deals uncertainties of the post-crisis were unlikely to kick off a wave of landscape. After two days of M&A or to have a material impact on simulations—when teams the company’s share of any market. representing competitors and stakeholders role-played against a These insights made a difference. “company” team—the executives When actual deal making began and understood that a strong competitor the player on the sidelines on the sidelines was likely to enter announced its intention to become a the market aggressively. The market leader, the high-tech executives also realized that the low company didn’t leap into the M&A end of the product range would face fray or otherwise lose focus. Instead, more price pressure than they had it concentrated on protecting its
  2. 2. 2core business, minimizing low-end two or three outcomes seemlosses, and investing in a major plausible along each of severalgrowth opportunity that required dimensions. When no amount ofnew technology and a long analysis will provide the rightincubation period—and has since answer, the results of gaming canproved valuable. shed valuable light on the range of possibilities that executives shouldFor a variety of reasons, many be considering.companies don’t learn as much fromwar games. Some misjudge when In addition, there must be somethey are appropriate. Others foul up meaningful competitive dynamicsthe game’s design by not including between the company and variousthe right participants. Still others stakeholders—a game to be played,take a cookie-cutter approach and in other words—and a clear way ofrely on standardized game design representing the most relevantsoftware or apply to operational players. Often this presents littleproblems the same approach they challenge: the high-tech company,previously used for strategic or for example, ran its game againstorganizational ones. current and potential competitors and included consumer teams inTo avoid these pitfalls—and the some rounds. But it can be tricky towasted time, money, and poor portray certain stakeholders, suchstrategic decisions that go with as the US Congress, which onethem—CEOs and other senior aerospace and defense contractorexecutives should ask tough realized it had to include for itsquestions when contemplating war game to yield valuable insights.games or answering proposals touse them. Four questions, drawn Consider other approaches if thefrom our experience with more than level of uncertainty, competitive100 war games at scores of dynamics, or stakeholder realitiescompanies around the world, can seem problematic. Scenariogreatly increase the chances that planning can help with decisionyour managers will use war gaming making if there is too muchto make better decisions in the uncertainty. Cost curves, pro t poolreal world. analyses, or other standard frameworks are effective when complex competitive dynamicsCan a war game help are absent.2with our problem? A nal word of caution: be wary ofThe sweet spot for games is some the argument that war games aremoderate level of uncertainty.1 If the primarily about generating newuncertainty is too great—say, the ideas. Companies following thisimpact of robotic nanotechnology approach often nd participantson manufacturing industries—game taking an “I’m going to prove howplanners can’t offer enough clever I am” posture, leading toguidance for the players to make unrealistic, impractical ideas. Wereasoned decisions. More suitable is suggest conducting idea generationan industry environment where, say, workshops instead (for more, see
  3. 3. 3 March 2011 our upcoming article “Seven funding, moves by competitors, and steps to better brainstorming,” outcomes of technology to be published in March, investments—would not have on mckinseyquarterly.com). justi ed the executive time spent on the exercise. What kind of game Instead, the company designed a should we play? game to answer the more strategic question: how can we win market Let’s say a consumer goods share given the budget pressures on company is considering a narrow the Department of Defense and the problem—raise prices 5 percent or moves of competitors? The game keep them constant—and wants to tested levers such as pricing, know how its biggest competitor contracting, operational might respond. Given the tactical improvements, and partnerships. objective, the consumer goods The outcome wasn’t a tactical maker might run two separate playbook—a list of things to execute games: one in which it raised prices and monitor—but rather strategic and one in which it didn’t. guidance on the industry’s direction, Alternatively, the company could the most promising types of moves, run a game in which it raised prices the company’s competitive by 5 percent but made other strengths and weaknesses, and adjustments, sometimes boosting where to focus further analysis. marketing expenditures and sometimes offering retailers concessions. It could then compare Who will design and the result with the outcome of the play the game? game in which it didn’t change prices. The key is running the gamut You have big personnel choices to of potential choices to make sure make or approve—who designs the each is tested. Such games are game and who plays. In both cases, most valuable when a company has deciding exactly how wide to cast very few but discrete choices to test, the net depends on whether the as well as a similarly small set of game’s objective is primarily tactical possible responses by competitors. or strategic or the creation of organizational alignment. Tactical games aren’t always practical, though. The aerospace Tactical games, with their detailed and defense company mentioned moves and evaluation criteria, are above originally considered running relatively straightforward: leaders a tactical game to better understand with deep expertise about and shifts in the US defense budget and responsibility for implementing the their impact on the business. But decisions are critical sources of the bene t of testing a very large input. The design of a strategic war number of scenarios for individual game requires much broader weapon systems—scenarios interaction. To ensure that the involving, for example, levels of defense contractor’s game wasn’t
  4. 4. Playing war games to win 4unduly in uenced by the customers.” This shared experience,hypotheses of its designers, for which would have been impos-example, they asked all 40 sible with a smaller or moreexecutives who would play it which homogenous group of participants,trends, scenarios, and decisions has continued to stimulateshould be tested. discussions across the company as market conditions evolve.The selection of players is alsocritical. A tactical exercise, such asa pricing game, can have a relatively How often shouldsmall set of participants. You should we play?cast a wider net in a strategic gameand a much wider one in an The one-off games described so farorganizational game in which the are the most common type; it’sobjective is to get people on board usually pointless to run a gamefor a strategic move. repeatedly to test the same uncertainties with the sameIn a game in which the goal is participants. It’s often bene cial,organizational alignment around a however, to repeat a game for thestrategic decision, for example, you sake of organizational alignmentshould include leaders of all when you want to bring alongfunctions that will be involved in its people who didn’t experience theexecution. Often, it’s also worth rst game—usually, the wider groupincluding frontline managers, of employees who will implementproduct designers, and account the decision. Most people learnreps, since they can raise different better by doing, and when they haveviewpoints during the game and shared experiences, they are moredisseminate the lessons to likely to embrace change.colleagues afterward. Repeating games also can be usefulA more diverse set of participants when conditions are changing. Ifalso creates valuable opportunities competitors or technologies haveto broaden their understanding of evolved, for example, it may be timethe industry—for instance, by to rerun a strategic game. Tacticalassigning them to stakeholder games like those for pricingteams with roles that are less negotiations may bear repeating asfamiliar to them. In the debrie ng frequently as every three or foursession after the high-tech months, with the same set of playerscompany’s game, the leader of a and slight modi cations to re ectbusiness unit, who had paired up changes in the market. That helpswith a salesperson on a customer salespeople re ne their pitches asteam, remarked, “Having played the customer needs, competitivecustomer, I now understand what offerings, regulations, and otherthe sales force means when they factors shift.say we get push-back on price.I am going to make sure we give You may, however, want to run theyou the support you need to make same set of players through a gamethe value-based argument to the repeatedly and rapidly to practice
  5. 5. 5 March 2011 for a critical upcoming test. The Well-designed war games, though negotiation team of a health insurer, not a panacea, can be powerful for example, was entering into a learning experiences that allow renegotiation with its key provider managers to make better decisions. partner and felt it had little room to By asking a few tough questions, maneuver. To explore its options, executives can help their the team played a war game in organizations be smarter about which it chose a negotiating when and how to play. approach, negotiated with the 1 provider team, huddled up to See the descriptions of Level 2 and Level 3 uncertainty in Hugh G. Courtney, Jane reformulate its strategy and tactics, Kirkland, and S. Patrick Viguerie, “Strategy and then reentered negotiations—all under uncertainty,” mckinseyquarterly.com, June 2000. in several quick rounds. 2 Kevin P. Coyne and John Horn, “Predicting your competitor’s reaction,” Harvard The participants replayed the game Business Review, April 2009, Volume 87, Number 4, pp. 90–97. several times in one day (starting again with new tactics when they got bogged down), re ected on the The author wishes to acknowledge results, and repeated the exercise the contributions of Kevin Coyne, an the following week. The alumnus of McKinsey’s Atlanta improvement between the rst and office, to the thinking behind this the last sessions was enormous: the article. players uncovered areas where they could stand rm and learned how to John Horn is a consultant in craft their message more adroitly to McKinsey’s Washington, DC, of ce. regain control of the situation. They also became more con dent and Copyright © 2011 McKinsey & Company. ready to ex their muscles in real All rights reserved. We welcome your comments on this article. Please send them negotiations with the provider. to quarterly_comments@mckinsey.com.