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A Primer on and Application of Competitive Dynamics. Walter Ferrier, Ph.D. Gatton College of Business & Economics University of Kentucky. Presented at Helsinki School of Economics March 2008. Competitive Outcomes. Coke’s Strategic Actions. Pepsi’s Strategic Actions. Rivalry.

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a primer on and application of competitive dynamics

A Primer on and Application of Competitive Dynamics

Walter Ferrier, Ph.D.

Gatton College of Business & Economics

University of Kentucky

Presented at Helsinki School of Economics

March 2008

slide2

Competitive

Outcomes

Coke’s

Strategic

Actions

Pepsi’s

Strategic

Actions

Rivalry

Organizational

Characteristics

Industry

Characteristics

observable relative dynamic
Observable … Relative … Dynamic

Karjala

Lapin

Kulta

Lapin

Kulta

dethronement of the shoe leader
Dethronement of the Shoe Leader

Market

Share

(U.S.)

Nike

Reebok

Adidas

1980 1990 2005

dethronement of the retailing leader
Dethronement of the Retailing Leader

Wal-Mart

Market

Share

Sears

JC Penney

1950 1960 1970 1980 1990 2000

dethronement of the aircraft leader
Dethronement of the Aircraft Leader

Market

Share

Boeing

McDonnell-

Douglass

Airbus

1950 1960 1970 1980 1990 2000

what is competitive dynamics
What is Competitive Dynamics?
  • …a paradigm
  • …a theory
  • …a pre-theory
  • …a view
  • …a reasoning
  • …a lens
  • …a method
    • Research design element
    • Observational mechanism
    • Measurement technique
integrated contributing theories
Info processing

Social networks

Managerial cognition

Multi-market competition

Prospect/Threat rigidity

First-mover

Institutional theory

Complexity

Communication

Knowledge

Signaling

Resource-based view

Real option theory

Game theory

Strategic groups

Structure-conduct-perform.

Dynamic limit pricing

Austrian economics

Corporate entrepreneurship

Dominant firm/Oligopoly

Force field (from psychology)

Population ecology

Integrated/Contributing Theories
integrated contributing theories1
Integrated/Contributing Theories
  • What do they explain?
    • Competitive behavior?
    • …its antecedents, contexts?
    • …processes?
  • Does competitive dynamics “enable” other theories explain, observe, conceptualize, measure:
    • “behavior”
    • “competition”
    • “events”
    • “dynamic interactive processes”
    • “change”
    • other things?
a pre theory of competitive inter action some boundary conditions
A Pre-Theory of Competitive Inter-Action:Some Boundary Conditions
  • Actor relativity/interdependence
      • The firm relative to:
        • Itself (over time)
        • Dyadic partners
        • Groups
        • Industry members
        • Other non-rivals
      • On factors/dimensions such as:
        • Competitive actions
        • Resources/capabilities
        • Firm characteristics
        • Outcomes
pre theory of competitive inter action
Pre-Theory of Competitive Inter-Action
  • Competitive “action” as fundamental element
      • “…a visible, externally-directed competitive move carried out to improve a firm’s relative competitive position”
  • Dynamic
      • Explicitly accounts for:
        • Time
        • Change
        • Evolution
        • Contingencies
        • Processes
pre theory of competitive inter action1
Pre-Theory of Competitive Inter-Action
  • Has impact/consequences on:
      • Performance
        • Relative
        • Absolute
      • Behavior of other firms
      • Supply chain members
        • Customers
        • Suppliers
      • Regulators
      • Investors
      • Society
pre theory of competitive inter action2
Pre-Theory of Competitive Inter-Action
  • Other
      • Uncertainty, unknowability
      • Imperfect information
      • Thought, intent, purpose
      • Not costless
theoretical scaffolding fulcrum
Theoretical Scaffolding/Fulcrum
  • Awareness
      • Alertness - attention
      • Vision
      • Scanning
      • Filtering
  • Motivation
      • Intention
      • Valence
      • Emotion
      • Desire
  • Capability
      • Organizational enablers/constraints
      • Contextual enablers/constraints
  • Theoretical Integration Required:
  • “Other theories” support
  • and explain logic when integrated
  • with this AMC theoretical
  • scaffolding – e.g.:
  • Behavioral theory of the firm
  • Institutional theory
  • Social network theory
  • RBV
slide15

An Emerging Theory of Competitive Dynamics

Organizational

Drivers

Firm 1

Strategy

Awareness

Industry

Structure

Drivers

Competitive

Inter-Action

Motivation

Capability

Performance

Cognitive

Drivers

Firm 2

Strategy

Institutional

Drivers

Socio-

Relational

Drivers

Other?

slide17

Levels of Analysis

Firm

Dyad

Finnair

Finnair

SAS

slide18

Levels of Analysis

Triad

Firm

Dyad

Finnair

SAS

Finnair

Finnair

SAS

Blue 1

slide19

Levels of Analysis

Triad

Firm

Dyad

Finnair

SAS

Finnair

Finnair

SAS

Blue 1

Network

Lufthansa

Virgin

Finnair

US Airways

KLM

slide20

Levels of Analysis

Triad

Firm

Dyad

Finnair

SAS

Finnair

Finnair

SAS

Blue 1

Network

Group

Lufthansa

Air France

Lufthansa

KLM

Virgin

eos

SAS

Finnair

Brussels

Blue 1

US Airways

Ryanair

KLM

slide21

Levels of Analysis

Triad

Firm

Dyad

Finnair

SAS

Finnair

Finnair

SAS

Blue 1

Network

Group

Industry

(or Population)

Lufthansa

Air France

KLM

Lufthansa

Finnair

KLM

Lufthansa

Virgin

eos

Virgin

eos

SAS

Finnair

British Airways

Brussels

US Airways

Blue 1

US Airways

Alitalia

Ryanair

Ryanair

KLM

slide22

Levels of Aggregation

Individual Action

(or response)

New

Product

Introduction

slide23

Levels of Aggregation

Individual Action

(or response)

Action-Response

Dyad

New

Product

Introduction

Price

Cut

Ad

Campaign

slide24

Levels of Aggregation

Individual Action

(or response)

Action-Response

Dyad

Competitive

Repertoire

New

Product

Introduction

Price

Cut

Ad

Campaign

6 x Price

1 xProduct

4 x Ads

2 x Signaling

1 x Law Suit

slide25

Levels of Aggregation

Individual Action

(or response)

Action-Response

Dyad

Competitive

Repertoire

New

Product

Introduction

Price

Cut

Ad

Campaign

6 x Price

1 xProduct

4 x Ads

2 x Signaling

Competitive

Attack

1 x Law Suit

attack

Coke

Ad

Signal

Product

Price

Legal

counter attack

Pepsi

Ad

Ad

Product

Price

Price

time

slide26

Network Evolution, Competitive Actions and Performance

t2

t3

t1

A

A

A

B

B

B

Focal

Firm

Focal

Firm

Focal

Firm

C

C

E

D

Performance

time

Mkt

Price

Mkt

Prod

Mkt

Mkt

Prod

Price

Price

Actions

slide27

Network Evolution, Competitive Actions and Performance

t3

t1

t2

A

A

A

B

B

B

Focal

Firm

Focal

Firm

Focal

Firm

C

C

E

D

Performance

time

Mkt

Price

Mkt

Prod

Mkt

Mkt

Prod

Price

Price

Actions

slide28

Network Evolution, Competitive Actions and Performance

t1

t2

t3

A

A

A

B

B

B

Focal

Firm

Focal

Firm

Focal

Firm

C

C

E

D

Performance

time

Mkt

Price

Mkt

Prod

Mkt

Mkt

Prod

Price

Price

Actions

slide29

Globalization, Competitive Action and Performance

t1

t2

t3

A

A

A

B

B

B

Focal

Firm

Focal

Firm

Focal

Firm

C

C

E

Think of internationalization and globalization in this way

D

Performance

time

Mkt

Price

Mkt

Prod

Mkt

Mkt

Prod

Price

Price

Actions

what is the next big thing
What is the next “big thing”?
  • Phenomena
  • Constructs
  • Measures
  • Levels of analysis or aggregation
  • Data
  • Unobservables
  • Analytical techniques
  • Theory
non organizational economic theories
Physics

Physical

Optical

Quantum mechanics

Biology

Molecular/DNA

Virology

Medicine

Neurology

Psychiatry

Kinesiology

Non-Organizational/Economic Theories
  • Music
      • Perception/appreciation
      • Composition theory
  • Experimental aesthetics
      • Perception
      • Interpretation
      • Subjective judgment
what is competitive dynamics1
What is Competitive Dynamics?
  • Coaching a basketball game
  • Training a hunting dog
  • Conversation/argument between husband & wife

K

Phenomenon

A

Z

time

  • Rivalry: Airbus vs. Boeing
  • Negotiating a raise
  • Writing an operatic duet
competitive dynamics instrumentality application and theory
Competitive Dynamics:Instrumentality, Application and Theory

An (any?) open-system process that:

  • Is interactive
    • Contains multiple actors
    • Behavior and outcomes relative among actors
  • Contains distinct, observable elements, events, or happenings
  • Contains some perceptual and actual uncertainty or unknowability
  • Requires some thought, intent, purposefulness on behalf of actors
  • Is not costless
slide35

The Fast and the Furious:The Assignment of Stock Risk Based on Investor Perceptions of Competitive Maneuvering and Who’s in the Drivers’ Seat

slide36

Dynamic Competitive Interaction

Focal

Firm

Actions

Rivals’

Actions

Focal Firm

Performance

Rivals’

Performance

TMT

Traditional-Objective Valuation Process

Investment

Community

Stock Risk

& Returns

What’s happening?

Dynamic-

Subjective Interpretation

and Valuation of…

Who’s making it happen?

slide37

Empirical Model

Focal

Firm

Actions

Rivals’

Actions

beta

X

TMT

Heterogeneity

Focal Firm

Performance

Industry Characteristics

subjective valuation of the top management team
Subjective Valuation of the Top Management Team

Demographic diversity among TMT members serves as a signal for:

  • Cognitive/experiential breadth
  • Decision quality/comprehensiveness
  • Environmental scanning
  • Legitimacy/reputation

…and for:

  • Interpersonal conflict/dysfunction
  • Slow decision speed
  • Lack of agreement-seeking/consensus
subjective valuation of competitive strategy
Subjective Valuation of Competitive Strategy

Interpretation and valuation related to perceptions of collative structure in the pattern of competitive behaviors:

  • Simplicity… complexity
  • Predictability… unpredictability
  • Conformity … non-conforming
  • Long duration … single blip
perceptions of gestalts in sensory information
Gestalt psych.

Simplicity

Proximity

Similarity

Common direction

Exp. aesthetics

Simplicity

Familiarity

Predictability

Orderly

Stability

Perceptions of Gestalts in Sensory Information

Comp. dynamics

  • Simplicity
  • Conformity
  • Predictability
  • Duration
  • Outcomes
  • Recognition of Gestalts or ‘wholes’
  • Subjective judgment; hedonic value…”pleasingness”
  • Subjective judgment of strategy-performancerelationship
pattern recognition interpretive certitude and hedonic value
“Sensory information”

organized into meaningful wholes…Gestalts

Pattern Recognition, Interpretive Certitude and Hedonic Value
  • Computer screen pixels
  • Paintbrush strokes
  • Musical notes
  • DNA nucleotides
  • Pitch sequence
  • etc.
hypotheses
Hypotheses

Investors will assign higher levels of stock risk to firms with heterogenous TMTs that carry out competitive attacks that are perceived as being:

  • Simple
  • Predictable
  • Conforming
  • Significant duration
sensory information competitive actions
Sensory Information: Competitive Actions
  • Pricing
  • Marketing
  • New Product
  • Service
  • Capacity
  • Overt Signals

b

c

d

e

a

competitive action sequences
Competitive Action Sequences
  • Ordered sample of “things”

‘Orderliness’ among elements (alphabet)

    • Logically unified sequence
    • Succession of market-based decisions
    • Patterns in stream of behaviors
    • Coordinated series of actions
    • Actions in a sequential strategic thrust
  • COMPETITIVE ATTACK: An uninterrupted series/sequence of competitive actions

b

c

d

e

a

slide45

Competitive

Outcomes

Coke’s

Actions

Pepsi’s

Action

Rivalry

b

c

e

b

c

e

a

d

a

d

Organizational

Characteristics

Industry

Characteristics

action reaction dyads
Action-Reaction Dyads

Action

Pair 1

Action

Pair 2

Action

Pair 3

Action

Pair 4

b

b

b

a

Coca-Cola

Pepsi

c

a

c

e

prior studies action repertoires
Prior Studies: Action “Repertoires”

b

b

b

b

b

Coca-Cola

c

a

b

Year-End

Tallies

Pepsi

c

e

time

slide48

Competitive Actions Over Time = Attack

Coke

Pepsi

a

a

a

b

b

b

c

c

c

d

d

e

e

d

c

e

a

a

b

a

b

c

d

e

c

b

Observed Sequence

Observed Sequence

slide49

Competitive Attack Simplicity

a

a

a

a

a

a

7

a

b

1

c

c

2

2

d

d

e

1

a

d

a

c

c

a

e

a

d

b

a

a

c

Observed Sequence of Competitive Actions

slide50

Competitive Attack Complexity

a

a

3

a

b

b

2

c

c

c

3

d

d

d

3

e

e

2

a

d

d

e

c

a

c

c

d

b

b

a

e

Observed Sequence of Competitive Actions

slide51

Competitive Attack Predictability

Focal Firm in time1

Focal Firm in time2

a

a

a

b

b

c

c

c

d

d

b

e

e

a

d

a

b

c

e

a

d

b

c

c

e

e

Observed Sequence

Observed Sequence

slide52

Competitive Attack Unpredictability

Focal Firm in time1

Focal Firm in time2

a

a

a

b

b

b

c

c

c

d

d

e

e

a

d

a

b

c

e

d

b

b

c

c

e

a

Observed Sequence

Observed Sequence

slide53

Competitive Attack Conformity

Focal Firm

Industry Norm

a

a

a

b

b

b

c

c

c

d

d

e

e

e

a

b

d

e

c

a

a

b

c

d

c

b

Observed Sequence

Observed Sequence

slide54

Competitive Attack Non-Conformity

Focal Firm

Industry Norm

a

a

a

b

b

b

c

c

c

d

d

e

e

d

c

e

a

a

b

a

b

c

d

e

c

b

Observed Sequence

Observed Sequence

slide55

Competitive Attack [Long] Duration

a

a

a

b

c

c

d

d

e

e

time

a

d

e

c

a

c

d

b

a

e

Observed Sequence of Competitive Actions

slide56

Competitive Attack [Short] Duration

a

c

c

d

time

c

a

c

d

Observed Sequence of Competitive Actions

hypotheses1
Hypotheses

Investors will assign higher levels of stock risk to firms with heterogenous TMTs that carry out competitive attacks that are perceived as being:

  • Simple
  • Predictable
  • Conforming
  • Significant duration
sample and data sources
Sample and Data Sources

All Fortune 500 Members who were:

  • Top two in market share (1987-1993)
  • Undiversified (i.e. single or dominant business)
    • 35 different industries over 7 years
    • 490 firm-years

Competitive Actions

  • News, Press Releases from F&S Predicasts

TMT Demographics

  • Dun & Bradstreet

Industry and Firm Financial Data

  • Compustat
analysis
Analysis
  • Structural Equations Model
    • Five-indicator model for TMT Heterogeneity
    • Median split -- Best SEM model fit for low TMT Heterogeneity condition
  • Educational background
  • Functional background
  • Industry background
  • Attendance at elite schools
  • Military experience
moderated effects sem results attack characteristics in low tmt hetero condition
“Moderated-Effects” SEM Results: Attack Characteristics in Low TMT Hetero Condition

beta

Simplicity

Duration

Conformity

Predictability

Weak

Collative

Properties

Strong

Collative

Properties

moderated effects sem results attack characteristics in low tmt hetero condition1
“Moderated-Effects” SEM Results: Attack Characteristics in Low TMT Hetero Condition

beta

Simplicity

Opposite

Duration

Support

Conformity

Predictability

Weak

Collative

Properties

Strong

Collative

Properties

conclusions
Conclusions
  • Human capital (TMT) and behavioral capital (competitive maneuvering) are important components of risk assessment
  • Collative properties of competitive strategy:

… increase interpretability and valuation of competitive strategy…

…but attenuated by perceptions of TMT processes and capabilities

  • Simplicity
  • Predictability
  • Conformity
  • Duration
  • Cognitive breadth
  • Decision comprehensiveness
  • Interpersonal conflict
  • Slow decision-making
slide65

Extant Research

TMT

Members

Group

Cohesion

Group

Dysfunction

Agreement-

seeking

Debate

Constructive

Conflict

Decision

Comprehensive-

ness

Strategic

Consensus

Decision

Speed

Strategic

Change

Competitive

Dynamics

Innovation

Performance

slide66

TMT

Members

Group

Cohesion

Group

Dysfunction

Agreement-

seeking

Debate

Constructive

Conflict

Decision

Comprehensive-

ness

Strategic

Consensus

Decision

Speed

Strategic

Change

Competitive

Dynamics

Innovation

Conversation

Analysis

Performance

the decision funnel inputs and processes presumed by tmt demographic proxies
“The Decision Funnel”Inputs and Processes Presumed by TMT Demographic Proxies

Raw

Decision

Inputs

Decision

Outcomes

Decision

Process

Field of

Vision

tunnel vision homogenous tmt industry background
Tunnel Vision: Homogenous TMT – Industry Background

Raw

Decision

Inputs

Decision

Outcomes

Decision

Process

Field of

Vision

dysfunction interpersonal conflict poor social cohesion
Dysfunction: Interpersonal Conflict – Poor Social Cohesion

Raw

Decision

Inputs

Decision

Outcomes

Decision

Process

Field of

Vision

constructive conflict cognitive experiential breadth da di
Constructive Conflict:Cognitive/Experiential Breadth + DA/DI

Raw

Decision

Inputs

Decision

Outcomes

Decision

Process

Field of

Vision

decision process in real time
Decision Process in Real-Time

Raw

Decision

Inputs

Decision

Outcomes

Decision

Process

Field of

Vision

decision process in real time1
Decision Process in Real-Time

Conversational, verbal statements uttered

in group decision-making sessions

pilot study
Pilot Study
  • MBA New Product Development Simulation
  • Student Teams (3 for now)
    • 5-7 members each
    • Experiential & functional diversity
  • Strategic, Multifunctional Task – Build “New Car”
    • 3 hours
    • Strategic position vs. other teams
    • Product features
    • Marketing
    • Assemble and test prototype
  • Audio Transcript of Decision Session
    • Coded into different verbal statements
preliminary categories of verbal statements
Preliminary Categories of Verbal Statements
  • NEW - New Idea/Concept Statement

“Based on the marketing reports, I think we should offer a really big luggage compartment.”

  • EXT - Idea/Concept Advocacy/Extension

“Oh, yea. We can cut manufacturing costs even more by outsourcing almost all our parts [production].”

  • INQ - Idea/Concept Inquiry

“What do you mean by customer-driven design?”

  • CHAL - Idea/Concept Challenge

“I just don’t get it. Why would customers care about dealer margin?”

  • DEF - Idea/Concept Defense

“Well, if you think the other companies are going to do the same thing, then we should stick with being different.”

slide75
ACQ - Idea/Concept Acquiescence

“I guess. Maybe we can’t really get the car to do all that in a 5-minute demonstration.”

  • VAL - Idea/Challenge Validation Statement

“I don’t know about you, but I think we should go ahead with a big luggage rack.”

  • TRAN - Transitional Statement

“Can we talk about how to get this done before 3:00 p.m.?”

  • AGR - Agreement-seeking Statement

“Anybody else wanna go for this?”

slide76
REA – Task/Process Reassurance Statement

“We’ll get the numbers when you need them.”

“I think we’re on the right track.”

  • CRIT – Task/Process Criticism/Doubt

“There’s no way the audience will see these all little parts.”

“If we can’t decide by 2:45, then let’s bag it.”

  • HUM – Humor

“How many MBAs does it take to build a Lego car?”

  • SMALL - Task- or Process-related Small Talk

“This is a pretty cool steering program.”

“I can’t wait to see what the other guys have.”

alphabet of verbal statements
‘Alphabet’ of Verbal Statements
  • NEW– New idea
  • CHAL– Challenge of idea
  • AGR– Agreement with idea
  • SMALL– Small talk
  • VAL– Validation of idea
  • DEF– Defense of idea
  • HUM- Humor

b

c

d

e

a

slide78

Conversation Complexity– Low Herfindahl Index

a

a

3

a

b

b

2

c

c

c

3

d

d

d

3

e

e

2

a

d

d

e

c

a

c

c

d

b

b

a

e

Observed Sequence of Verbal Statements

slide79

Conversation Unpredictability– High Distance Scores

Focal Team Decision Phase1

Focal Team Decision Phase2

a

a

a

b

b

b

c

c

c

d

d

e

e

a

d

a

b

c

e

d

b

b

c

c

e

a

Observed Sequence

Observed Sequence

slide80

Conversation Non-Conformity– High Distance Scores

Focal Team

Industry Norm

a

a

a

b

b

b

c

c

c

d

d

e

e

d

c

e

a

a

b

a

b

c

d

e

c

b

Observed Sequence

Observed Sequence

slide81

Conversation Chunking– Low Separation Scores

a

a

a

b

b

b

c

c

c

d

d

e

e

a

d

b

e

c

a

c

b

d

b

a

e

c

Observed Sequence of Verbal Statements

slide82

Conversation Motif

– High Variance of Precedence Scores

a

b

c

d

e

a

d

a

b

c

a

e

d

b

b

e

c

c

Observed Sequence of Verbal Statements

other dimensions of verbal statements
Other Dimensions of Verbal Statements
  • Task- vs. Interpersonal-directed
  • Task Relatedness/Relevance
  • Statement Complexity (number of distinct ideas within statement)
  • Scope (the breadth of total task addressed by statement)
  • Statement Duration
  • Tone (directive/confident, condescending, worrisome, etc.)
decision process in real time2
Decision Process in Real-Time
  • Conversation Phase Predictability
  • Conversation Complexity
  • Conversation Motif
  • Conversation Chunking
propositions
Propositions

Innovation

& Creativity

Conversation Motif

Conversation Chunking

Conversation Complexity

Conversation Unpredictability

Low

High

Conversational Sequence

Characteristics

moderated mediation model
Moderated Mediation Model

TMT

Composition-

Demographics-

Processes

Conversational

Structure

Innovation

Performance

food for thought
Food for thought…
  • Sequence of decision “process” matters
    • Decision phases
    • Dynamic dimensionality
    • Potential impact on decision quality and innovation
  • Verbal exchange as informative level of analysis
    • Verbal statements as fundamental decision points
      • Artifactual data with qualitative flavor
      • Avoid self-report bias
    • Group-level construct/measure
      • Avoid multi-level problems (i.e., aggregating TMT demographics or questionnaire scales)
dynamic event sequencing
Dynamic Event Sequencing
  • “Event” coding, phasing, and sequencing technique used for other organizational processes
    • Resource acquisition or allocation events
    • Inter-organizational alliances events
    • New product development phases
    • Globalizing or internationalizing events
  • Explore link between patterns in a variety of organizational processes and patterns of behavior

Organizational

Processes

y

z

x

v

w

Competitive

Behavior

b

c

d

e

a