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11/12/96

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Misreading the competition hurts

STANFORD -- Executives who pride themselves on their competitive instincts may be surprised at the results of a study examining the importance of executive perceptions to competitive performance.

David Montgomery of the Graduate School of Business and Bruce Clark of Northeastern University found that executives performed very poorly when asked to assess the motives and objectives of their competitors. Not only did they frequently misjudge the actions of competitors, but they often missed a rival's moves altogether ­ a costly mistake that is most likely to undermine a corporation's competitive edge. The researchers also found that a healthy level of paranoia can pay off.

Montgomery and Clark based their study on simulation games played by 100 executives of a European multinational in a six-day executive education program. The executives were grouped into 20 teams across four industries. Teams filled out a questionnaire that asked them to discuss their decisions and strategies for various business scenarios. It also asked whether teams were attacking or reacting to competitors in their decisions and whether they had observed reactions by competitors. In the study, executives were wrong in their assessment of rivals' actions fully 79 percent of the time.

While correct perceptions are always important to success, the study found they were not as crucial to performance as missed perceptions. When a team failed to anticipate an action by a competitor, such as a new product entry or a product improvement, it was consistently damaging to performance.

"Competitive blind spots matter," says Montgomery, who is the Sebastian S. Kresge Professor of Marketing Strategy at Stanford Business School. "We need to study ways for managers to think more systematically about their competitors."

In an increasingly competitive world, a little fear keeps managers alert when it comes to responding to rivals. The punishing effects of early mistakes taught players to be paranoid later in the game. As the simulation wore on, paranoia significantly helped performance. "Paranoia can have positive effects," says Montgomery.

Indeed, paranoia has been a successful method of competitive operation for some high-profile chief executives, notes Montgomery. One of them is Andrew Grove, CEO of semiconductor-maker Intel and a lecturer at the Business School. His bestselling book of the same title argues that "only the paranoid survive."

Montgomery and Clark argue, among other things, that paranoia can be advantageous even if it is irrational or unwarranted. Paranoia is highly motivating, says Montgomery, because if a firm believes it is constantly under competitive threat, it will work hard to defend itself. Second, paranoia may lead to more detailed competitive analysis, reducing the possibility of nasty surprises from rivals in the future. "The oft-repeated advice to analyze one's competitors intensely is valuable," says Montgomery. "Firms may benefit from heightened vigilance." When in doubt, a little paranoia goes a long way.

"Perceiving Competitive Reactions: The Value of Accuracy (and Paranoia)," by Bruce H. Clark and David B. Montgomery (Marketing Letters, March 1996)

-Barbara Buell-

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