Olin Expert: To gain competitive edge, companies should try war gaming

It has been nearly three years since the COVID-19 pandemic upended businesses worldwide. From supply chain disruptions to shipping delays, worker shortages and, now, the looming threat of a recession, it has been anything but business as usual ever since.

With so much uncertainty, how can businesses gain a competitive edge going into the new year and beyond? How can they better anticipate threats created by competitors, the economy, suppliers, politicians and more, and identify new opportunities?

One way is through the process of “war gaming,” according to John Horn, professor of practice in economics at Washington University’s Olin Business School and author of the forthcoming book “Inside the competitor’s mindset: How to predict their next move and position yourself for success.” In simple terms, war gaming is a simulation that allows risk-free analysis of how to act strategically in the actual marketplace, Horn said.

“War gaming gives businesses the opportunity to practice a series of situations in a risk-free environment so that when they confront that situation in the real world, they have better insight into the best way to respond.”

For centuries, militaries have conducted war gaming exercises to better anticipate how their enemies will act in battle. Likewise, war gaming in a business setting always involves other “players,” such as competitors, supply chain partners and regulators. War gaming is not used to test strategy against some abstract market model or in cases where decisions made—like the Federal Reserve raising interest rates—are outside the company’s influence, Horn explained.

Instead, the practice is used to test strategy based on how competitors, regulators and other influencers will react to choices you make, and how their choices could affect you. During the simulation, team members are given background information on the role they are assigned to play. Then, they develop their strategy and the facilitators determine the market outcome resulting from all the teams’ collective decisions. The workshop helps the organization gain insight into what works, and why.

Walk a mile in competitors’ shoes

Prior to joining the Olin Business School faculty, Horn worked as a senior expert in the strategy practice of McKinsey & Company. Over the course of nine years, he worked with more than 100 clients on competitive strategy, war gaming workshops and corporate and business unit strategy across a variety of industries and geographies.

“I began doing war gaming exercises because I wanted companies to experience what it was like to make those decisions, and to feel those decisions, both for themselves and for their competitors,” Horn said. “What I realized is that a lot of companies ignore their competitors because they think they are irrational. But it’s not that competitors are irrational. Companies have never taken the time to understand their competitor’s perspective and why they do what they do.

“Through role playing, you gain a better understanding of why your competitors make the choices they make, even if you do not agree with them.”

John Horn

“Through role playing, you gain a better understanding of why your competitors make the choices they make, even if you do not agree with them. Like, why are they lowering prices? Why are the focused in a particular region? Why are they topping my products? From there, leaders are better positioned to anticipate their future moves and how best to respond.”

Practical applications

There are many practical applications for war gaming, Horn said. It can be used when there’s something strategic you’re wanting to accomplish, like growing sales or introducing new products. War gaming also can be used to test how you and others in the industry will respond to things happening outside of your company, like a recession or a regulatory change.

Additionally, war gaming can be useful to understand how new technology or trends—like increased awareness about global warming or consumer demands—will impact your industry. And it can be employed in response to new competitors entering the market. These are just a few of the potential scenarios in which war gaming can help business leaders analyze the situation, Horn said.

With the threat of a recession looming, business leaders should be thinking about how an economic downturn could shake up their strategic plans and affect their bottom line, Horn said. War gaming might help.

Let’s say you owned a sporting goods company that struggled during the past two recessions. During the last recession, your chief competitor fared better. Through war gaming, you can analyze the possible decisions your competitors will make this time around and how your company might respond.

“War gaming helps companies avoid being caught off guard, better anticipate decisions their competition might make and determine how to respond to them,” Horn said.

War gaming ‘lite’

One downside to running a war game exercise is that it can require several weeks of designing and building the material needed to conduct the workshop. However, there is a way of getting the benefits of war gaming without the resource-intensive costs of a traditional effort, which Horn calls “war gaming lite.” This format can be incorporated anytime the organization meets to discuss future industry trends.

Based on his observations, Horn said one of two things typically happen when business leaders discuss strategy and future plans. Most often, leaders focus on what they’re going to do and why it’s going to be good for them. Occasionally, the conversation takes a much more negative tone—we’re going to get crushed, there’s no way we can win, Horn said.

“It’s only natural for business leaders to have a more biased view about how situations will play out to their advantage,” Horn said. “War gaming forces them to take a more realistic view of the situation. Yes, I want it to work this way, but my competitors want it to play out a different way, and they’re going to make choices that may not be good for us. The benefit of ‘lite’ war games is that you realize these benefits without incurring the costs of a traditional war game.”

For example, imagine a hospital rolling out a new weight loss surgery program. In preparing to launch this new service, hospital leaders will likely have detailed conversations about how this program will increase patient volume and profitability, giving them an edge. Or, they may worry that the larger hospital in town will continue to stay one step ahead, dominating the market. As a result, they may limit expectations for the new program.

It would be more beneficial if the team took the time to incorporate a lite war game. Assuming the roles of the hospital’s competitors and referring physicians, the business development team could test ways to market the procedure with patients and physicians, referral processes, clinic practices and more before going public with the announcement. The role-play information would build off ongoing competitive insight efforts, and the conversation about how the industry would play out would incorporate each of those players’ perspectives based on what works best for them. The process can highlight risks and opportunities business leaders might otherwise miss, Horn said.

The best part is this process does not require a large investment of time or resources. While it’s true that larger simulations—the kind companies may do every few years as a part of their overall strategy process—often occur over days and may require external consultants, Horn said it doesn’t always need to be that detailed.  

“Ideally, I would like to see companies getting in the habit of conducting their own lite war game activities any time they have a strategic question that involves outside players. Set aside 30 minutes to think about how these outside players may react and what you can do to get ahead,” Horn said.

By making this a regular habit built into the company’s strategic planning process, companies can maintain their competitive edge through recessions, market changes, supply chain disruptions and any other challenge they may face in 2023 and beyond.