When a competitor strikes—introducing an innovative new product, for example, or slashing prices—management theory suggests that companies should immediately dive into complex analyses of their possible moves and countermoves across the whole competitive landscape, assess these potential responses with sophisticated financial metrics such as net present value (NPV), and promptly mount a response.
The real world is much simpler, according to a McKinsey survey of executives from around the world and from a variety of sectors, including financial services, manufacturing, and high tech.1 On the whole, as companies determine how to respond to a competitor’s moves, they generally assess three or fewer options and don’t look forward more than two years. About half don’t examine more than one round of countermoves by any competitor. A significant number rely on intuition to determine a response. And companies most frequently respond with whatever counteraction is most obvious in the moment—answering a price cut, for example, with a cut of their own, which often doesn’t hit the market until at least one or two sales cycles after the competitor’s move.
Even so, most respondents to the survey say they were able to counteract at least some of the reduction in earnings...