Competitors watch and copy one another's moves closely. But copying them too closely can start a race to the bottom.

As competitors scrutinize one another's products, prices, and marketing, a strategic move by a single company often prompts its peers to do the same thing. Although best-practice benchmarking can be among the most effective tools for improving the efficiency and productivity of companies, when they become too much alike they may all become less profitable. McKinsey research shows how this herding phenomenon severely eroded margins in Germany's mobile-telecom industry in the 1990s.

Three carriers competed for business users by offering similar pricing schemes. As strategies converged, margins dwindled. When a new carrier entered the market, in 1994, offering a different pricing plan tailored to low-volume users, the leaders copied its offer, squashing its attempt to be different. An index measuring strategic differentiation among the companies fell by 83 percent from 1992 to 1998. Over the same period, margins were cut in half.

For more on the risks of strategic sameness, read "Best practice ≠ best strategy."