They don't have to compete, palworld offered little resistance or trouble for them. You are comparing 3m sales of a base game to 30m. The only thing they might consider is either adding more functionality in game (which is good) but still based on Arceus, I doubt art or optimization and graphics will be of importance.
Well Palworld is just a bland survival game that has pokemon in it. The major interesting thing Palworld does is a base/farm simulator where your workers have different specialties and can assign jobs. I highly doubt Pokemon will go that route.
So the only other thing Palworld does is that it doesn't run like dogshit and is concurrent multiplayer. So if we get either of those from Pokemon I guess that's a win?
It might be bland, but the fact it's been marketed as "holy shit, it's like Pokémon if Game Freak gave a shit" says it all about the Pokémon franchise.
FWIW, I doubt they'll change a thing. People will buy anything with a Pokémon cover, and Game Freak know this...