by Mark Chussil

Who did best? I’m not talking about the Democrats and Republicans. Not the New York Yankees and the Boston Red Sox. Not even the Beatles and the Rolling Stones.

I mean something BIG.

I mean Safeway and Supervalu, the huge supermarket chains.

If you’re still here you must be one of my faithful readers, and my faithful readers may remember an essay called House, MBA. In that essay, written with the American economy reeling, we saw that Safeway CEO Steve Burd wished he’d done what Supervalu CEO Craig Herkert did on prices, while Supervalu CEO Craig Herkert wished he’d done what Safeway CEO Steve Burd did on prices. (As they must say in an old proverb, the produce is greener in the other store.) We further explored what nasty, brilliant, truth-seeking, fictitious Dr. Gregory House would do to resolve the dispute.

Here’s how Safeway and Supervalu were doing at the end of 2008.

The Numbers are In!

A couple of years have passed since the House essay, since Mr. Burd and Mr. Herkert ranked #50 and #51 on the Fortune 500 list, and since they took their respective actions.

Think about where they started. Think about what they said in The Wall Street Journal of October 16, 2009, in “Safeway Shifts Tactics in Grocery Price War.” Safeway’s Burd said, “Had the chain moved quicker to lower prices, it would be ‘doing a bit better than we are now.’” Supervalu’s Herkert said, “Increased use of promotions ‘destroyed our gross margin… More items really cheap don’t bring in more people.’”

What would you expect to happen? What actually happened? Whose strategy worked? Here are their 2010 numbers, from the 2011 Fortune 500:

And the Winner is…

Pretty clear who did best, right? Not so much. Actually, not at all.

If you value, say, 10-year total return to shareholders, then Supervalu is doing better. If you value, say, return on equity, then Safeway is doing better. There is not a definitive, objective reality of one outperforming the other until you subjectively define success. You pick the metric, you pick the winner.

Plus, we don’t know what metrics Burd and Herkert wanted. We don’t know if they think they succeeded.

It gets less clear. Many things were in motion at the same time as their price moves. Changes in the economy, decisions about everything from advertising to sourcing to employment, Supervalu’s adjustment to a new CEO (Jeffrey Noddle left in 2009), and so on. Not to mention that companies’ cultures and capabilities differ. (See What You Pay For.) Not to mention randomness, uncertainty, and luck. (See Marvelous Techniques.)

It gets still less clear. Even if we knew exactly what each had done on price, how could we reasonably single out price as the driving force, the “reason” for one or the other to win? It just doesn’t make sense to do so.

What I think we’ve seen is that “who did best” is a difficult, complex question. It is not objective; it requires that we make value judgments. It is not clear who or what is responsible for “best” performance.

So what should we believe? How do we know who did best?

What Works Best

It seems to me that “who did best” is of limited value as a question and of even more limited value as a way to figure out which or whose strategy “worked.” It tells us what happened. It doesn’t tell us why it happened.

What I think is of far greater value is to change the question from “who did best” to “what works best.”

Treat that inquiry as a scientist would, looking for cause and effect. Treat it as a systems thinker or engineer would, balancing multiple moving parts and knowing everything is connected. Treat it as a chess master or military commander would, recognizing that it’s not only your moves that matter. Treat it as a statistician would, checking what’s random and what’s real. Treat it as a psychologist would, aware of human creativity, biases, and determination to succeed. It’s possible,* and it’s worth it.

* I like what Barney Pell said about a problem that needs only for people to think big and muster the will to take it on: “It’s only rocket science.”

by Mark Chussil

Attorney: All your responses must be oral, okay? What school did you go to?
Witness: Oral.
(Source: One of those humor emails that circulates eternally)

You ask a silly question, you get a silly answer. That much we know. But how do you skip the silly and go for better?

Questions and business war games

Business war games, in my experience (see Appendix), provide outstanding insights that greatly impact bottom lines. But why? What is it about business war games that produces insights that evidently elude other approaches?

I think the answer lies in the questions business war games ask. You ask a better question, you get a better answer.

The first, worst question

“For a moment, nothing happened. Then, after a second or two, nothing continued to happen.” — Douglas Adams

Imagine that we expect a new competitor to enter our market, or we plan to launch a new product, or we want to see what would happen if we cut our price, or we need to set performance goals.

We pull out our trusty spreadsheet, full of estimated sales and costs and with quarterly profits lined up in the traditional hockey-stick formation.

What is the question that our trusty spreadsheet implicitly answers? If it’s like most that I’ve seen in corporate use, it is this:

What will happen to us with this strategy, assuming it works?

“What will happen to us with this strategy” is fine as a first question. What makes it the worst question is stopping after we answer it. Which strategists are prone to do, because spreadsheet analysis looks detailed, precise, and definitive, and thus makes us forget the second, often-unspoken “assuming it works” part.

Here’s why accounting-based spreadsheets assume our strategy will work:

• They do not take competitors’ actions or reactions into account. Equivalently, they assume competitors will behave as we wish.
• They further assume that costs can be cut without affecting sales. It is a rare spreadsheet that explicitly links costs to the top line as well as to the bottom.
• They assume sales will grow as we command, costs will slow as we demand, and profits will flow as we expand.

Those assumptions, of course, leave us open to surprises, mostly unpleasant.

Further reading: Do Not Overtighten and With All This Intelligence, Why Don’t We Have Better Strategies?

A better question

Rick Blaine, Humphrey Bogart’s character in “Casablanca,” on Captain Renault: “Oh, he’s just like any other man, only more so.”

Of course savvy strategists worry about stopping after the first question. Fortunately, it’s a cinch to find a second, better question. The better question is this:

What do you think they will do?

“They” usually refers to competitors, although it may be anyone whose actions can affect us. Here, we’ll stick to competitors.

The need to answer this better question is obvious enough that people have provided an assortment of tools to do so. The tools include competitive intelligence, trend analysis, and SWOT (strengths, weaknesses, opportunities, and threats) analysis.

“What do you think they will do” is a major step forward because it explicitly looks at relevant others, especially competitors. Where it falls short is not in theory but in practice.

When human beings answer “what do you think they will do,” they tend to start with past behavior. They figure that future behavior will be like past behavior, only more so or less so. (This is called anchoring. See further reading, below.)

• Done well — say, by noticing that a competitor has hired a person with an unusual background to run their R&D — competitive intelligence can help you anticipate even quantum shifts. That, and much more, is truly valuable. Done less well, you may get only raw facts and figures. And no, numbers do not speak for themselves.
• Trend analysis, by definition, extrapolates the past into the future, and thus, by definition, will not expose possible shifts in direction. That makes it least useful precisely when you need it most, which is when the future will not look like the past.
• SWOT analysis theoretically can assay what competitors might do. In practice, it may not work out that way, as we’ll see when we get to the next question. By the way, the very act of assigning labels — strengths, weaknesses, opportunities, threats — prejudges effects and biases our thinking about what we should do.

Think, though, about how you make decisions. You don’t aspire to be as you were yesterday, only more so or less so. You strive to get out of the box and do something innovative and magnificent. So do your competitors.

Further reading: Decision Traps, J. Edward Russo and Paul J.H. Schoemaker, covers anchoring. See also Anchors Weigh Down Competitive Thinking. On trend analysis, Predicting Competitors.

An even better question

“The guy who invented the first wheel was an idiot. The guy who invented the other three, he was a genius.” — Sid Caesar

The previous question unintentionally leads us to start with the past and make adjustments. But what if (and notice the mind-shift in “what if”) we don’t default to the past? We could ask this question instead:

What would you do if you were them?

Logically, the two questions are related. The new one even seems like a precursor to answering the prior. But in practice they work differently.

“Oh, if I were them, here’s what I would do!” The even-better question triggers an imaginative, even playful, reaction not at all like what emerged from the previous two questions. Now we’re brainstorming, we’re role-playing, we’re exploring scenarios.

People are so eager to answer “what would you do if you were them” it’s hard to shut them up. They have fun and indulge their creativity. They get to show off their imagination and cleverness. They build on their knowledge and even their fears.

We can beef up this question with the information we may have compiled for the other questions, especially competitive intelligence. CI helps us tour competitors’ heads. We learn they’re struggling to survive, and we imagine desperation. We learn they’re outsourcing, and we infer future price cuts or long-distance distribution chains. We learn they have a radical new product almost ready to launch, and we imagine what else they would be getting ready to do.

Plus, we can think about CI from their perspective, where we are the target. If they learn our customer satisfaction is dropping, they may consider launching a switch blitz. If they learn we’ve hired a hotshot senior executive from a different industry, they may infer we’re planning to make big changes. If they learn our relations with our foreign distributors are stormy, they may give those distributors a discreet call.

There’s one more question to go because we’re still missing three things. Voluntary exercise in creative thinking: can you figure out what they are?

Further reading: I Didn’t Know You Could Do That.

The last, best question

“The enemy is anybody who’s going to get you killed, no matter which side he’s on.” — Joseph Heller, Catch-22

With the previous question we get into competitors’ heads and imagine where they could go. With the last, best question we put on competitors’ shoes and see where they could go. The best question, at least until you or I come up with a better one, is this:

You are them. Go forth and win!
Now what happens?

I mentioned that the previous question, “what would you do if you were them,” was missing three things that this question supplies. Here’s what they are.

1. Dynamic interaction. It’s easy in the previous question to think only of one move; that is, action at one point in time. (You might avoid that if you use role-playing.) In this question, multiple actions and reactions are built in.
2. Calculation. Here, with the “what happens” part, we explicitly address consequences. We did that in our first, worst question too, but here we take competitors into account and, with proper design, avoid the other mistakes as well.
3. Emotion. We human beings feel emotion when our strategies succeed or fail, and we respond with emotion: fear, desperation, retaliation, embarrassment, overconfidence, hubris. Competition isn’t computer against computer, it’s human against human. To understand our markets and our future, we have to include emotion.

That’s why our last, best question answers my initial question of why business war games work better than conventional techniques. Unlike the other techniques with which I am familiar, business war games alone combine dynamic interaction, calculation, and emotion:

• Dynamic interaction through teams role-playing their business, its competitors, and relevant others, through multiple moves.
• Calculation through simulation models that use team decisions to estimate results.
• Emotion through war-game design and humans’ natural competitiveness.

Further reading: About dynamic interaction, Predictable Competitors. About calculation, All About Models, What The Model Says, and The Model Whisperer. About emotion, Feeling is Believing.

The bottom line

My point isn’t that business war games are the only way to gain better answers to tough strategy questions. Perhaps other techniques can be made to produce similar benefits.

My point also isn’t that the business war games that I conduct are the only business war games to achieve those benefits. Other fine firms conduct business war games too.

Rather, my point is that we don’t improve answers only via precision or speed. Often it’s best to improve the questions we ask. We’ve all felt the magic of a great question.

Appendix

I’ve worked with business war games a lot. I’ve conducted a couple hundred, for Fortune 500 companies and at conferences and universities, on six continents. I’ve conducted others, involving millions of scenarios, in the privacy of my computer. All in all, I’ve observed the behavior, decisions, and performance of thousands of real-life strategists.

For some war-game case studies, see this page on ACS’ website.

You can view and download a free bibliography of two dozen articles and essays by ACS on business war games, with summaries and links to full text online.

by Mark Chussil

Investors suffer from a surplus of checks. I don’t mean checks in the sense of “here, let me write you a check.” I mean checks in the sense of due diligence, verification, and oversight. Not that there’s anything wrong with that, except for when they merely make sure you don’t overpay for your berth on the Titanic.

Some time ago I attended a meeting of investors, of whom I was not one. They filled a large, partially elegant room and listened to pitches from passionate entrepreneurs, of whom I was also not one.

The entrepreneurs all sounded highly competent, knowledgeable, and professional. They clearly knew their markets, their products, and their potential.

The investors all sounded highly competent, knowledgeable, and professional. They clearly knew investing, finance, and prudence.

I listened to the thirty or so questions asked by the investors following the entrepreneurs’ presentations. The questions dealt with checks for due diligence, verification, and oversight. Hey, if I’d been an investor, I’d want to be sure everything was legitimate too.

But that’s what every question was about. Every question sought a reason to believe that giving you a great deal of my money would be a wise move. Not a single question dealt with what could go wrong. What if, for example, a company already in a market wants to squash the entrepreneurial intruder? What if an applied-for patent is denied?

We humans are basically optimistic and energetic. We imagine things, we want things, we make things happen. I’m that way too; I wouldn’t have started businesses otherwise. But being an optimist doesn’t mean looking only for reasons to believe. An optimist steps up to a challenge. A fool steps off a cliff.

When we blend reasons to believe with ambition we get advocacy. I’m right, this is why I’m right, this is why we should do things my way, this is why you should follow me with your money or your career. That’s how we get ahead. That’s how we inspire action.

Due diligence may not protect you from frenzies of advocacy. At its worst, it’s like signing an ill-advised legal document because the spell-check said it was okay. Think it doesn’t happen? Remember that no one invests in a strategy or business expecting it to fail, yet somehow smart people invest in strategies and businesses that fail.

To make due diligence perform at its best, we must ensure that it does more than pummel the proffered reasons to believe things will go well. We must ensure that it also looks vigorously for reasons why things will fall apart. What if a whole bunch of mortgages sour at the same time? What if the market implodes for a couple of years? What if our product unexpectedly and publicly fails? What if credit dries up?

Looking at the dark side does not make you a pessimist or a naysayer. It makes you truly duly diligent.

There are many practical ways to do so. Stress tests. Business war games. Strategy simulations. What-if analysis. Thinking through a wide variety of scenarios. Role-playing with the equivalent of sparring partners. Corporate contrarians. Those are best practices used by optimists who want things to go right and know something can go wrong. After all, if an unexpected threat (or opportunity) can come out of left field, it is good to look toward left field before you commit to a strategy or investment. There are no guarantees, of course, but you can greatly improve your odds. I’ve seen it; it’s the rule, not the exception.

True-due diligence does more than protect you. It also helps you move forward, because you put together a better strategy and you have a better story to tell.

One last point. If true-due diligence demonstrates that it a strategy will produce unhappy results, that’s not a good enough reason to reject the strategy. First, you must compare the unhappy results to the outcomes you’d get under the status quo. If you get better results with the new strategy than you’d get without it, then, unhappy as it is, you should switch to it. Or, look for a better strategy. You’ve been forewarned.

“I observe the physician with the same diligence as the disease.”
John Donne (1572-1631)

This essay is a new, improved version of Checks and Balances, which this site retains for historical reasons.

This interview comes from the Trust Across America blog, where Barbara Brooks Kimmel writes on building great business through trustworthy behavior. Ms. Kimmel is a Founder of Trust Across America. I had appeared on Trust Across America’s radio show on September 29, 2010, and Ms. Kimmel and I continued our discussion after the show.

Barbara: Mark, tell us a little about your background.

Mark: I am the Founder and CEO of Advanced Competitive Strategies, and author of Marvelous Techniques: Essays on Going Beyond Strategy as We’ve Known It (available direct from ACS) and Nice Start: Questions Only You Can Answer to Create the Life Only You Can Live (Inkwater Press). I lecture and consult globally about strategic thinking, business war games, and strategy simulation. My work has appeared in Fast Company, The Wall Street Journal, and elsewhere. And finally, I earned an MBA at Harvard and a BA at Yale.

Barbara: Why do companies engage in untrustworthy behavior?

Mark: No one gets up in the morning saying “My job today is to screw up the world. If I make people miserable, if I hurt the general well-being, if I damage our civilization in even the slightest way, then I can go to sleep with the satisfaction in a job well done.” Most people want to do good things, but when we work for a company, we are bound, in a keep-my-job way, to “do good” according to the company’s definition of “doing good.” We do what we’re paid to do.

Barbara: On your blog you have an essay called “What You Pay For.” Is that what you mean?

Mark: Yes. The customer gets what he or she pays for, and companies are our customers when it comes to employment. If the customer, the company, pays you for sales growth, it will get sales growth from you. It may also get profits or innovation or social responsibility, and it may also get shortcuts or bribery or non-compliance with safety regulations, but those are side effects.

Barbara: Presumably a trustworthy company cares about more than just sales growth.

Mark: Yes, a trustworthy company will care about other metrics too, such as impact on the environment, fair treatment of employees, customers, and suppliers, and living up to its word. The point is that compensation programs — what companies pay for — are tremendously important. Perhaps one way to identify trustworthy companies is to find out what they pay for.

Barbara: What else can we look at besides compensation programs?

Mark: Look also at how they work. Kaiser Permanente, the big HMO, is proactively using data on medical tests. Over the last 15 years they identified 450 patients with new or recurring cancers or abnormal biopsies who would not otherwise have been found. I’m one of their customers, and that proaction is one reason why. See “What the Doctor Missed” in The Wall Street Journal.

Barbara: The Wall Street Journal had an article on automobile safety (“What’s Safer, a Chevy or Mercedes?”). I think you blogged about it, in “Who Doesn’t Like Airbags?”. The auto industry has often resisted mandatory safety improvements, even going back to seat belts, as well as fuel-economy standards. Now they compete on safety features and fuel economy. What happened?

Mark: Regulations forced some good behavior, such as publicizing crash-test results so customers would have the information they need to compare car models. Plus, Lee Iacocca, who used to run Chrysler, decided to stop resisting safety improvements and, instead, make safety a selling point. The resulting competition directly benefits customers.

Barbara: Why did Mr. Iacocca do that?

Mark: I don’t know. Did he change his mind because he saw there was money to be made or because he wanted to save people’s lives? Do we care about the answer?

Barbara: Are you saying that it doesn’t matter why a company does good things? What, then, does it mean to be “trustworthy?”

Mark: At one level I don’t care why a company does good things. I want Delta to fly me safely from one place to another. I don’t care if they do it because they’re afraid of punishment if they fail, they don’t want to lose customers (perhaps literally), or they think it’s honorable to keep their customers safe. Does it matter if I give to a charity because I like the charity or because I think the donation will get me into heaven? [See Update at the end of this interview for more on this subject.]

Barbara: But the threat of punishment seems to happen when a company has proven itself untrustworthy.

Mark: I agree. We expect “trustworthy” to have some connection to good motives and intentions, not merely following the rules. A company that demonstrates good intentions makes us trust that it will not deceive us or put us at risk. We’re all sadly familiar with the opposite kind of company.

Barbara: So let’s talk about a company’s motives and intentions. Is it reasonable to expect a company to behave well?

Mark: Professors Jay Lorsch and Rakesh Khurana of the Harvard Business School wrote an article called “The Pay Problem.” They say corporations have shifted their focus from “stakeholders” to “shareholders.” Stakeholders can include customers, employees, and society in general; shareholders means just the people who own shares in the company. When we evaluate decisions in terms of effects on stakeholders, we look more broadly than when we think only of shareholders.

Barbara: What difference does that shift make?

Mark: I believe it means we have more need of government regulation, and I think that recent events ranging from the financial crisis to the BP oil spill show why. We need rules to ensure that the shareholders-perspective does not go too far. That’s why we have anti-trust laws, the FAA, FDA, and FTC, minimum fuel economy rules, and so on. Those solutions might have been controversial when they were first put in place, but just try to take them away now.

Barbara: You mentioned regulations, which are enforced with fines and other actions. An article in Newsweek, “Do Fines Ever Make Corporations Change” (September 13, 2010), suggested that fines won’t make corporations change because they are tiny relative to the size of the companies. Do we get untrustworthy behavior because fines are too low?

Mark: Perhaps fines are too low, and perhaps inspections are too infrequent or lax. An option might be for fines to go up as a company accumulates offenses, just as insurance companies raise our rates if we get into too many accidents or we face more years in prison for repeated offenses. But those are punishments. We really want to prevent bad behavior, and there are reasons why companies may think it’s profitable to risk take chances.

Barbara: Why?

Mark: One reason is that companies generally don’t quantify the value of their reputations, so they don’t know until it’s too late (and maybe not even then) how much it hurts to have their name dragged through the mud. A second is that human beings underestimate the odds of a bad event; “it won’t happen to us.” A third is that there’s little incentive to be the first one to play fair. Managers can clearly see, or think they see, the costs of playing fair, and it’s harder for them to see the benefits.

Barbara: It’s important to level the playing field or to have vigorous competition.

Mark: I agree. Regulations level the playing field so no one has extra costs. I’ve worked with executives who want stronger regulations so that they can do what they know is right without making themselves uncompetitive. And Lee Iacocca’s move, being the first to embrace safety features, was important because he changed the calculus for the other automakers. They could see the costs of falling behind.

Barbara: So what are you saying about companies? Why don’t they see the benefits as well as the costs of trustworthy behavior?

Mark: Some management experts say if you don’t measure it you won’t manage it. Problem is, financial statements don’t have lines for reputation, customer loyalty, product quality, and so on, and they don’t show how a loss of reputation trickles down to a lousy bottom line. And management culture is dominated by financial statements.

Barbara: In your writing you often talk about the quality of decision-making. What do you mean by that?

Mark: Imagine you have a persistent cough. You would not expect your doctor simply to say “in my experience, people with persistent coughs usually have bacterial pneumonia, so take these antibiotics and you’ll be fine.” Well, you won’t be fine if your persistent cough comes from asthma, emphysema, or lung cancer. A doctor who just gives antibiotics to every coughing patient who comes in without asking questions and running tests… that sounds to me like it’d be malpractice. But an executive following that approach might have a fine career in the business world. See my essays “It’s Working!” and “Gross Galactic Product.”

Barbara: In other words, part of trustworthiness is good decision-making.

Mark: Yes, even for shareholders. I think everyone would agree that the quality of decisions affects the probability of good outcomes. The better the decisions, the better the outcomes. It’s not a guarantee, but it raises the odds. Good outcomes mean jobs for employees, healthy communities, happy customers, and fair returns for shareholders. Bad decisions and bad outcomes help no one.

Barbara: Okay, so how do we get good-quality decisions? Isn’t that why companies try to hire the best managers, with experience and education?

Mark: Yes, but if that’s all it took we wouldn’t have companies going under. GM didn’t go under after a slow decline of 40 years because it hired bad managers; on the contrary, it went under in spite of hiring good managers. See my essay “Suffering Was Optional.”

Barbara: If having good managers isn’t enough, what else do we need?

Mark: Just as there are modern tools of medicine that help your doctor make good decisions about your persistent cough, there are modern tools of management that help managers make good decisions about their businesses. But in management we still have a culture of experience, even “instinct,” instead of rigorous, critical thinking. One of the themes in my book Marvelous Techniques is that we have biased humans using flawed tools, and that leads to bad decisions.

Barbara: What do you mean by “biased humans” and “flawed tools”?

Mark: I don’t mean that humans are biased in the sense of prejudice, and I don’t mean tools are flawed in the sense that they make mistakes in arithmetic. I mean that all managers are humans, and humans have a variety of unconscious biases that interfere with our ability to make good decisions. I mean that tools are flawed if they are the wrong tool for the problem, such as using an accounting-based spreadsheet to answer a strategy question.

Barbara: Give me examples of biased humans.

Mark: Russo and Shoemaker, in Decision Traps, talk about overconfidence and group biases that led, among other things, to the Challenger disaster. Tavris and Aronson, in Mistakes Were Made (but not by me), talk about cognitive dissonance, which makes people cling to past beliefs, such as the guilt of a person held in prison for many years, even after there’s conclusive evidence to the contrary. Dörner, in The Logic of Failure, describes the disaster at Chernobyl, when people overrode safety systems because they believed they were experts and knew what they were doing.

Barbara: How does that apply to business?

Mark: Perhaps the most obvious example is price wars. Price wars can be devastating to companies; look at the airlines. You’d think that smart, experienced managers wouldn’t start price wars. Yet they do, and getting out of them can take a long, unprofitable time. Price wars are a more complicated subject than they might appear, but the key thing is that no one expects to suffer a price war. They expect to enjoy a price advantage.

Barbara: What’s another mistake due to bias?

Mark: Managers often think they can forecast the results of a strategy in their heads; that’s what they’re doing when they say “if I do this, then I’ll get that result.” Business, though, is immensely complicated. Just to give you an idea of that: I conducted a recent program for a Fortune 500 company in which we determined that there were over 39 million possible outcomes from the options they faced. No human being can even list them, let alone pick which are the most probable or most profitable. See my essay “The How-Likely Case.”

Barbara: How about flawed tools?

Mark: We talked earlier about financial statements that don’t take into account reputation, customer loyalty, product quality, and similar factors. Those spreadsheets also don’t take competitors’ reactions into account. As a result, many analyses based on financial spreadsheets leave companies vulnerable to surprises. Generally unpleasant surprises, because spreadsheet analysis implicitly assumes that a strategy will work.

Barbara: How, then, can companies avoid falling into those traps?

Mark: The best techniques I’ve seen involve business war games and strategy simulations, which are ways to stress-test business strategies. They’re able to get past the limitations of spreadsheets and trend lines, and they’re able to handle the arithmetic. By the way, business war games aren’t about war or conquest. See my essay “The War (Game) Metaphor.”

Barbara: Should we not trust companies unless they use business war games or strategy simulations?

Mark: My point is not about business war games or strategy simulations, although they do work. The point is that companies need conscious, deliberate processes that ask tough questions, such as what could make our strategy fail. The USA and the EU took a step in that direction when we started to stress-test banks after the financial crisis. Without that question we get wishful thinking, results that disappoint, careers that flame out, people losing their jobs, and contributions to economic problems instead of to economic recovery.

Barbara: Why look at what could make a strategy fail?

Mark: Because that’s how we know how risky it is and what we have to do to strengthen it. Imagine how much better off we’d all be if we’d run those stress-tests before the financial crisis instead of after.

Barbara: Have any stories about that?

Mark: Sure, see my essay “When I Was Wrong.” I put together a pricing simulation that, so far, about 300 strategists have tried. I put in my own strategies, and they didn’t do very well. After I got over my private humiliation, I realized it was a good thing. Before the simulation, you’d have every reason to trust my advice: I’m an expert in my field, and you could expect me to know what I’m talking about. After the simulation — that is, after I learned from the simulation — you’d get much better advice from me. The trick is to make mistakes where it’s fast, cheap, and educational, not when real jobs, real careers, and real money depend on it.

Barbara: Mark, thank you for sharing your thoughts with me.

Mark: You’re welcome. Thanks for having me on the show, and congratulations on the work you’re doing at Trust Across America.

If you have a comment or question about the interview, Trust Across America invites you to share it in their comments box.

Update, October 7, 2010. In Brazil Engineers a Critic-Proof Dam, The Wall Street Journal says Brazil decided it made business sense to build environmentally conscious dams on the Amazon. “The dam’s greener hue isn’t because of any special environmental ardor on the part of the builders. It reflects a calculation about the unpredictable extra costs that environmental suits, [Amazonian] Indian protests and political backlashes can cause. ‘In the end, this is business,’ said Gabriel Azevedo, a former World Bank and World Wildlife Fund executive who serves as sustainability director at the energy division of the dam’s lead construction company, Odebrecht SA.”

Update, January 7, 2011. Trust Across America named Mark Chussil “one of 2010′s Top 100 Thought Leaders in Trustworthy Business Behavior.”

I’ve conducted hundreds of business war games for companies and at workshops around the world. Unfortunately (for me), many strategists don’t like the phrase “business war game.” War is not a happy thing, and “business war games” sounds like extolling or playing down horror. Uncomfortably (for me), other strategists do like the phrase, because they think it accurately reflects the idea that business is war.

Still, the “business war game” phrase has stuck. At the very least it promises a benefit we all can enjoy: a vacation from the rat-a-tat of PowerPoint bullets.

The war metaphor

“A good metaphor can make any bad idea sound good.” — Scott Adams

Although I’m a scarred veteran of many competitive-strategy campaigns, I don’t like the business-is-war metaphor. Not because I’m namby-pamby or lily-livered, because I’m not. Not because I faint at the sight of red ink, because I don’t. On the contrary, I’m as red-blooded and testosterone-soaked as a male MBA ought to be.

I am troubled by the war metaphor because thinking “business is war” can unconsciously bias strategy decision-making.

Words matter; that’s why we use them. The words we choose both reflect and shape our thinking. So what does the war metaphor reflect and shape? It tars our competitors as our enemies, focuses our efforts on fighting them, and interprets their behavior as hostile.

Incidentally, I’ve met plenty of strategists who viewed their competitors as hostile. I have not met a single strategist who characterized his or her company as hostile. Hmmm.

I’m not saying we should think of our competitors as our buddies, help them get their goals, or interpret their behavior as benevolent. I’m not saying we should avoid going head-to-head with them to win a customer. I am saying that the real objective of competitive strategy is our prosperity, not our competitors’ destruction. Clobbering the competition is only one path — and not necessarily one that’s attractive, low-risk, or feasible — to achieving our prosperity.

War and war games

“The difference between the almost right word & the right word is really a large matter — it’s the difference between the lightning bug and the lightning.” — Mark Twain

There’s a difference between a war game and a war. Two, actually. First, people die in a war, but not in a war game. Second, a war is about fighting and a war game is about learning. In a war game you test strategies and skills in a safe environment, and you learn from the results. A good idea before you march into real battle, and a good idea before you risk real jobs and megabucks.

That’s why I can be against the war metaphor and in favor of business war games. Assuming “business is war” constricts our thinking; conducting business war games expands it.

(Incidentally, a well-designed business war game is neutral, making no assumption that business is war or is not war. Discovering whether the strategies you’re testing lead to war is one of the key insights you can get in a war game. See the case study in Putting the Lesson before the Test.)

And there’s another reason we can favor war games: They show us the horrors of war, even the business kind. Many of my war-game stories begin with strategists ready to assault the competition and end with those same strategists discovering that they could better achieve their prosperity objective by less-confrontational means.

This is something I’ve learned from all those war games: Watch out for the war metaphor in your strategic thinking, and challenge it if you see it. The challenge doesn’t cost you anything. You can always go back to the war metaphor if you really think it works.

P.S. Alternative names for games

“Call me anything you want, but don’t call me late for dinner.” — My father, to me, when I was about 5. I didn’t get it at the time.

I’ve worked with strategists who embraced the phrase “business war games.” One even had people wear military fatigues during war-game sessions. His objective was not to make them hard to see but to encourage them to think outside the cubicle.

You can call business war games by other names. I’ve worked with strategists who preferred to call them “virtual competitions” or “strategy games.” Just don’t call them too late.

Update

A few hours after I posted this essay, the Wall Street Journal printed a front-page story by Ellen Byron entitled P&G Chief Wages Offensive Against Rivals, Risks Profits. The story bristles with war metaphors, not least because of P&G CEO Robert McDonald’s military background and battle-inspired tactics. Interestingly, McDonald says of his price cuts in 10% of P&G’s business, “In my mind there’s not a price war going on,” and Energizer CEO War Klein says “We are following in order to be competitive. We didn’t initiate this.”

That article, so soon after I posted my essay? Coincidence? I think so.

Further reading

I mentioned that the business-is-war metaphor can bias our decision-making. That’s because the metaphor greatly influences our ”mental models” of how things work. For more about mental models and their effects on our decisions, see All About Models.

Wal-Mart Radio Tags to Track Clothing, reported the Wall Street Journal on July 23, 2010. The giant retailer plans to use radio-frequency ID (RFID) tags in some clothing so it can keep shelves and inventory properly stocked with sizes. There are efficiencies to be had, costs to be saved, prices to be cut, customers to be thrilled.

According to the article, Avery Dennison, which makes RFID equipment, says a “pilot program at American Apparel Inc. in 2007 found that stores with the technology saw sales rise 14.3% compared to stores without the technology.” Looks like an advantage, and not inconsiderable.

Surely the 14.3% boost isn’t because customers prefer clothes with RFID tags. “Look, Ophelia, I got those jeans with an RFID tag on ‘em!” We surmise instead that American Apparel’s sales grew because customers were able to find the sizes they wanted, due to RFID-enabled systems goosing sales clerks to replenish sizes as they are sold. We’ve all had the experience of not finding our size.

Now we get to the strategically relevant point. Who gets to enjoy the 14.3% increase in sales, and for how long? Is there a first-tagger advantage, and is it worth having? Let’s think it through.

Customers aren’t going to buy more clothes because they find their size in the store. They may buy more from you, but not more overall(s). If they find their size in your store, they don’t have to look in someone else’s store. So if you get the first-tagger advantage, you may score that 14.3% increase.

As your sales rise your competitors’ sales fall. They don’t like that so they take action, possibly also adopting the RFID tagging system. Their sales recover. And your sales fall. Now the important part happens: you decide what your sales decline means.

You could conclude that:

• The first-tagger advantage is ephemeral or was oversold.
• Something else has gone wrong in your stores to cause your sales to fall.
• Your competitors have spotted hot new trends.
• Your competitors have begun using RFID tags and are catching up to you.

The last would be reasonable and would prevent knee-jerk overreactions, and I’ve seen my clients do it by using strategy simulations to set performance expectations. But companies generally insist that results should get better, better, better, and a sales decline happens at your peril, and the short-attention-span performance reports companies use neither remember nor remark on “effects of competitors simply catching up.” So you’re going to feel some pressure and heat. (See also Do Not Overtighten and Do Something.)

Time passes. Sooner or later there is a new floor, a new baseline, a level playing field, in which pretty much everyone who could adopt the tags has adopted them. They become a part of the background in the same way that bar codes, credit cards, and electronic cash registers have. Are they worthwhile only during the time you’re the only one with the technology — the first-tagger advantage — or are they beneficial also when everyone uses them? Do they hurt when everyone has adopted them? (See also Putting the Lesson Before the Test.) That question is answerable, although we won’t answer it here. Note that the Avery study reported an increase in sales in one year; it said nothing about profit or subsequent years. (That may be due to the Journal’s reporting, not to the study itself.) The tags may be profitable if they cut costs by via fewer stock-outs, less over-ordering, and less theft. They may be unprofitable if they mostly add costs, such as equipment and systems to track the tagged items, labor to restock shelves, and higher costs from suppliers. Or they may be neutral, as prices and costs rebalance.

Ironically, the company-centric numbers we use to gauge our performance can make it appear that the benefits are better for the later adopters. The first-tagger appears to get a temporary boost; the later-taggers appear to get a lasting improvement. Translate that into performance reviews: the first-tagger decision-makers seem to have over-promised, the later-tagger decision-makers look like turn-around heroes.

So, there are two dangers in being the first one.

1. You may attract competition and thereby change the path to profits you expected to walk. A risk factor for such disappointment is whether your decision-making is done with company-centric, accounting-based spreadsheets. Recommendation: Consider how your world will look if everyone else follows you. Would you still be glad you made the move?
2. It’s easy to misinterpret the change in your results when your competitors catch up. A risk factor for such misinterpretation is whether your performance assessment looks more at effects than at causes. Recommendation: Consider what external events would have a causal impact on your results. Track those events as well as your numbers.

The best way to avoid those dangers is to think it through before you make your move. The point is not to be first, second, twelfth, or last. The point is to make good decisions.

“It’s an enviable position when you’re the only one.” — Lord Tolloller to Lord Mountararat, lamenting that he’s not the only one in love with the heroine, in Gilbert & Sullivan’s Iolanthe.

Postscript. Hmmm. 14.3% exactly equals 1/7. Could that precise percentage have come from rough estimates? I read in a terrific book, probably one of John Allen Paulos’ Innumeracy series, about the average weight of a species of hummingbird. (I’ve got the story right but perhaps not the specific numbers, so don’t quote me.) The bird’s weight was reported as 113.5 grams, which seemed awfully precise. Except that 113.5 grams exactly equals 4 ounces, and we can easily imagine someone saying “this bird weighs about ¼ pound.”

“The purpose of writing is to inflate weak ideas, obscure pure reasoning, and inhibit clarity. With a little practice, writing can be an intimidating and impenetrable fog!” — Bill Watterson (1958-), author of the comic strip “Calvin & Hobbes”

Based on a recent discussion on the Business Strategy & Competitive Strategy Forum of LinkedIn.com, many strategists must fight their way through intimidating and impenetrable fogs of strategy.

One brave warrior, weary of the fog, asked this clear, straightforward, and provocative question:

Where is the evidence that a clear strategy makes a company more likely to succeed?

Many opinions were offered. Rather than summarize and paraphrase others’, I will share mine. I’ve gently edited what I originally wrote to include stuff I should have included before and to make me look smarter now than I did then. Here we go.

That brave question is stunningly difficult to answer.

We can quickly dispense with any suggestion that clarity is enough by itself. A clear-but-lousy strategy is still a lousy strategy. Clarity might help such a strategy perform better than lack of clarity, and it might not, but even if it helps, that’s small comfort.

I worked for 15 years at The PIMS Program (Profit Impact of Market Strategy), created by the brilliant Sidney Schoeffler. SPI had a multi-year database of thousands of real-life businesses contributed by hundreds of businesses around the world. The PIMS Program was perhaps the largest, most comprehensive effort to learn what’s different between businesses that perform well and businesses that perform badly. The research succeeded. However, whether those differentiating factors were the result of clarity, strategy decisions by the business, strategy decisions by competitors, or just plain serendipity, could not be known even with that monumental effort (note 1).

I did research on the PIMS database with Prof. Robert D. Buzzell of Harvard Business School on how much of their performance-potential businesses actually achieved. The short answer: not much (note 2).  Even strategies that seem to succeed often performed worse than they could have. Our research on how much success is possible reminds us that the strategy-clarity issue begs the question of how to gauge success. Performing better than competitors? Better than targets? Better than last year? A high percentage of potential performance? A rising stock price?

Let’s not stop with clarifying success. Let’s also clarify clarity. What do we have when we have a “clear” strategy? Agreement on each person’s role in operating a strategy? Step-by-step instructions? Does “clarity” mean execution, in the sense that it’s difficult to execute an unclear strategy well?

This is getting complicated. But wait, there’s more! And don’t worry. I see, of all things, a useful bumper sticker in our future.

Back to the idea of a strategy that succeeds. My recent work on strategy analysis, using decision tournaments or decision tests, makes clear something that’s intuitively obvious though often ignored: our performance is only partly under our control. Competitors’ strategies are relevant and can be more impactful than our own. What Netscape did made a difference to Netscape, but what Microsoft did made a bigger difference to Netscape. By most measures Netscape did not succeed, but what exactly was its failure? (note 3)

I’ve conducted many business war games with companies around the world over the last 18 years. Over and over I’ve seen seasoned strategists surprise themselves with the ideas they come up with, and when they have executed those strategies they have done well. This is hopeful for the clarity question because in war games strategists test and live through their strategy decisions, leading to an unusual level of clarity and consensus. Still, cases and “experience” are anecdotal; they’re not proof that clarity matters. Plus we have a survivor-bias problem: companies with clear strategies that failed aren’t around to tell us their stories.

Which brings us full circle to why the question is so difficult to answer. It’s difficult to satisfy a request for evidence because it is extraordinarily hard to set up an evidence-based test. We have good hints (PIMS), we have simulations (decision tournaments), we have anecdotes (business war games and other stories). We also have questions about the nature of success and clarity. But as far as I know, we don’t have evidence that links clarity to success.

The bottom line: A bumper sticker

I’ve found that when one question is too hard to answer, it’s helpful to ask a different question. Remember the bumper sticker that said “If you think education is expensive, try ignorance”? In this case, the bumper sticker would be this: “If you’re not sure it’s important to have a clear strategy, try an unclear strategy.”

So, here’s the best answer I can offer. Clarity is good, but as an effect, not a cause. To me, the well-intentioned desire to cause clarity by issuing marching orders can lead unintentionally to rigidity. Clarity as an effect of rigorous strategic thinking, stress-testing, war-gaming, and the like, is more successful. I don’t have data to prove it, but at least that interpretation is consistent with my experience, analysis, and research.

If you’re not sure it’s important to have a clear strategy, try an unclear strategy. Assuming, of course, that it’s a non-lousy strategy.

Notes

1) That’s not a flaw in the design of the PIMS database or the research conducted on it. If you think about what would be required to tease apart the necessary variables — and we thought about it, a lot — you’ll probably come to the same conclusion we did, which is that it’s extremely hard to do in any practical way. Moreover, knowing why strategists did something was not the program’s objective. The objective was to know the consequences of what strategists did regardless of why they did it.

2) The methodology is too complex to describe here but it’s available in a Sloan Management Review article that Prof. Buzzell and I wrote, “Managing for Tomorrow.” See Buzzell, R.D. and Chussil, M.J. (1985) “Managing for Tomorrow,” Sloan Management Review, Vol. 26, No. 4, pp.3–14. That article also appears as a chapter in The PIMS Principles by Buzzell and Bradley T. Gale.

3) One could argue that Netscape should not have tried in the first place. On the other hand, some people did make money. AOL bought Netscape in 1998 for stock valued at $4.2 billion. (AOL received $750 million from Microsoft in 2003 as a settlement in an antitrust lawsuit.) Then again, other people lost money. Netscape was disbanded in 2003.

This is my modest contribution to a vigorous LinkedIn discussion about Twitter. I edited it slightly to make me sound smarter than I originally did. Some in the discussion argued good-humoredly that Twitter is an important new force. Others argued good-humoredly that it is a useless new farce. Both groups had copious supporting anecdotes and analogies.

As you read here, think of the arguments about competitive-strategy options you’ve heard.

Fascinating. This is fun. Thank you all. Seriously, thank you.

This is just like politics: anecdote and analogy. And, just like politics, there’s always an anecdote and analogy that supports one’s side. I happen to find one side’s anecdotes and analogies more compelling than the other side’s, but who cares? I haven’t any followers. [If you “tweet” well, you accumulate people who “follow” your every 140 characters.] I don’t tweet, therefore I am not.

Something always works, or at least seems to work, and the people who jump on its bandwagon appear prescient. Something always fails, or at least seems to fail, and the people who stay off its bandwagon appear prudent. This is why we have, and need, the scientific method.

Okay, okay, the quick movers with twitchy texting fingers are groaning at the fuddy-duddy who wants actual evidence of efficacy. The lack of such evidence is why I don’t buy into, say, astrology and homeopathy. I do, however, appreciate my late grandfather’s advice: if you eat borscht for 90 years, you’ll live to be old. He missed by six months. He should have eaten borscht longer, I suppose.

But back to Twitter. I appreciate that evidence of efficacy may be hard to come by, especially if no one is collecting evidence other than the bandwidth consumed or the number of numb-fingered twitterers. I would provisionally settle for a testable causal theory that, if true, would explain why Twitter would work under X conditions and not work under Y conditions. We also have to define what it means to “work.” Boost sales? Improve the quality of decisions? Make our lives happier?

In lieu of evidence and a causal theory, I say that if you like to tweet, go ahead and tweet. You don’t need to justify it — and you cannot justify it —any more than you need to justify a preference for cabernet sauvignon over pinot noir. Recognize that the burden of proof (not the burden of anecdote) is on you if you want to convince the rest of us that we “should” tweet.

If you don’t like to tweet, don’t tweet. You don’t need to justify it either, nor can you.

Besides, who needs to be in such constant communication? But enough of that. If you’ll excuse me, I simply must check my email.

A poetic note about the lack of evidence. “I hope that while so many people are out smelling the flowers, someone is taking the time to plant some.” — Herbert Rappaport (1913-1999?).

Further reading: House, MBA and “How To Think Better.”

Update, June 2010: And now I tweet, for ACS and for my book Nice Start: Questions Only You Can Answer to Create the Life Only You Can Live. Follow @BusinessWarGame and @NiceStart, respectively.

Update, October 2010. See Malcolm Gladwell in The New Yorker on Small Change: Why the revolution will not be tweeted. And then there’s Amy McMullen’s retort in Salon, Malcolm Gladwell is wrong about the revolution.

Why “again”? Because this isn’t the first time. See also Honey, We Shrunk The Industry, published in Competitive Intelligence magazine, July/August 2009.

A business war game. Five automaker teams: Ford, GM, Hyundai, Toyota, Volkswagen. Three market segments. Two years. One set of consumer judges, one set of investor judges. Fascinating results, again.

The automaker teams were smart and they wanted to win. Yet collectively their decisions subtracted roughly $15 billion of simulated profits from the industry over two years.

It appears that company-centric financial approaches (what are our costs, how much capacity should we mothball) instead of competitive analysis (what will our competitors do, how will consumers respond) led to those problems. In effect, the automaker teams worked by the book, but the book didn’t work.

The good news: Anyone who’d gone through the war game would be less likely to make those mistakes in real life. They would have a competitive advantage.

Background

On September 30, 2009, the front line in the automobile wars could be found in a conference room at Northrop Grumman outside Washington, DC. That’s where a group of 20 strategists converged to war-game the industry. Sponsored by the Greater DC chapter of the Society of Competitive Intelligence Professionals and facilitated by me, the war-game used a simplified version of ACS’ ValueWar™ strategy simulator, customized for the auto industry.

The war-game exercise was designed to demonstrate war-gaming, not to solve the problems of the auto industry. After all, the industry’s problems took decades to build, and it would take our talented strategists more than three hours to fix them all. That said, it was fascinating to see many of the industry’s woes reenacted — and understood — in those three hours. Moreover, the strategists saw for themselves how war-gaming provides a new look at businesses people know well.

War games are not about a consultant or guru dispensing advice to eager supplicants. They are about business strategists living through future scenarios in fast forward and discovering lessons for themselves. They are about strategists making the most of their knowledge, expertise, and creativity. They are about smart people teaching themselves. War games make it possible in a way that conventional strategy development does not.

Why A Business War Game?

Business war games provide a new look at businesses we already know by having us role-play competitors and customers in addition to ourselves, by having us compete as well as compute, by having us encounter action and reaction rather than assume bigger and better. They let us explore and stress-test in a safe environment, where mistakes mean oops instead of ouch.

We can think of business war games as being the highest of three levels of competitive inquiry.

• “What do you think they will do?” This is a basic competitive-analysis question. It explicitly treats competitors as “them.” Strategists, being human, tend to view “them” as less capable than “us.” In practice, answers to this question are often extrapolations of competitors’ past actions.
• “What would you do if you were them?” This question is a major improvement because it encourages the strategist to look through competitors’ eyes. It greatly reduces wishful thinking. Brainstorming or scenario-planning programs may use this question, assuming that they explicitly consider competitors.
• “You are them. You want to win. Go!” This is what happens in a business war game. Strategists don’t only look through competitors’ eyes; they walk in competitors’ shoes. Business war games tap human competitiveness and desires to win. They make tough sparring partners out of genial colleagues. The sparring partners find the flaws in their company’s strategy just as real competitors will. And so strategies get stress tests second only to real life.

The Design Of The Automobile War Game

Teams, segments, judges, and decisions

We divided the war game participants into five automaker teams: Ford, GM, Hyundai, Toyota, and Volkswagen. For the purpose of this war game, these teams/companies competed in three USA market segments:

• Big Tough (roughly SUVs). In the game, this segment was slowly shrinking.
• Slick Style (roughly upscale sedans). This segment was steady.
• Cool Green (roughly eco-friendly vehicles). This segment was slowly growing.

Why five teams? Not to be flip, but three would have been too few for participants to experience the richness of the industry and seven would have been too many to handle in the time we had. Similarly, one segment would have been too few and five too many. Three made for manageable tasks and complexity. Of course, there’s nothing about war gaming that forces those limits. I’ve run war games with eight competitors and with ten segments, and I’ve designed simulation software that can handle dozens of competitors in scores of segments.

We had two judge teams too, representing consumers and investors. The automaker teams would find it difficult to win the war game by creating unidimensional customer-satisfaction or shareholder-wealth strategies. They would have to make real-world tradeoffs.

In addition to excluding some competitors and market segments, we excluded decisions regarding labor, pensions, healthcare, debt service, dealers, government regulations, and suppliers.  We did that for reasons of time and complexity. For the same reasons we limited the game to decisions for pricing, marketing, production, and capacity. That may sound like a short list — real business war games may allow strategists to work with many strategy levers — but it was more than enough to simulate the dilemmas and debacles that real automakers face in real life.

In addition to making pricing and other decisions, the automaker teams presented marketing pitches to the consumer judges and business pitches to the investor judges. The judges’ assessments joined the teams’ decisions in the simulator, which did the arithmetic to estimate demand, sales, profits, and market share.

Calculating outcomes

We used a computer-based strategy simulator, calibrated for the five automakers and the three market segments, to calculate the demand, sales, market shares, and profit consequences of the teams’ strategies. The model took into account common-sense connections like the following. Some of those connections work similarly in other industries, and some don’t.

• Customers have choices. If you invest in marketing or product improvements that customers like, and if you do it better than your competitors, then demand for your autos will rise. If you sit on your laurels, demand is likely to fall.
• Some customers are loyal and will buy again from the same automaker. Other customers are not loyal and will make conscious purchase decisions.
• Price affects both demand and the bottom line. Demand, through customer purchase decisions. The bottom line, by rippling through revenue and costs.
• You decide how much to produce before you find out how much customers want to buy. You cannot sell more than you produce.
• If an automaker cannot satisfy demand, some customers will buy from its competitors (if they have produced enough cars). Other customers will not buy at all if the car they want is unavailable.
• Production capacity costs money. An automaker can save some money by mothballing capacity. However, mothballing will limit what it can produce, and mothballed capacity cannot be brought back on line quickly.
• And more.

There is much more to say about simulation design, customization to industries, and other aspects of business war-gaming, but we won’t say it here. (See other articles and essays on this website.) What’s important is that it is possible to simulate and war-game virtually any industry. My colleagues and I have conducted war games with management in dozens of industries, from airlines to vaccines, on six continents.

About accuracy

All in all, the simulator estimated outcomes pretty well, and definitely better than conventional company-centric analyses. “Estimated” is an important word. We didn’t pretend that this simulator was “accurate” (no analysis of the future is). However, it was definitely realistic and directionally correct, which makes it highly useful for evaluating and stress-testing strategy moves.

Accuracy in future-looking simulations is a fairly complex subject and bigger than I’ll treat here. I’ll just say this. No matter what, strategists will make decisions. The relevant question is not whether a simulation is accurate. The relevant question is whether a strategist can make a better decision with a simulation than without. Oh, and I’ll also say this. There is always a model in strategy decisions. It may be in someone’s head, it may be in a spreadsheet, it may be in a simulator. Choose your model consciously.

Publicly available information and realistic estimates

The war game used publicly available information and realistic estimates as the basis for strategizing and simulating. Nothing proprietary or mysterious, nothing contentious. As in most business war games, the action and the insights come from strategists’ thinking, behavior, assumptions, and decisions, not from decimal points or obscure factoids.

Two rounds (year 1 and year 2) and three hours

The auto teams made decisions about their company’s pricing, marketing, production, and capacity mothballing. They made those decisions for year 1 and we fed their decisions into the simulator. We shared key year-1 results with the teams before they completed their year-2 decisions. They made their decisions for year 2 and we simulated those results too. All, including a debriefing, in three energetic hours (very fast for a business war game).

A level playing field

The five automakers we chose for the war game didn’t start from equal positions and they didn’t have equal resources. We took that into account in the scoring process to ensure that every automaker team had an equal opportunity to win.

It helps for the teams participating in a war game to know there will be a winner because it taps the competitive emotions that affect real-life decision-making. During the business war games we’ve run for real business situations, we’ve seen a company’s own people cheer when they, role-playing the competition, beat their own company! That’s good for the same reason that a boxer wants to practice with a tough sparring partner.

The hard part: Strategic thinking

Competitive strategy is often likened to chess for its complexity and to poker for its competitive interplay. It’s tougher than chess and poker, though, because in competitive strategy the contestants make their moves simultaneously instead of sequentially. You make your strategy decisions before you know your competitors’ strategy decisions.

Take, for instance, this war game.  If you know your competitors will focus on the Slick Style segment and cut production in the Big Tough segment, it’d be reasonable for you to do the reverse. Problem is, simultaneous moves means you don’t and won’t know that. You have to commit to your moves before you know what your competitors will do. (That’s why it’s so helpful to find clues with competitive intelligence and what-if analysis.) It’s a classic and difficult problem, and it affected the automakers in the war game. Here are some of the consequences and the lessons we can draw from them.

Lessons From The War Game

We’ve  run this war game before (June 2009), with SCIP Oregon. We can run it again, too. Contact ACS at info@whatifyourstrategy.com if you’re interested.

Some of the lessons we observed in the previous war game are similar to those from the DC war game, and some are different. The differences are important because they show there’s more than one set of possible strategies and outcomes. The similarities are important because they reveal how strategists commonly think.

These lessons cite various numbers from the simulation. As I said, the numbers are not “accurate.” However, they are sensible and meaningful, and none of the lessons below would materially change if the numbers were off by considerable amounts.

Do not use any information or analysis presented here to make investment or other weighty decisions about the auto industry!

Lesson 1. History isn’t all it used to be

It always happens: strategists tend to think in terms of where they were last year and then adjust up or down. It’s related to a phenomenon that psychologists call “anchoring.” More importantly, it’s due in part to assumptions that there is some kind of static, steady-state, or equilibrium position, assumptions that are reinforced by trend-line and other analyses.

This war game was no exception. Teams went into exquisite calculations with decimal-point precision, figuring out this year in terms of last year plus or minus.

As a result, the Toyota team produced fewer cars than it could have sold. How many? Across the three segments, over 1.2 million in year 1 and 1.3 million in year 2. At prices around $25,000 per car, that means roughly $30 billion in revenue left on the table each year.

The Toyota team wasn’t alone. The GM team was short 581,000 Big Toughs in year 2; there goes $15 billion, more or less. Ford and GM were short 164,000 Slick Style and 260,000 Big Tough cars, respectively, in year 1. Hyundai was low by 138,000 Slick Styles in year 2, which amounts to over 10% of their total sales.

Those shortfalls became unearned bonuses for the automakers who produced more cars than consumers wanted to buy. In other words, automakers who had extra cars to sell were able to sell some to disappointed customers of the out-of-stock automakers. For instance, GM picked up Slick Style sales roughly equal to Hyundai’s shortfall.

Why didn’t the automaker teams know better? Arguably not because they didn’t have enough time, because teams that have hours to develop strategies do the same thing. Definitely not because they were stupid, misinformed, or indifferent, because they were smart, well-informed, and motivated. Why, then? Partly because it’s not the way strategy development usually works. Partly because it’s really hard: it requires analyzing multiple moving parts, including competitors, consumers, production and segment allocations, price, mothballing, marketing spending, and resulting sales. And partly because few people have experience with that kind of systems thinking. All of which are reasons why war games are so surprising and so useful.

Lesson 2. Don’t forget the consumer

In my experience with business war games, teams usually pander to consumers. They promise the earth, they promise the moon, they try to outdo each other by offering shiny baubles and promising elysian delights at bargain prices.

Not this time. Even though I urged the teams several times to produce advertisements to appeal to consumers, and even though I told the teams that reactions from the consumer judges would greatly influence their sales, the teams’ presentations focused almost entirely on the investor judges. There was a minor battle for supremacy of slogans, but that was about it for consumers.

It showed up in the judges’ questions. A consumer judge asked over and over, “Why should I buy a car from you?”

It showed up in the judges’ ratings. On a 0-10 scale, where 0 means not good and 10 means not bad, the average investor ratings were 5.9 in year 1 and 6.9 in year 2. Consumer ratings were 5.1 and 4.8, respectively.

And it showed up in the teams’ results. In year 2, Ford made 1.3 million vehicles it couldn’t sell. They also had low ratings from the consumer judges. The low ratings from the consumers translated into low demand. Low demand in itself doesn’t hurt, but it does when combined with high production and heavy fixed costs for capacity, which is what Ford faced. If Ford had sold those cars, it might have broken even.

GM would have faced a similar fate except it didn’t overproduce quite so much. It only made about 690,000 cars it couldn’t sell, which also represented the difference between a major loss and breakeven.

Volkswagen was hurting too. They had 245,000 leftovers in year 2 (up from 98,000 in year 1). A smaller number, but it was the highest leftover percentage in the game: 51% of the cars made by Volkswagen went unsold.

Meanwhile, Toyota sold out, and Hyundai almost sold out. Toyota was strongly profitable in year 2, and Hyundai was a short drive away from making money. Those were the automakers the consumers liked most and that didn’t over-produce.

Lesson 3. Numbers aren’t only about numbers

Even though we’ve got a bunch of numbers here, the numbers aren’t the point. The point is about the way the teams competed. All of the teams did some things right. All the teams made mistakes, some costing tens of billions of dollars in actual costs or opportunity costs. But the interesting part is where the numbers came from. The numbers — sales, shortfalls, and profits — are, of course, results of doing things right, and of mistakes.

The numbers in the teams’ decisions are expressions of their thinking. The decisions reflected the teams’ predictions and assessments of what moves would work for them. They prioritized their time to focus on investors instead of consumers not because they thought that was a bad idea, but because they thought it was a good idea. They spent $X on marketing because they believed $X was the right amount to spend on marketing, not because they believed $X was the wrong amount. If they thought different decisions would have worked better, they would have made those decisions.

• Speaking about marketing, the teams held their marketing expenses very close to where those expenses began. I don’t know why, other than perhaps taking a budget-oriented perspective: if I overspend I’ll get in trouble, if I underspend I’ll get less next year. (I’ve seen that in other business war games too, where we told participants that they could spend whatever they wanted and all of them kept within a few percentage points of their previous spending.) There were some tweaks, as with prices, but the changes were, in effect, noise.
• The teams focused efforts on the numbers rather than on consumer appeal (i.e., the ads they were encouraged to create), yet the latter could have had tremendous impact. (We could say that the problem wasn’t that some overproduced, it was that they undersold.) Not so dissimilar to what strategists face in real life: huge focus on the numbers and planning, less on blue-sky thinking. It makes incumbents vulnerable to upstarts. Why, after all, is it even possible for upstarts to gain a toehold against incumbents? Incumbents have, or at least can have, all the advantages. The only advantage an upstart can have is thinking differently, and thereby acting differently.
• The calculations some teams recorded for mothballing decisions suggest that the teams were trying to optimize a financial statement rather than to create a competitive strategy. An interesting (at least to me) question is whether it’s better to have a shortfall or to expand capacity to ensure that no demand goes unsatisfied. A strong argument can be made that many woes are due to a desire never to leave money on the table. People can lose a lot of money trying not to leave behind a little bit of money. I’m not saying that a company should go one way or the other. I am saying that there is often a hidden assumption that we should (and can) match supply to demand, and it’s good to notice and challenge hidden assumptions from time to time.

True, the teams didn’t have much time to formulate their strategies. Still, the way they chose to spend their limited time reflects what they believed to be important.

Lesson 4. It’s not enough to be smart

The people participating in our war game were really smart. Those who have participated in other war games were also really smart. The problem is, it’s not enough to be smart. None of us is able to do all the arithmetic in our heads. I’m not saying that any team made mistakes; then again, we all know that no one is always right. Plus, we know that individuals can make rational decisions that, in combination, produce undesired results.

The thing is, when it comes to strategy it’s even hard to tell when an individual or a team is smart. Say you got terrific results. How much of that is because you did something smart and how much is because someone else did something not smart? How much of your decisions were due to luck and how much to thoughtful analysis? How do you know if the same moves will work next year? It can be hard to resist the automatic conclusion that our strategy is working.

We say that people learn from experience. The trick is to get experience where it’s cheap, and to get lots of it. Business war games are cheap, plentiful experience. Cheap, because you’re not playing with real money and real careers. Plentiful, because you can test multi-year strategies in a few hours. With computer simulations, you can test them in a few seconds.

Lesson 5. Define “winning”

The auto team that scored best on profits was Toyota. (That’s a statement about the Toyota war-game team as well as the Toyota brand itself. By no means was Toyota predestined to be big and profitable in the war game.) GM had the biggest overall market share, but Toyota was within rounding error of them. It appears that Toyota had a winning strategy. Appears. However, they were the team that had by far the biggest capacity shortfall in both years. Over two years that team could have sold over 2,500,000 more vehicles. They could have sold roughly $60 billion more.

Other tidbits:

• Toyota gained by far the most share, despite their shortfalls. They wouldn’t have if they had mothballed more capacity.
• Ford took it on the chin. They might not have if they had built less and mothballed more, or if they had impressed the consumer judges more.
• Volkswagen lost a little share. Hyundai gained a bit. GM pretty much held still.

So, did the Toyota team do well (highest profits, biggest share gain) or did they do badly (biggest opportunity lost)? Hard to know. But we do know that it would be hard to see the situation with a conventional spreadsheet, and it was easy to see in a war game with a strategy simulator.

Conversely, the simulation had the Toyota team’s competitors pick up much of what the Toyota team left behind. In effect, the Toyota team’s mistake became a gift that inflated the other teams’ results and that made them look better than their decisions warranted.

Lesson 6. To find better strategies, look again

Of course the teams might have come up with better strategies if they’d had more time. More importantly, the teams would probably have come up with better strategies if we had the time to turn back the clock and try a second round of strategizing.

In the real business war games I’ve conducted, disappointments from the first rounds are essential to getting people’s attention and stimulating people’s creativity. The second set of simulations are where the best strategy ideas come up. Just think: if you’d participated in this business war game, and you knew all these lessons (and more), wouldn’t that help you develop a much better strategy?

Ever see a Fortune 500 company turn on a dime? I have. It’s with the process similar to the one we ran, with those second or third rounds. The key is to get quickly and persuasively to the second or third rounds.

Incidentally, my colleagues and I are strategy agnostic. We don’t come in with a favorite strategy. I for one don’t even care what strategy the company ends up adopting. What I do care about, and I care about this deeply, is the quality of the company’s strategic thinking and decision-making. I don’t care if the right answer for your company is to zig or to zag. I care a lot about helping you find the right answer, whatever it turns out to be.

And In Conclusion

As obvious as those lessons may appear now, they were not obvious before the war game. Corollary: what appears obvious before a war game often turns out to be a really bad idea. That lesson and its corollary are the rule, not the exception, in real business war-gaming.

Business war-gaming and strategy simulations are big subjects and we’ve just scratched the surface. I urge you to learn more about them. Qualitative or quantitative, formal or informal, big or small, facilitated by you or outsiders… business war games help strategists make much better strategy decisions.

Thanks, and congratulations

My thanks to the Greater DC Chapter of SCIP, especially to August Jackson and Jeff Trexel, for inviting me to present the automobile industry business war game.

My thanks to the intrepid strategists who gave their all to the automobile industry for three hours. It was a huge challenge, and you rose to the occasion with intelligence, critical thinking, and humor. You brought great ideas, open minds, and good cheer to the event. Well done.

Congratulations to the Top Strategists on the top-scoring team, Toyota, and to the judges who asked great questions as consumers and investors. Honorable mention to the Hyundai team, which was within a decimal point of Toyota.

The blog essay that used to live here was published  in the July/August 2009 issue of Competitive Intelligence magazine (www.scip.org). You can see the article in the Library section of ACS’ website, or click here to go directly to it.

There’s also a sequel to this essay, called Honey, We Shrunk The Industry Again.

Our thanks to SCIP Oregon for inviting us to present the automobile industry business war game. Specifically, our thanks to the extraordinary team of Sean Campbell and Scott Swigart of Cascade Insights.

Our thanks to the intrepid strategists who gave their all to the automobile industry for four hours. It was a huge challenge, and you rose to the occasion with creativity, critical thinking, and good cheer. Well done.

Our congratulations to the Top Strategists on the top-scoring team and to the Top Strategist judges who asked great questions as consumers and investors.

If you would like to experience the automobile business war game or any of ACS’ other programs, please contact us at info@whatifyourstrategy.com.