How to predict your competitor’s next move

In this episode of the Inside the Strategy Room, John Horn, author of the new book Inside the Competitor’s Mindset (The MIT Press, April 2023), explains how to predict competitor actions. Horn is a professor at Washington University’s Olin Business School in St. Louis who helps companies maximize the value of competitive insights. He spoke with Emma Gibbs, who leads McKinsey’s Strategy and Corporate Finance Practice in the United Kingdom, Ireland, and Israel. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.

Emma Gibbs: What is the core message of your book?

John Horn: The big idea is that many companies do competitive intelligence, but where they fall down is in turning that intelligence and data into insights about what the competitor will do. Many of my clients say that their competitors are irrational, but this is because they are not taking the time to look at the world from their competitors’ point of view. Once they do, those competitive actions start to make sense. The book sets up frameworks and processes to help executives get inside the competitor’s mindset.

Emma Gibbs: Why do you think companies have such a hard time understanding their competitors’ points of view?

John Horn: One reason is that we assume our approach and the way we look at the world is right. When someone does something differently, it creates a dissonance with what we think is the correct answer. The other reason is that with more seniority, power, or status comes greater difficulty in being empathetic. We made choices that got us promoted, so we assume they had to be right choices. Any others don’t make sense to us.

Emma Gibbs: Have you come across instances when a company does act irrationally?

John Horn: I have yet to see a company act truly irrationally. Typically, the competitor’s actions aren’t irrational but are moves that we wouldn’t make or we don’t want them to make. I did a war game with a transportation client, and we discussed whether we should include warehousing space as a choice in the game. The client said, “No, because our competitor is irrational with their warehousing. It’s a mature industry with excess capacity and they are adding warehouse space.” I asked, “Have you added capacity in the past 18 months?” He recited a short list: expanding one facility, adding another, acquiring a third. I said, “So you’ve added or expanded 12 facilities. Your competitor added four, and they’re irrational?” He looked at me and said, “Yeah, but there is a good reason why we added those 12.”

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Emma Gibbs: How would you approach figuring out the competitor’s reasons for their moves?

John Horn: It’s about breaking out of your own mindset and forcing yourself to look at the world from competitors’ points of view. If I had their assets, what would I do with them? If I decrease my prices and the competitor matches that decrease, I won’t gain any market share. Any time you plan to build a new plant or acquire a company or change your pricing, you should think, as in any game, “If I make this move, what will my opponent do in response?” The minute you say, “They’re irrational,” you stop trying to understand them.

Emma Gibbs: In your book, you have a four-stage framework for understanding competitors. Can you explain those steps?

John Horn: The first step is to pay attention to what competitors say and do by downloading earnings calls or annual reports and scanning media releases. The second step is to find out what assets, resources, and capabilities they have. They may have a supply chain in markets or geographies that you don’t have or upgraded facilities. That’s where you start to differentiate the competitor. The way I like to phrase it is, “If I had their toys to play with, what would I do?”

The third step is to consider the person making the decisions. What do you know about them? When someone with a marketing background becomes the CEO, they won’t suddenly start optimizing the footprint of factories. That person will likely focus on marketing to help the company grow, partly because they will think, “My background is why the board hired me.”

Companies doing competitive intelligence often try to collect all data about all competitors all at once, but they lack the staff or the ability to analyze the information and develop insights. You should start small. Who are the major competitors you want to track, and what do you want to track about them?

The fourth element, which is really important, is making a prediction and then tracking it to see how it lines up with what happens. If you paid attention to what the competitor said and did, considered all its assets, and understood the leaders’ backgrounds, you can say, “I think they will do this in the next three to six months.” If what they do is in line with what you expected, you know you are on the right track. If you’re off, then go back and ask, “What did I miss? Maybe they used a certain partner or hired a new person to make decisions.” That updates what you pay attention to going forward to help you make better predictions. The objective is never to be 100 percent accurate, but it’s a lot better to be 30 percent accurate than to be 0 percent accurate in predicting what your competitor will do.

Emma Gibbs: In our practice, we talk a lot about the social side of strategy—ingrained ways of thinking or internal agendas. How should individuals who gather these insights share them with senior leaders so they make the best decisions?

John Horn: It’s more about storytelling than about charts and spreadsheets. It’s hard to say, “Here is what we should have invested, and here’s what the return would have been.” Rather, come up with examples of where the company faced big challenges in the past. For example, it might be something like, “Remember when we entered Latin America and got hammered by that competitor and lost our $200 million investment?” Then go back and look at what the competitor had done before. “If we had spent time to analyze the competitor, we may not have perfectly predicted their reaction, but we could have seen them as a threat and paid more attention to them.” Anecdotes aren’t proof, but you want those big hairy, messy anecdotes to be in senior leaders’ minds, so they realize that this is something they need to pay attention to.

Additionally, when you start implementing a competitive intelligence program, you want to go for small wins to build up the right to get bigger. Focus on one or two competitors and one or two strategic choices; maybe it’s one competitor’s pricing and product portfolio. Then track that and show that you can predict their actions with growing accuracy.

Emma Gibbs: Should business leaders start small when venturing in a new strategic direction, to get a sense of the competitor response?

John Horn: Some strategic choices can’t be made incrementally. If I’m going to acquire a company or expand a facility, I can’t do that partially over time. On the other hand, maybe I can expand a product into a couple of areas and see if a competitor tries to block it. We have this idea that our competitors are tracking our every move and just waiting to pounce. In fact, many will not realize that you are making a move in the market for weeks or months. With big moves, war games and simulations can be very helpful: “Emma, I want you to play a competitor. Here’s what I want to do. What would you do in response?” You can come up with a pretty accurate sense of the competitor response and based on that, decide what you might do differently.

Emma Gibbs: You interviewed people from different backgrounds for the book. What insights did you gain from that?

John Horn: One of the challenges with competitive insight is that you can’t talk to your competitor, so you have to intuit outside in, from second- and third-party resources. A colleague of mine said, “It’s similar to a homicide detective who can’t ask the victim, ‘Who killed you?’” It made me realize that other professionals, such as archaeologists, paleontologists, and neonatal ICU nurses, face the same challenge. Paleontologists can dig up fossil bones, but that doesn’t tell them how T. Rex ran or if it hunted in packs. I asked these different groups how they approach the challenge of not being able to directly interrogate the subject of their research and synthesized their answers into ten lessons. The number one thing was to create a diverse team. Almost everyone said, “If you want to have good competitive insight, you need people who look at the problem from different angles, whether that’s cultures, genders, or functional or educational backgrounds. The more people with different voices actively participating, the better answers you will get.”

Emma Gibbs: What advantages can technology bring to getting into the minds of competitors? And how do you combine it with the human aspects?

John Horn: It’s hard to do competitive insight without having a good database of what companies have done in the past and are doing currently so you can see patterns. Competitive insight or business analytics dashboards are very helpful for collecting and codifying that information. When you’re trying to predict your competitor’s actions, you need to know two things. First, are they following patterns? For pattern tracking, artificial intelligence and dashboards are helpful as long as AI recognizes the pattern. For example, if I want to know how a competitor will react when I change my prices or when another competitor changes its prices, I have to train the AI tool not only to recognize when the competitor I’m tracking changes its prices, but when others in the industry change their prices. I’m not sure AI has reached the level of being systemic and holistic in tracking multiple competitors relative to one other.

‘Knowing competitors’ historical patterns doesn’t tell us whether those patterns will continue. That’s where the human element comes in. Given what you know about what the competitors are saying and doing, do you expect them to continue those patterns or change direction because they want different outcomes?

The second element, which AI is not good at right now, is predicting changes. I used to do an exercise with my students to prepare them for consulting interviews. It was a consumer goods case, where one company’s market share went from 33 percent to 30 to 27, and another’s went from 27 percent to 30 to 33. The client company stayed flat. I asked the students which company they should be worried about, the one whose market share went up or the one whose market share went down. Most said the one that went up, because that competitor got stronger. I asked, “Do we know that this company wants its market share to continue to go up, or are they happy with where it is? Or did their market share go up without them doing anything and it will fall back because they’re not paying attention to it?” Similarly, the company whose market share went down could continue to go down because the company plans to exit that market. Alternately, its leaders could aggressively try to regain that market share, or they could try to merely stabilize things because they’re focused on other areas.

This shows that knowing historical patterns doesn’t tell us whether those patterns will continue or change. That’s where psychology and the human element comes in. Given what you know about what the competitors are saying and doing, do you expect them to continue those patterns or change direction because they want different outcomes? Technology is not yet good enough to make and track predictions without that human intervention.

Emma Gibbs: On your point about codifying patterns, what information should companies track?

John Horn: It’s a good question because companies doing competitive intelligence often try to do everything. They collect all data about all competitors all at once but lack the staff or the ability to analyze the information and develop insights. It goes back to my earlier point that when you start a competitive insights function, you should start small. Who are the major competitors you want to track and what do you want to track about them? Is it about product innovation, pricing moves, acquisitions, talent management, or supply chain? You figure that out by asking people in the organization where they have seen the competitor surprise or challenge them in terms of their response.

Coming up with a small set of competitors and strategic factors will help you focus the data collection. If I’m focusing on acquisitions, I don’t need to reverse-engineer the competitor’s product portfolio, but I do need to track how often they made acquisitions. How big were the deals? Were they bolt-ons? As you build up that information, you start to get feedback. “That’s great. Can you also look at this other question?” You earn the right to expand the function. It’s similar to the idea of a minimum viable product for entrepreneurs. You start with the MVP, get feedback from the people in your organization, and continue to develop and refine it.

Emma Gibbs: Does John Nash’s equilibrium theory, and game theory in general, play a role in predicting competitors’ moves?

John Horn: The Nash equilibrium essentially says, “I’m going to make the best response in reaction to you, and you will make the best response in reaction to me.” But Nash and the theory of economics always starts from the idea that we want to maximize profit. In the real world, sometimes we are trying to maximize market share in the hopes of getting profits down the road, or to maximize short-term earnings, or to integrate an acquisition as quickly as possible. All Nash would say is, “If that’s your objective, will the competitors have the same response as in other scenarios?” It’s a reminder that we have to consider not what we want other players to do, but what those players will do that’s in their own best interests.

Emma Gibbs: Can you offer some examples of organizations that have effectively generated competitive insights?

John Horn: One financial services company gained support from the CEO. Anytime someone proposed a new strategic initiative, the CEO would ask, “Did you talk to the competitive insight group?” Working with that group became part of how the company did business. The company was also deliberate in ensuring that information flowed up and down throughout the organization.

In another company I worked with, regional managers initially didn’t talk to each other. Since competitors applied similar strategies across regions, there were a lot of missed opportunities. The competitive insights group asked the regional managers to provide information about their main competitors and shared with them information they received from others. When the first reports started trickling in, the managers realized that when a competitor lowered prices in one country, they might lower prices in their regions. The company started small and then created a virtuous feedback loop: “If you want more information, give us more information.” Once you start providing information that helps people do their job better, they will want more of it.

Emma Gibbs: Do you find that companies tend to prioritize customer insights over competitive insights? Are there techniques used for customer research that could be applied to generating competitive insights?

John Horn: I think companies do a better job of understanding customers than competitors. I have led strategy workshops where we asked the client what makes the company distinctive, and the participants said things like high quality and customer responsiveness. The CEO said, “All our competitors would say the same thing, so how are we different?” We have to apply those same empathetic techniques to competitors, as well as supply chain partners and ecosystem stakeholders. For example, why are regulators making the moves they are making? Companies are good at scanning social media to understand how customers are responding to their products, but they don’t apply those techniques to reviewing how customers respond to competitors’ products. What is the competitor’s customer experience score? Are positive or negative responses changing for competitors? That can help you gain insight into what the competitor will do.

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