Shell finds the flaws in a major strategy initiative and saves $133 million | Advanced Competitive Strategies

Why would the move fail? Because, Shell managers discovered, the only logical reaction for their competitors would be to match Shell’s strategy. Shell’s short-term gains would quickly vanish as competitors built their own pumps. Consumer demand would not grow (people don’t drive more because there are more gas stations), so the same market would be spread more thinly. Meanwhile, the battling suppliers’ fixed-capital costs would increase because of the new pumps. Bottom line: Costs would rise, revenue would not, and profits would suffer.

The simulation did more than give a general sense of competitive reactions; it attached numbers to the result. By not implementing the strategy, the company would have earned a projected $211 million in one geographic market over five years. Implementing the strategy appeared to offer $315 million in additional profits — but after allowing for the likely competitive reaction, Shell would make only $182 million. In other words, rather than adding $104 million in profits, the strategy would ignite a firestorm that would consume $29 million, thus it would come in $133 million below expectations.

Shell decided to back off on the initiative, although currently it is poised to respond quickly if a competitor launches a “pump war.” The simulation was able to take the company to this point five years earlier and $133 million more efficiently than actual experience. Shell gained the experience without the expense of taking the test.

Those insights, like those from other ACS business war games, may seem obvious. Maybe they are…after the fact. Before and during war games, they weren’t. Those insights surprised the companies’ smart, experienced, motivated, well-informed, dedicated strategy teams.

One of the most startling and most valuable characteristics of business war games is that they pierce through conventional, habitual, acculturated thinking. It’s one thing to tell something to a human being; it’s another thing for a human being to experience it. It’s one thing to engage in comfortable fantasy about a business; it’s another thing to see smart, determined attacks against it. It’s one thing to ask for outside-the-box ideas in a conference room; it’s another thing to feel the competitive pres-sure, intellectual stimulation, and necessity to think differently.

In the 100 business war games ACS has conducted, “ah-ha” insights are the rule, not the exception. Every war game leads to at least one major surprise. Couldn’t strategists get those insights without business war games? Based on what we’ve seen, we conclude: apparently not.

From Wharton on Dynamic Competitive Strategy (George Day and David Reibstein, editors). Copyright © 1996 David J. Reibstein and Mark J. Chussil. Published by John Wiley & Sons, 1997.