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Tuesday, June 9, 2009

SCIP Simulation Session: War Gaming

I had previously blogged about a Society of Competitive Intelligence (SCIP) session where we learned about Mark Chussil's war gaming simulation work. I attended a session where Mark led us through a 4 hour war gaming simulation around the auto industry. There were no preemptive strikes or blood shed and no excel spreadsheets or power point slides were harmed in this exercise.

Instead about 30 of us from Seattle and Portland formed teams of 5 different car companies and decided what we would do with 3 different lines of cars (SUV's, sedans, and hybrids were the only cars in this simulation to make it simple). We decided upon a price for each car line, marketing budget, production, and expected profitability. We had 2 rounds to make these decisions and presented to a panel of consumers and investors who were the more "judgemental" participants.

It was impressive that our teams could make all these decisions in 45 minutes since we were meeting each other for the first time. We digested about 4 pages of data tables, made decisions, created a marketing pitch and remembered each other's names in that short time period.

In the first round, we made all our decisions based on market share and accounting data that was on the spreadsheets. In the intro, Mark had cautioned us that spreadsheet data tells us about past history and will only help us forecast if the future is the same as the past. We also need to understand the industry, macro-trends, what competitors will do, and what our customers think of us. For the first round, we had to make decisions without knowing what our competitors would do or what customers thought of us.

My team was Ford and we felt that we were stable enough financially to discount our vehicles. We were the only team that did and when the investors pressed us on our ability to remain profitable with the discounts, I told them that we would make it up on volume. The joke actually went over so I decided not to elaborate but was later told that I got penalized for not answering the question seriously. That was a good lesson for public speaking.

As soon as our competitor heard about our discounts, we were slammed for trying to buy customers during their presentations. So we learned that discounts will be used against you besides the risk of igniting a price war. My other lesson was that it is really difficult to present to customers and investors at the same time. They are both looking for very different information and it forced us to have a very consistent story.

We got our results back from the first round and they were dismal. All of us lost money and sales except for Toyota (which is kind of what happened in the auto industry in 2008). Our initial reaction was to question the data, claim that we still had the right strategy, and that there wasn't anything that we could differently. We blamed every external force that we could think of and would have gotten around to blaming the government, OPEC, and Canada if Mark hadn't told us that we had 30 minutes to make decisions for the 2nd round. For a moment, I felt the pain of the car companies.

In the second round, were were able to refine our approach based on competitor response. As you can imagine, knowing the competitive landscape made a big difference. Here's a summary of what also happened and different approaches that we had:
  • Trying too hard to be cool: In the simulation, the sedan segment was 50% of the market and flat, SUV was 25% of the market and shrinking 2% and the hybrid line was 25% and growing 2%. We all fled the SUV segment except GM which did well by sticking to its knitting. Everyone dived into the hybrid line and ignored the sedan segment. I pushed my group to spend resources on this segment since it was half the market. However, everyone was enamored by the cool hybrid line even though it's market size and 2% growth didn't really warrant the attention. I feel like we tend to overcommit to the the trendy segment even though it may never acheive the market size of traditional segments.
  • Message consistency: GM pushed their SUV line in the first round and completely switched to the hybrids in the 2nd round. They explained that everyone knows about their SUV's and it's time to focus on the hybrids. However, the consumers found the complete switch to show a lack of focus. I personally agreed with GM's approach and thought that the SUV's was part of their DNA. However, promoting a dramatically different product line from one year to the next makes a company look like it's riding trends and it's hard to build credibility. I did find the GM approach better than the Hyundai team who marketing campaign of "Hard name to pronounce but easy to love" complete with different pronunciation options. Why would you want to confuse people about how to really pronounce the name of your company?
  • No one knows what will really happen in the future: An auto industry insider was also at the simulation and answered questions. We asked her about some general future questions and what happened with some past strategies like the Chrysler-Daimler merger. She agreed that it was really hard to understand all of the dynamics to the industry and what we read in the paper or saw explained industry trends as well as anything. For example, high US gas prices resulted in hybrids being as popular as acid wash jeans in the 80's. Low gas prices resulted in hybrids being as popular as acid wash jean in the 90's. The auto industry is complex enough that even industry insiders had the same questions that we did.

I had to leave before finding out if there were any results from the 2nd round and to see if anyone improved their position dramatically. It was pretty impressive to note the difference in quality of analysis when you operate in a competitive vaccuum compared to taking competitor decisions into account. That does need to be balanced with understanding your own company and not just making the same decisions that your competitor did a few months ago. I haved worked at a previous company where I feel like we outsourced our strategic planning to our competitors.

Ultimately the competitor information and just as importantly industry trends are another piece of data that we throw into our strategic planning soup. The best skills that I've developed at my current job are a willingness to be generous with assumptions to build scenarios and not worry if they have a p value of less than 5%. Sometimes, I lick my thumb and hold it up in the air to show one level of confidence to my teammates and sometimes I mimic smoking a joint to show another level of confidence. However, clear paths have emerged from just having the scenarios modeled out on a power point slide.

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