©2003 Southwestern Publishing Company 1 Competitive Rivalry and Competitive Dynamics Michael A....

©2003 Southwestern Publishing Company 1

Competitive Rivalry and Competitive Rivalry and Competitive DynamicsCompetitive Dynamics

Michael A. Hitt

R. Duane Ireland

Robert E. Hoskisson

Chapter 5Chapter 5

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Strategy ImplementationStrategy Implementation

Chapter 13Chapter 13StrategicStrategic

EntrepreneurshipEntrepreneurship

Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and

ControlsControls

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Chapter 12Chapter 12StrategicStrategic

LeadershipLeadership

Strategy FormulationStrategy Formulation

StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average

ReturnsReturns

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment

Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment

The Strategic The Strategic Management Management ProcessProcess

FeedbackFeedback

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Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry

and Competitiveand CompetitiveDynamics Dynamics

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

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DefinitionsDefinitions CompetitorsCompetitors

– firms operating in the same market, offering firms operating in the same market, offering similar products and targeting similar similar products and targeting similar customerscustomers

Competitive rivalryCompetitive rivalry– the ongoing set of competitive actions and the ongoing set of competitive actions and

responses occurring between competitors responses occurring between competitors – competitive rivalry influences an individual competitive rivalry influences an individual

firm’s ability to gain and sustain competitive firm’s ability to gain and sustain competitive advantagesadvantages

4

DefinitionsDefinitions Competitive behaviorCompetitive behavior

– the set of competitive actions and competitive the set of competitive actions and competitive responses the firm takes to build or defend its responses the firm takes to build or defend its competitive advantages and to improve its competitive advantages and to improve its market positionmarket position

Competitive dynamicsCompetitive dynamics– the total set of actions and responses taken by the total set of actions and responses taken by

all firms competing within a marketall firms competing within a market

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From Competitors to From Competitors to Competitive DynamicsCompetitive Dynamics

CompetitorsCompetitors

• Through competitiveThrough competitivebehaviorbehavior• Competitive actionsCompetitive actions• Competitive responsesCompetitive responses

• To gain an advantageousTo gain an advantageousmarket positionmarket position

Competitive DynamicsCompetitive Dynamics• Competitive actions and responses taken by allCompetitive actions and responses taken by all

firms competing in a marketfirms competing in a market

CompetitiveCompetitiverivalryrivalry

Engage inEngage in

What results?What results?

What results?What results?

Why?Why?

How?How?

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Effect of Competitive Rivalry on Effect of Competitive Rivalry on a Firm’s Strategies a Firm’s Strategies Success of a strategy is determined by:Success of a strategy is determined by:

– the firm’s initial competitive actions the firm’s initial competitive actions – how well it anticipates competitors’ responses how well it anticipates competitors’ responses

to them to them – how well the firm anticipates and responds to how well the firm anticipates and responds to

its competitors’ initial actions its competitors’ initial actions

Competitive rivalryCompetitive rivalry– affects all types of strategies affects all types of strategies

– most dominant influence is on the firm’s most dominant influence is on the firm’s

business-level strategy or strategies.business-level strategy or strategies.

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A Model of Competitive A Model of Competitive RivalryRivalry

Competitive AnalysisCompetitive Analysis• Market commonalityMarket commonality• Resource similarityResource similarity

Drivers of CompetitiveDrivers of CompetitiveBehaviorBehavior

• AwarenessAwareness• MotivationMotivation• AbilityAbility

Interim RivalryInterim Rivalry• Likelihood of AttackLikelihood of Attack

• First mover incentivesFirst mover incentives• Organizational sizeOrganizational size• QualityQuality

• Likelihood of ResponseLikelihood of Response• Type of competitive actionType of competitive action• ReputationReputation• Market dependenceMarket dependence

OutcomesOutcomes• Market positionMarket position• Financial performanceFinancial performance

feedbackfeedback

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Competitive RivalryCompetitive Rivalry Firms are mutually interdependent Firms are mutually interdependent

– one firm’s competitive actions have noticeable one firm’s competitive actions have noticeable effects on competitorseffects on competitors

– one firm’s competitive actions elicit one firm’s competitive actions elicit competitive responses from competitorscompetitive responses from competitors

– competitors feel each other’s actions and competitors feel each other’s actions and responsesresponses

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

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Competitor AnalysisCompetitor Analysis Competitor analysisCompetitor analysis

– a technique firms use to understand their a technique firms use to understand their competitive environment. Along with the competitive environment. Along with the general and industry environments, the general and industry environments, the competitive environment comprises the firm’s competitive environment comprises the firm’s external environmentexternal environment

– a technique used to help the firm a technique used to help the firm understandunderstand its competitorsits competitors

– the first step to being able to the first step to being able to predictpredict competitors’ behavior in the form of its competitors’ behavior in the form of its competitive actions and responsescompetitive actions and responses

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Market CommonalityMarket Commonality Market Commonality is concerned withMarket Commonality is concerned with

– the number of markets with which a firm and a the number of markets with which a firm and a competitor are jointly involvedcompetitor are jointly involved

– the degree of importance of the individual markets the degree of importance of the individual markets to each competitorto each competitor

Most industries’ markets are somewhat related Most industries’ markets are somewhat related in terms ofin terms of– technologiestechnologies– core competenciescore competencies

Multimarket competitionMultimarket competition– Firms competing in several marketsFirms competing in several markets

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Resource SimilarityResource Similarity Resource similarityResource similarity

– the extent to which the firm’s tangible and intangible the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms resources are comparable to a competitor’s in terms of both type and amount of both type and amount

Firms with similar types and amounts of Firms with similar types and amounts of resources are likely toresources are likely to– have similar strengths and weaknesseshave similar strengths and weaknesses

– use similar strategiesuse similar strategies

Assessing resource similarity can be difficult if Assessing resource similarity can be difficult if critical resources are intangible rather than critical resources are intangible rather than tangibletangible

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A Framework of Competitor A Framework of Competitor AnalysisAnalysis

MarketMarketCommonalityCommonality

HighHigh

LowLow

LowLow HighHighResourceResourceSimilaritySimilarity

The shaded area represents The shaded area represents degree of market commonality degree of market commonality between two firmsbetween two firms

Resource endowment BResource endowment B

Resource endowment AResource endowment A

KEYKEY

IIIIII

IIIIII IVIV

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Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:

Awareness is the extent to which Awareness is the extent to which competitors recognize the degree of competitors recognize the degree of their mutual interdependencetheir mutual interdependence– mutual interdependence results mutual interdependence results

fromfrom• market commonalitymarket commonality• resource similarityresource similarity

AwarenessAwareness

AwarenessAwarenessDrivers of competitive behaviorDrivers of competitive behavior

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MotivationMotivation


Motivation concerns the firm’s Motivation concerns the firm’s incentiveincentive– to take actionto take action– or to respond to a competitor’s or to respond to a competitor’s

attackattack– and relates to perceived gains and and relates to perceived gains and

losseslosses

AwarenessAwareness

Drivers of competitive behaviorDrivers of competitive behavior


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AbilityAbility


Ability relatesAbility relates– to each firm’s resourcesto each firm’s resources– the flexibility these resources the flexibility these resources

provideprovide Without available resources the firm Without available resources the firm

lacks the abilitylacks the ability– to attack a competitor to attack a competitor – to respond to the competitor’s to respond to the competitor’s

actionsactions

AwarenessAwareness

Drivers of competitive behaviorDrivers of competitive behavior


AbilityAbility

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A firm is more likely to attack the A firm is more likely to attack the rival with whom it has low market rival with whom it has low market commonality than the one with whom commonality than the one with whom it competes in multiple marketsit competes in multiple markets

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

MarketMarketcommonalitycommonality

Drivers of competitive behavior influenced byDrivers of competitive behavior influenced by

Market CommonalityMarket Commonality

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ResourceResourcesimilaritysimilarity


The greater the resource imbalance The greater the resource imbalance between the acting firm and between the acting firm and competitors or potential responders, competitors or potential responders, the greater will be the delay in the greater will be the delay in response by the firm with a resource response by the firm with a resource disadvantagedisadvantage

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

Drivers of competitive behavior influenced byDrivers of competitive behavior influenced by

MarketMarketcommonalitycommonality

Resource SimilarityResource Similarity

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Competitive RivalryCompetitive Rivalry Competitive actionCompetitive action

– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to build or defend its competitive advantages or build or defend its competitive advantages or improve its market positionimprove its market position

Competitive responseCompetitive response– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to

counter the effects of a competitor’s counter the effects of a competitor’s competitive actioncompetitive action

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Strategic and Tactical ActionsStrategic and Tactical Actions Strategic action or a strategic responseStrategic action or a strategic response

– a market-based move that involves a a market-based move that involves a significant commitment of organizational significant commitment of organizational resources and is difficult to implement and resources and is difficult to implement and reversereverse

Tactical action or a tactical responseTactical action or a tactical response– market-based move that is taken to fine-tune a market-based move that is taken to fine-tune a

strategy; it involves fewer resources and is strategy; it involves fewer resources and is relatively easy to implement and reverserelatively easy to implement and reverse

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Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:

First movers allocate funds forFirst movers allocate funds for– product innovation and developmentproduct innovation and development– aggressive advertisingaggressive advertising– advanced research and developmentadvanced research and development

First movers can gain First movers can gain – the loyalty of customers who may the loyalty of customers who may

become committed to the firm’s become committed to the firm’s goods or servicesgoods or services

– market share that can be difficult for market share that can be difficult for competitors to take during future competitors to take during future competitive rivalrycompetitive rivalry

First moverFirst moverincentivesincentives

First Mover IncentivesFirst Mover Incentives

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SizeSize


Small firms are more likelySmall firms are more likely– to launch competitive actions to launch competitive actions – to be quicker in doing soto be quicker in doing so

Small firms are perceived asSmall firms are perceived as– nimble and flexible competitors nimble and flexible competitors – relying on speed and surprise to relying on speed and surprise to

defend their competitive advantages defend their competitive advantages or develop new ones while engaged or develop new ones while engaged in competitive rivalryin competitive rivalry

Small firms have the flexibility needed Small firms have the flexibility needed to launch a greater variety of to launch a greater variety of competitive actionscompetitive actions


SizeSize

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Large firms are likely to initiate more Large firms are likely to initiate more competitive actions as well as competitive actions as well as strategic actions during a given time strategic actions during a given time periodperiod

Large organizations commonly have Large organizations commonly have the slack resources required to the slack resources required to launch a larger number of total launch a larger number of total competitive actionscompetitive actions


SizeSize

SizeSize

““Think and act big and we’ll get smaller. Think and Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”act small and we’ll get bigger.”

- Herb Kelleher, Former CEO, Southwest Airlines- Herb Kelleher, Former CEO, Southwest Airlines

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QualityQuality


Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations


SizeSize

QualityQuality

Product quality dimensions includeProduct quality dimensions include– PerformancePerformance– FeaturesFeatures– FlexibilityFlexibility– DurabilityDurability– ConformanceConformance– ServiceabilityServiceability– AestheticsAesthetics– Perceived qualityPerceived quality

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QualityQuality


Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations


SizeSize

QualityQuality

Service quality dimensions includeService quality dimensions include– TimelinessTimeliness

– CourtesyCourtesy

– ConsistencyConsistency

– ConvenienceConvenience

– CompletenessCompleteness

– AccuracyAccuracy

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Factors Affecting Likelihood of Factors Affecting Likelihood of ResponseResponse

Firms study three factors to predict how a Firms study three factors to predict how a competitor is likely to respond to competitor is likely to respond to competitive actionscompetitive actions– type of competitive actiontype of competitive action– reputationreputation– market dependencemarket dependence

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Factors Affecting Likelihood of Factors Affecting Likelihood of Response:Response:

Strategic actions receive strategic Strategic actions receive strategic responsesresponses

Tactical responses are taken to Tactical responses are taken to counter the effects of tactical actionscounter the effects of tactical actions

Strategic actions elicit fewer total Strategic actions elicit fewer total competitive responsescompetitive responses

A competitor likely will respond A competitor likely will respond quickly to a tactical actionquickly to a tactical action

The time needed to implement and The time needed to implement and assess a strategic action delays assess a strategic action delays competitors’ responsescompetitors’ responses

Type ofType ofcompetitivecompetitive

actionaction

Type of Competitive ActionType of Competitive Action

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ReputationReputation


An actor is the firm taking an action An actor is the firm taking an action or responseor response

Reputation is the positive or negative Reputation is the positive or negative attribute ascribed by one rival to attribute ascribed by one rival to another based on past competitive another based on past competitive behaviorbehavior

The firm studies responses that a The firm studies responses that a competitor has taken previously when competitor has taken previously when attacked to predict likely responsesattacked to predict likely responses


actionaction


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MarketMarketdependencedependence


Market dependence isMarket dependence is– the extent to which a firm’s the extent to which a firm’s

revenues or profits are derived revenues or profits are derived from a particular marketfrom a particular market

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


actionaction


Market DependenceMarket Dependence

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CompetitionCompetition Competitive DynamicsCompetitive Dynamics

– competitive dynamics concerns the ongoing competitive dynamics concerns the ongoing actions and responses taking place among actions and responses taking place among allall firms competing within a market for firms competing within a market for advantageous positionsadvantageous positions

Competitive RivalryCompetitive Rivalry– building and sustaining competitive advantages building and sustaining competitive advantages

are at the core of competitive rivalryare at the core of competitive rivalry

– competitive advantages are the link to an competitive advantages are the link to an advantageous market positionadvantageous market position

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Strategic Conduct is DynamicStrategic Conduct is Dynamic

• A firm’s strategic conduct is dynamic in A firm’s strategic conduct is dynamic in naturenature

• Actions and responses shape the Actions and responses shape the competitive positions of each firm’s competitive positions of each firm’s business level strategybusiness level strategy

Firm BFirm BFirm Firm AA

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Firm BFirm BFirm Firm AA

Strategic Conduct is DynamicStrategic Conduct is Dynamic

• Actions taken by one firm elicits Actions taken by one firm elicits responses from competitorsresponses from competitors

• Competitive responses lead to additional Competitive responses lead to additional actions from the firm that acted actions from the firm that acted originallyoriginally

ActionsActions

ResponseResponse

New ActionsNew Actions

New ResponseNew Response

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Competitive Dynamics:Competitive Dynamics:

Slow-cycle marketsSlow-cycle markets– the firm’s competitive advantages the firm’s competitive advantages

are shielded from imitation for long are shielded from imitation for long periods of timeperiods of time

– imitation is costlyimitation is costly Competitive advantages are Competitive advantages are

sustainable in slow-cycle marketssustainable in slow-cycle markets A proprietary, one-of-a-kind A proprietary, one-of-a-kind

competitive advantage leads to competitive advantage leads to competitive success in a slow-cycle competitive success in a slow-cycle marketmarket

Slow-cycleSlow-cyclemarketsmarkets

Slow-Cycle MarketsSlow-Cycle Markets

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Gradual Erosion of a Sustainable Gradual Erosion of a Sustainable Competitive AdvantageCompetitive Advantage

Ret

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fro

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Sus

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Adv

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Time (Years)Time (Years)00 55 1010

LaunchLaunch

ExploitationExploitation

CounterattackCounterattack

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Fast-cycleFast-cyclemarketsmarkets


Fast-cycle marketsFast-cycle markets– the firm’s competitive advantages the firm’s competitive advantages

aren’t shielded from imitation aren’t shielded from imitation – imitation happens quickly and imitation happens quickly and

somewhat inexpensivelysomewhat inexpensively Competitive advantages aren’t Competitive advantages aren’t

sustainablesustainable Competitors use reverse engineering Competitors use reverse engineering

to quickly imitate or improve on the to quickly imitate or improve on the firm’s productsfirm’s products

Non-proprietary technology is Non-proprietary technology is diffused rapidlydiffused rapidly


Fast-Cycle MarketsFast-Cycle Markets

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Obtaining Temporary Advantages to Obtaining Temporary Advantages to Create Sustained AdvantageCreate Sustained Advantage

Ret

urns

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Ser

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Rep

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Time (Years)Time (Years)00 55 1010 1515

LaunchLaunch

ExploitationExploitation

CounterattackCounterattack

Firm has already moved Firm has already moved to next advantageto next advantage

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Standard-cycle markets Standard-cycle markets – the firm’s competitive advantages may the firm’s competitive advantages may

be shielded from imitationbe shielded from imitation– imitation is moderately costlyimitation is moderately costly

Competitive advantages are partially Competitive advantages are partially sustainable if the firm is able to sustainable if the firm is able to continuously upgrade the quality of its continuously upgrade the quality of its competitive advantagescompetitive advantages

FirmsFirms– seek large market sharesseek large market shares– gain customer loyalty through brand gain customer loyalty through brand

namesnames– carefully control operationscarefully control operations


Fast-cycleFast-cyclemarketsmarkets

Standard-cycleStandard-cyclemarketsmarkets

Standard-Cycle MarketsStandard-Cycle Markets

©2003 Southwestern Publishing Company 1 Competitive Rivalry and Competitive Dynamics Michael A....

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