Gaming to support strategic decisions

One of the most difficult aspects of making consequential strategic decisions is gauging how competitors and other stakeholders might react. Scenario planning is a start, but a fact-based approach to war gaming can better help executives prepare for the real-life pressure and uncertainty they’ll face in the moment. In this podcast from McKinsey on Finance, partner Werner Rehm joins partner Jay Scanlan and associate partner Thomas Meakin from McKinsey’s London office to explore war gaming from a CFO’s perspective. An edited transcript of their conversation follows.

Podcast transcript

Werner Rehm: Tom, Jay, thanks for joining me today on the podcast. Let’s talk about how CFOs and the finance function in general can use war gaming to help companies improve their strategic process. What do we actually mean when we say “war gaming”?

Jay Scanlan: “War gaming” is a realistic simulation of the type of market environment the CFO and executive teams face as they make really big and consequential decisions. Whether they be go-to-market decisions or capital planning and infrastructure decisions, war gaming allows you to have a real-life experience of them under pressure with incomplete information and uncertain reactions from competitors and new entrants.

We often ground the war game against several different future scenarios in order to test how robust and effective different strategies are in terms of economic growth, the entrance of new competitors, or changes in consumer or business customer preferences. That allows executives to see what that future might look like in the real world, as it were, rather than just on a spreadsheet.

Werner Rehm: Would I assign various people on my team to be competitors and then play out various potential actions and reactions in the future?

Thomas Meakin: That’s exactly it. You gain a deeper appreciation of what the different actors are going to do in the market based on a close analysis of their own P&L and financial positions, but also their track history in taking particular strategic moves. You get a better sense of where your own business model can stretch, where you can’t, what moves make sense, and which don’t. Quite often we find management teams and boards, who sometimes go through this process together, leave with a deeper appreciation and understanding of how they work together and how they make decisions under stress.

Werner Rehm: When is this most useful in the life of a CFO? Should I do this annually? Or during my strategic process?

Thomas Meakin: There are two situations in which conducting a war game makes sense. The first is as part of an ongoing strategic planning process. A war game can be done right at the beginning or right at the end—or even at two points within that process in order to get a sense of the business model dynamics and how they will relate to the underlying market trends.

The second situation is when there is a disruption. I define disruption broadly, so anything from a regulatory change, to a market entry, either by your own company or by a competitor, and anything in between.