How CFOs can use war gaming to support strategic decisions

| Podcast

One of the most difficult aspects of making consequential strategic decisions is gauging how competitors and other stakeholders might react. Scenario planning is a start, but a fact-based approach to war gaming can better help executives prepare for the real-life pressure and uncertainty they’ll face in the moment. In this podcast from McKinsey on Finance, partner Werner Rehm joins partner Jay Scanlan and associate partner Thomas Meakin from McKinsey’s London office to explore war gaming from a CFO’s perspective. An edited transcript of their conversation follows.

Podcast transcript

Werner Rehm: Tom, Jay, thanks for joining me today on the podcast. Let’s talk about how CFOs and the finance function in general can use war gaming to help companies improve their strategic process. What do we actually mean when we say “war gaming”?

Jay Scanlan: “War gaming” is a realistic simulation of the type of market environment the CFO and executive teams face as they make really big and consequential decisions. Whether they be go-to-market decisions or capital planning and infrastructure decisions, war gaming allows you to have a real-life experience of them under pressure with incomplete information and uncertain reactions from competitors and new entrants.

We often ground the war game against several different future scenarios in order to test how robust and effective different strategies are in terms of economic growth, the entrance of new competitors, or changes in consumer or business customer preferences. That allows executives to see what that future might look like in the real world, as it were, rather than just on a spreadsheet.

Werner Rehm: Would I assign various people on my team to be competitors and then play out various potential actions and reactions in the future?

Thomas Meakin: That’s exactly it. You gain a deeper appreciation of what the different actors are going to do in the market based on a close analysis of their own P&L and financial positions, but also their track history in taking particular strategic moves. You get a better sense of where your own business model can stretch, where you can’t, what moves make sense, and which don’t. Quite often we find management teams and boards, who sometimes go through this process together, leave with a deeper appreciation and understanding of how they work together and how they make decisions under stress.

Werner Rehm: When is this most useful in the life of a CFO? Should I do this annually? Or during my strategic process?

Thomas Meakin: There are two situations in which conducting a war game makes sense. The first is as part of an ongoing strategic planning process. A war game can be done right at the beginning or right at the end—or even at two points within that process in order to get a sense of the business model dynamics and how they will relate to the underlying market trends.

The second situation is when there is a disruption. I define disruption broadly, so anything from a regulatory change, to a market entry, either by your own company or by a competitor, and anything in between.

Werner Rehm: What is involved in preparing for a war game?

Jay Scanlan: It can be quite an intensive process. And it’s beneficial to be intensive because it allows for a really deep reflection on where you make money today, how you are positioned, what you are doing relative to your competitors, and where there may be opportunities across the value chain that are very different or disruptive. When we have done this elsewhere it has sometimes been a four-, six-, or even eight-week process.

And by that, I mean we literally go and interview the senior executives, board members, and other key stakeholders both within and sometimes even outside the organization. We look at what we believe about this market now. What could we believe about what the future might look like?

Then we try to inject some very different and unusual ideas to create stress, tension, and pressure on the business model to see how executives and board members react, and to imagine a world very different from the one they had anticipated.

Thomas Meakin: Another really important thing is bringing data to these exercises. War gaming is too often treated like a qualitative exercise. People get in a room and pontificate about market evolution and their view on likely futures.

But those likely futures are rarely grounded in numbers or on their impact on the particular company in question, the broader market, and their competitors. When done well, war gaming is couched in some kind of quantitative model, often called a game engine, which simulates that market rather than guesswork or experience.

Jay Scanlan: War gaming doesn’t always have to be around life and death, organizational shaping, consequential decisions. But the decision does need to be consequential enough to really absorb the type of detailed time and attention necessary to do one really well. A war game done poorly actually undermines the credibility of the choices in front of you, and undermines confidence in the executive and in the decisions that might be taken.

Werner Rehm: Is that link to the numbers and analytics the reason why the CFO is the right one to lead war gaming?

Thomas Meakin: Exactly. The increased availability of financial data, the increased transparency that each player in the market has on other participants and how they’ve historically performed means that CFOs can now bring a very complex understanding of the interdependencies within a market into their strategic planning process.

Their familiarity, knowledge, and influence on the business’s numbers is clearly key. Often, the CFO will have the best understanding of business model dynamics and market operations, but also they’ll be able to inform the resource reallocation decisions that result. It’s important that war gaming exercises aren’t just fun, two-day workshops like management off-sites that are great in the short term, but don’t lead to any practical long-term conclusions.

Werner Rehm: How is this different from traditional scenario thinking or scenario planning?

Jay Scanlan: Scenario planning provides you the opportunity to test the likely evolution of your markets, how your competitors may react over time, and where your sources of competitive advantage come from.

War gaming injects a real-life element to the decision making that allows the executive team to make bigger, bolder, more informed choices about how the company approaches that future.

Within the scenario planning process, war gaming adds a level of ambiguity or uncertainty, because when done well, it doesn’t tell participants which scenario they’re in. That forces executives to respond to new information in almost real time. That includes, for example, data-rich information around changes in customer buying behavior, announcements of big mergers and acquisitions in the industry, or the announcement of new entrants into the industry with different business models or new product launches. As a consequence of both the scenarios that have been dreamed up ahead of the game and then the real-life pressure testing of it during a war game, executives have a lot more confidence in the strategic choices before them.

Werner Rehm: Who sets the ground rules in this?

Jay Scanlan: War games are most effective when there is a very thoughtful, intelligent game engine controller in the middle of it all.

It shouldn’t be the CFO him or herself because the CFO gets great value out of playing the game along with his or her peers. It might be a really thoughtful and sophisticated financial controller or business planning and analysis individual. They might be supported by a strategy colleague and either a commercial or a CAPEX M&A-type colleague, depending on the types of questions that you want to explore.

Often they form the nucleus of an intelligent central game engine room which creates the rules, comes up with the response curves of the engine itself, and sometimes comes up with the slightly devious and devilish disruptions in the marketplace that are designed to throw the executive team and/or the board off the scent and challenge their thinking about how their business is positioned today.

Werner Rehm: So at the end of all this, what do I have for my financial plan, for my strategic priorities?

Thomas Meakin: At the end of a war-gaming session there is a reflection period—a facilitated session to bring out the implications the participants are starting to think of, either for their business, their position in the market, or their competitors.

The impact of a war-gaming process is really in the actions—typically, the resource reallocation decisions or strategic moves that management teams take as a result. Crystallizing those actions can often take a couple of weeks, and then the actions would gradually be prioritized and fed into the line two to four weeks after a war-gaming exercise. In much the same way as strategic priorities or initiatives might emerge from a strategic planning process.

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Werner Rehm: I’ve used this in the past for joint venture negotiations, where the other side is playing competitors, but also future JV partners. So in the two weeks of preparation we separated part of the team to lay out their negotiation strategy and they were not allowed to talk to anybody about it, basically.

Thomas Meakin: We see similar kinds of things in product launches where a couple of weeks before the actual event, you split the management team or the players into different teams. You tell them who they are, and you give them a certain set of collateral or briefing material they can use to start to better understand their mind-set, their position in the market.

Because while you do want to replicate the uncertainty and lack of information many management teams experience going into these big strategic decisions, you also want to make sure people get in character and can start playing their roles as faithfully as possible.

Jay Scanlan: One of the other really interesting things about the war game is not only do you try to separate teams to keep them from talking about their own individual team strategy, you often try to incent the people playing with real and tangible rewards. Not just the typical consumer electronics giveaways, but real rewards of prestige and visibility so there’s a real incentive to try to “win,” to create a real esprit de corps within the experience so that teams do feel that sense of competitive pressure and a strong sense of teamwork.

Werner Rehm: So we’re really getting at the “gamification” of strategy here.

Thomas Meakin: Gamification allows you to create scenarios that most management teams won’t encounter until things start going wrong. One example is a failure in a product launch. Partway through the war game the participants were told to stop and prepare a press conference speech in three minutes. Then they were quizzed by a series of external advisers. Now, clearly, this was a little bit contrived, but it forced the executive team to think through the worst-case scenario. The war game put them in an unexpected and uncomfortable position and as a consequence, they would go into this product launch better prepared for the downside risks.

Werner Rehm: Thanks a lot for joining me on this podcast.

Jay Scanlan: Werner, thanks for having us.

Thomas Meakin: Thanks, Werner.

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