Chapter 5 – Competitive Rivalry & Competitive Dynamics

1. Chapter 5 – Competitive Rivalry & Competitive Dynamics

2. 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

3. Rivalry’s Effect on Strategy • Success 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

4. A Model of Competitive Rivalry • Firms 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!

5. 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 Competitive Rivalry vs. Dynamics

6. 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.

7. Competitor Analysis • Market 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

8. 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.

9. Market Commonality Market Commonality • A 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

10. Resource Similarity Resource Similarity • The 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

11. 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.

12. Awareness Motivation Ability 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

13. 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.

14. First Mover Competitive Timing • 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

15. First Mover Second Mover Second Mover • Second 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

16. First Mover Second Mover Late Mover Late Mover • 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

17. 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

18. Organizational Size Organizational Size - Small Firms • 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)

19. Type of Competitive Action Factors Affecting Response • 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

20. Type of Competitive Action Actor’s Reputation Factors Affecting Response • Reputation 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

21. Type of Competitive Action Actor’s Reputation Dependence on the market Factors Affecting Response • Market 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

22. 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

23. Fast-cycle Markets • Developing Temporary Advantages to Create Sustained Advantage • Markets in which the firm's capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive