This piece is excerpted from Predictable Winners: A Handbook for Developing, Forecasting, and Launching New Products and Services by Stuart E. Jackson and Ilya Trakhtenberg. Jackson is Vice Chairman & Leading Adviser on Corporate Growth and Innovation at L.E.K. Consulting. Trakhtenberg is a Partner and Managing Director in L.E.K. Consulting’s Chicago office and a leading partner in its healthcare practice
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The place that we call the “product graveyard” is full of great ideas that became great products that—as it turned out—no one actually wanted to buy.
Avoiding that graveyard requires a few things: developing the right product/market fit, defining a customer runway, and ensuring that you are configured to succeed against competitors. In this excerpt, we dig into the competitive dynamics you need to evaluate to meet that last precondition: ensuring that you can win in the market against competitors. This is, of course, critical to improving the odds of success for your innovation.
Competition is a thoroughly studied and well understood topic, in both economics texts and in business literature. Seminal works in strategy—like Michael Porter’s 1980s classic Competitive Strategy—increased the acuity with which business leaders began to think about this topic. The technology disruptions of the 1990s and 2000s further heightened interest in what determines a sustainable competitive position, leading to works like Jim Collins’s Good to Great. Your authors, too, have contributed to the literature of competition by introducing concepts like Strategic Market Position (SMP) in Where Value Hides, which highlighted the importance of defining market segments appropriately to accrue competitive advantage.
So in a sense, this is already a crowded space—and our goal here is not to introduce yet another framework for thinking about competition and competitive advantage. Instead, we focus on bringing some of these good ideas into the marketplace. Why is this important? We’ve seen in our practice that innovators, and business leaders more broadly, struggle to operationalize the many insights available on the topic of competition. Our observations from real world practice of strategy are that business leaders
- systematically define their competitive sets incorrectly;
- consistently underestimate their competitors; and
- underinvest in understanding competitive responses.
Let’s turn that list around into a positive assertion: If you can successfully address these missteps, you will be well positioned to understand how and why your competitors go to market, and you will be able to predict their behavior. This, in turn, will enable you to pursue the right strategy to win in the market.
Define Your Current and Future Competitive Set
Starting with the first of our three observations above, most innovators think too myopically—or, ironically, too broadly—about their competitive sets.
To explore this point, let’s look at the coffee market and the story of Nespresso. Nespresso, part of the Nestlé Group, sells machines that brew espresso- based coffee drinks rapidly from single-use pods.
The story began in the mid-1970s, when a young Nestlé engineer named Eric Favre was tasked with finding a product that could sit somewhere on the spectrum between tasty/laborious (ground coffee from an espresso machine) and less tasty/effortless (instant coffee). Inspired by the espresso machines he had seen in Rome, Favre came up with a technology that used sealed coffee pods (to ensure freshness) injected with hot water at high pressure. It was far from an overnight success story, but for the sake of brevity, let’s jump to the punchline: in 2020, the Nespresso division was selling 14 billion coffee capsules a year, which amounts to something like 400 Nespresso pods consumed every second, in more than eighty countries around the world. By 2022, Nespresso’s revenues were approaching $6.5 billion.
Going back to the outset of that story, one could assume that Nespresso’s competitive set was, and is, coffee makers and instant coffee—but that would be an overly narrow definition. What if on this particular morning, instead of drinking your coffee at home, you grab it on the way to the office? That would make coffee shops and other food service venues also “competitors” to your Nespresso machine, in a sense. Or what if today, you decide to drink tea instead of coffee or maybe a Coke or a Red Bull later in the morning or as an afternoon pick-me-up? Well, those too could be considered competitors. But wait—are we starting to think a bit too broadly? Arguably, we are.
So how do you define your set of competitors correctly?
First, let’s recognize that there are different types of competitors that can be characterized as being most similar or least similar to your product or service. In the first group are your direct competitors: those market players that are most closely aligned with your value proposition and set of use cases. In the case of Nespresso, in-home machines would be considered direct competitors, as they seek to provide the taste of coffee-shop drinks at home. In the second group—least-similar competitors—are your indirect competitors. In Nespresso’s case, instant coffee and bulk drip coffee—as well as the local coffee shop or the corner Starbucks—are indirect competitors.
Finally, something like tea (and, to a lesser extent, Coke and Red Bull) would be considered substitutes, which—although they can compete for some of the same demand—should be assigned to a different category. But “different” doesn’t necessarily mean “less important.” Substitutes are often entirely omitted when defining competitive sets—and that omission can be a serious mistake. Substitutes can include technologies that create a new competitive category (e.g., portable CD players like Sony’s Discman being challenged, and ultimately replaced, by mp3 players like Apple’s iPod) or that chip away at or even negate the need for a product (e.g., electric vehicles reducing market demand for gas stations). Sometimes the substitute is not using the product at all. This is particularly true when creating a new market.
When you’re undertaking incremental innovations in a well-understood market, it isn’t difficult to define your competitive set. It is much more difficult to define a competitive set for breakthrough innovations, since— by definition—you’re creating something novel that rarely has much direct competition. Ultimately, the right way to define your competitors is by determining who is in the consideration set when the customer is making a buying decision. By extension, this also means that, even for the same customer, your competitive set may not always be the same but may vary by use case (e.g., your morning cup of coffee may always be Nespresso, but your afternoon cup may depend on whether or not you are at home). Determining which use case or cases you are competing for can therefore be critical.
More often than not, innovators are surprised to learn that their true competitive set is so narrow for any given customer and use case pairing. In our experience, irrespective of industry, the true competitive set for a buying decision is usually fewer than five competitors.
This is true even in highly competitive industries, in part because customers typically use a variety of purchasing criteria (e.g., price, quality, reputation) to narrow down the consideration set to a manageable number of options. For example, there are dozens of car brands, but once you specify your preferred body type (e.g., sedan vs. SUV), size, motor type (e.g., gas vs. electric vs. hybrid), and price range, the list gets surprisingly narrow. The same is true in our own industry: consulting. While there are many thousands of consulting firms, clients rarely look at more than three or four for a specific type of service in a specific sector.
One last thing to add on defining the competitive set: Don’t forget to look ahead! Innovators need to be particularly wary of future competition. For many, this doesn’t come naturally: People are often too focused on the static state of the competition they are trying to beat right now, today. But just because you are the disruptor today doesn’t mean you won’t be the disrupted tomorrow. Your competitive set will almost certainly evolve. Therefore, you need to have a view on who you will be competing with at various milestones on the timeline: one year post-launch, three years, five years, and possibly beyond.
At the risk of stating the obvious, this can have substantial implications for your financial forecast (e.g., share loss to new branded or generic drugs in pharma) and for your value proposition and messaging, your customer runway (e.g., priority of customer segments), your launch planning (e.g., limited vs. full-scale launch), and your continuing product development (your R&D priorities going forward). This may require you to consider different competitive scenarios.
Understand Your Competitors and Their Advantages and Disadvantages
Once you have appropriately defined the competitors for your innovation, you need to ensure that you have a sufficient understanding of them. Competitive intelligence-gathering is well understood in the business world, so we won’t go into detail here, but we do recommend being thorough as well as creative. You can’t know your competitors too well. The more you understand them, the better you can predict how they will behave, and the more likely you are to pursue a winning strategy. You are also far less likely to underestimate them.
Your market-insight gathering efforts (e.g., interviews, surveys) should help you understand not only who your competitors are but also their positioning in the market, key strengths and weaknesses (real and perceived), go-to-market approaches, and so on. Many of the same datasets and techniques for gathering customer insights we describe elsewhere in the book can also be used for gathering data on your competitors in a systematic and cost-effective manner. This can include financial filings (if the competing company is publicly held), web-scraped data on portfolios and pricing, web traffic measures, customer reviews, employee reviews, job postings, regulatory filings, patent filings, fundraising data, press releases, news articles, and more. You can also use market datasets to estimate current share and share trends, often at high levels of granularity and accuracy, depending on the country and end market. In short, there is almost always an immense amount of data that can be gathered—and this is homework that many innovators do incompletely.
All this data gathering about your competitors will help you understand their true competitive advantages. As mentioned, there are many, many books—and probably too many business frameworks—devoted to defining and assessing “competitive advantage.” Even so, we’ve attended all too many corporate workshops during which the management team articulates their competitive advantages in such vague terms as “quality,” “people,” “service.” While these attributes may well be in place and may be contributing to the company’s success, we argue that much greater specificity is needed. What’s special about your organization that every other competitor wouldn’t also say?
Let’s keep it simple: A competitive advantage is the reason a competitor wins. Often, there aren’t that many entries on that list, and they’re not necessarily the most inspiring attributes. They may be strong relationships with hard-to-reach customers, control of a channel, expertise with manipulating a raw material, brand longevity, size of an installed base, and so on. These are all examples of real, tangible competitive advantages, which are both hard to replicate and contribute significantly to a winning strategy. Again, your competitive homework needs to help you to understand what’s on the short list for each of your key competitors.
Sometimes, your competitive advantage may simply be the flexibility to do things your competitors can’t. Among U.K. supermarkets in the early 1990s, Tesco was always a little behind the market leader, Sainsbury: lower share, lower margins, and a more down-market positioning. Ten years later, Tesco was twice the size of Sainsbury. How did this role reversal unfold? Yes, there were some innovations that Tesco brought in, such as its loyalty program, but the big reason they were able to gain share was simply that they built more stores. Sainsbury—with the founding family still owning a significant stake—targeted a hefty 21 percent return on equity. Tesco, by contrast, was happy with 18 percent, so a greater number of proposed store openings leapt over their investment hurdles, and they had more freedom to respond to low-price discounters. Investors were happy, too, because they could see the company was growing and gaining share.
One less well-covered aspect of competitive intelligence gathering in business is understanding the people in the competing organization. Let’s call this the Machiavellian side of competitive intelligence. On a fundamental level, competition is never truly between organizations; it is between people. Just as you are contemplating how to successfully win with your innovation, there is someone (or several such people) at each of your competitors plotting how to thwart you and all other competitive threats. In our experience, many innovators don’t even bother to identify the individual leaders who hold key positions in competing companies. But this can be critical. Getting a read on these individuals—their motivations, their experiences, and their track record—is critical to understanding how they may behave when you enter the market. How aggressively will they respond? How have they responded to competitive challenges in the past? What levers might they pull to protect their business interests, meet their P&L goals, and ensure their own career success?
Certainly, some of this data is much harder to uncover than publicly disclosed information. But speaking with former employees (“former” tends to be safer in a legal sense) and reading between the lines of your accumulated competitive data can provide a decent picture. And while this is generally hard work, it’s well worth the effort. Again: Identifying a competitor’s advantages goes beyond understanding the constraints within which an organization operates; it also comprises learning about the characters and personalities with whom you are competing—and how they might act within those constraints.
Use Wargaming to Predict and Prepare for Competitive Responses
Having developed a thorough understanding of your competitors, you’re now ready to play chess. It’s an overused metaphor, but in this case, it’s apt. You need to be thinking several moves ahead: “If I do this, what will each competitor do, and how will I respond?” Great chess players not only see the moves ahead and prepare; they make moves that force their opponent to respond in a specific way because there are no viable alternatives. So how to do this in the realm of business? A good place to start is to stop playing chess with yourself.
Most business leaders approach the task of determining their competitors’ actions as if they were playing chess with themselves. What do we mean by this? When you play chess with yourself, you’re always tempted to have “your opponent” play the game you want them to play. This is just human nature, right? You subconsciously bias your moves based on what you want the other side to do. In the business realm, competitive responses are usually assessed far too optimistically, and the range of possible actions assigned to competitors is far too narrow.
So how do you get out of your own way? One answer is wargaming. Borrowed from the military and adapted for business, wargaming is a technique whereby participants roleplay as different competitors. Participants are provided the background needed to “get into character”—that is, to simulate the mindset and perspective of the role to the extent that it is possible. This background material can often be created by leveraging the competitive intelligence gathered (e.g., a two- to five-page company profile). Next, one or more scenarios to be roleplayed are defined. A very basic example would be, “Company A launches product X to customer segment Y in year Z.” Finally, participants act out the scenario, determining their responses to that scenario from the perspective of the role they are playing.
The key to success with this technique is to give participants enough time to really get into their roles and put themselves in that competitor’s shoes. A robust wargaming exercise can take from a few hours to a full day, depending on the number of competitors, scenarios, and participants. As an aside: Wargaming can be used to play out scenarios not only with competitors but also with other stakeholders like channel partners and key customers, especially in the context of negotiations or strategic moves that can create conflicts.
Wargaming can be a very engaging experience, in part because it draws on the imagination of the players. More importantly, wargaming can be surprisingly effective in both broadening the range of potential competitive responses and bounding the likely outcomes. In effective wargaming, many ideas for possible actions can come up, but in most cases only a few paths will appear to be rational and likely.
This juncture is when it’s likely to prove helpful that you’ve done your homework on the individual stakeholders and not just the company with which you are competing. To boost creativity in your potential responses, it also can be helpful to acquaint yourself with the kinds of legal competitive responses that can be deployed by companies. In our experience, we have seen “aha” moments arise when previously hypothesized actions or scenarios are proven to be off-base and are replaced by more likely and more nuanced expectations for competitive responses.
Although wargaming can be highly useful, it’s very much underutilized in the business world. Why? Partly because of the time investment and thought required to do it right and partly because of general unfamiliarity with the technique. But the truth is, we have yet to see a wargaming exercise that “wasn’t worth it.” If it seems unlikely that your company will do the kind of deep dive described above, consider a less intense version of wargaming. You may get much of the benefit without as big an investment.
No matter how you proceed, keep in mind that the spirit of wargaming—and indeed, of most steps along the path of innovation—is to never assume that you are smarter than your competitors. Don’t underestimate your competitors. It’s almost always better to overestimate them and then be pleasantly surprised when they play into your chess game.
Executive Summary
- Define your competitors by those actually considered at the time of a customer buying decision, including direct and indirect competitors and substitutes.
- Remain wary not just of current competitors but also of future competitors.
- Invest in deeply understanding your competitors (both the organizations and key leaders).
- Identify real competitive advantages (reasons why someone wins) both for competitors and for yourself.
- Predict realistic competitor responses by putting yourself in their shoes through wargaming (i.e., don’t play chess with yourself).
Stuart E. Jackson is Vice Chairman & Leading Adviser on Corporate Growth and Innovation at L.E.K. Consulting. Ilya Trakhtenberg is a Partner and Managing Director in L.E.K. Consulting’s Chicago office and a leading partner in its healthcare practice.
