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Chapter 5 – Competitive Rivalry & Competitive Dynamics

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Competitive Strategy

One firm’s actions rarely go unnoticed by rivals

Therefore, firms not only need to know their own strengths and weaknesses before acting, but also predict the kind of response competitors are likely to make

“Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.”

Sun Tzu, “The Art of War”, approx. 500 BC

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Rivalry’s Effect on StrategySuccess of a strategy is determined by:

The firm’s initial competitive actions

How well it anticipates competitors’ responses

How well the firm anticipates and responds to its competitors’ initial actions

Competitive rivalry:

Affects all types of strategies

Has the strongest influence on the firm’s business-level strategy or strategies

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A Model of Competitive RivalryFirms are mutually interdependent

A firm’s competitive actions have noticeable effects on its competitors

A firm’s competitive actions elicit competitive responses from its competitors

Competitors feel each other’s actions and responses

Marketplace success is a function of both individual strategies and the consequences of their use!

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Competitive Rivalry vs. Dynamics Competitive Rivalry (individual firms)

Market commonality and resource similarity

Awareness, motivation, and ability

First mover advantages and firm size

Competitive Dynamics(all firms)

Market speed (slow-cycle, fast-cycle, and standard-cycle)

Effects of market speed on actions and responses of all competitors in the market

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A Model of Competitive Rivalry

Source: Adapted from Chen, M.-J. (1996): “Competitor analysis and interfirm rivalry: Toward a theoretical integration”, Academy of Management Review, 21: 100–134.

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Competitor AnalysisMarket Commonality

Each industry composed of various markets which can be subdivided into (segments)

• I.e., Financial industry

Resource Similarity How comparable the firm’s tangible and intangible

resources are to a competitor’s in terms of both types and amounts.• I.e., FedEx and UPS – both have efficient operations and focus on

cost reduction

Firms with similar types and amounts of resources are likely to: • Have similar strengths and weaknesses.• Use similar strategies.

Combination of market commonality & resource similarity indicate a firm’s direct competitors

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A Framework of Competitor Analysis

Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134.

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Market CommonalityA firm is more likely to attack a rival with whom it has low market commonality than one with whom it competes in multiple markets

Given the high stakes of competition under market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in effort to protect its position in one or more markets

Market Commonality

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Resource SimilarityThe greater the resource imbalance between the acting firm and competitors, the greater will be the delay in response by the firm with a resource disadvantage

When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response

Resource Similarity

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A Model of Competitive Rivalry

Source: Adapted from Chen, M.-J. (1996): “Competitor analysis and interfirm rivalry: Toward a theoretical integration”, Academy of Management Review, 21: 100–134.

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Drivers of Competitive Behavior

Awareness is: extent to which competitors recognize degree of their mutual interdependence that results from market commonality and resource similarity

Motivation concerns: the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses

Ability relates to: Firm's resources that allow competitive action and flexibility responsiveness

Awareness

Motivation

Ability

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A Model of Competitive Rivalry

Source: Adapted from Chen, M.-J. (1996): “Competitor analysis and interfirm rivalry: Toward a theoretical integration”, Academy of Management Review, 21: 100–134.

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Competitive TimingFirst Mover

First movers can gain:

The loyalty of customers who may become committed to firm’s goods or services

Market share that can be difficult for competitors to take during future competitive rivalry

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First Mover

Second Mover

Second MoverSecond mover responds to first mover’s competitive action, typically through imitation:

Studies customers’ reactions to product innovations

Tries to find mistakes first mover made, and avoid them

Can avoid huge spending of first-movers

May develop more efficient processes and technologies

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Late mover responds to competitive action only after considerable time has elapsed

Any success achieved will be slow in coming and much less than that achieved by first and second movers

First Mover

Second Mover

Late Mover

Late Mover

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Organizational Size

Organizational Size - Small Firms

Small firms:

Act as nimble and flexible competitors

Rely on speed and surprise to defend their competitive advantage

Have greater variety of competitive behavior options available

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Large firms:

Often have greater slack

Have greater likelihood to initiate competitive and strategic actions over time

Tend to rely on a limited variety of competitive actions, which can ultimately reduce their competitive success

“Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”(Herb Kelleher, Former CEO of Southwest Airlines)

Organizational Size

Organizational Size - Small Firms

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Factors Affecting ResponseType of

Competitive Action

Strategic actions receive strategic responses

Strategic actions elicit fewer total competitive responses

The time needed to implement and assess strategic action delays competitor’s responses

Tactical responses are taken to counter the effects of tactical actions

Competitor likely will respond quickly to tactical actions

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Factors Affecting ResponseReputation is positive or negative attribute ascribed by one rival to another based on past competitive behavior

Firm studies responses that competitor has taken previously when attacked to predict likely responses

Type of Competitive

Action

Actor’s Reputation

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Factors Affecting ResponseMarket dependence is extent to which firm’s revenues or profits are derived from particular market

In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position

Type of Competitive

Action

Actor’s Reputation

Dependence on the market

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Slow-cycle markets

• Gradual Erosion of a Sustained Competitive Advantage

• Markets in which the firm's competitive advantages are shielded from imitation for long periods of time

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Fast-cycle Markets

Developing Temporary Advantages to Create Sustained AdvantageMarkets in which the firm's capabilities that contribute to competitive

advantages are not shielded from imitation and where imitation is often rapid and inexpensive