Chapter 5 Competitive Rivalry and Competitive Dynamics Diane

Chapter 5 Competitive Rivalry and Competitive Dynamics Diane M. Sullivan, Ph. D. , 2012 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

The Strategic Management Process • After selecting a business-level strategy, firms must remain aware of competitive rivalry and dynamics that affect the success of their competitive actions and that allow them to predict competitor’s actions Insert figure 1. 1 graphic

Competitive Rivalry and Dynamics: Key Definitions • Competitors – Firms operating in the same market, offering similar products and targeting similar customers • Competitive Rivalry (firm-to-firm competitive actions) – Ongoing set of actions and responses occurring between competitors as they contend with each other for an advantageous market position – Also called interfirm rivalry • Competitive Dynamics (sum of all firm competitive actions) – Total set of actions and responses of all firms competing within a market • Strategic Action – Significant commitment of a specific and distinctive resource that is irreversible (Boeing’s midsized jet liner; Guess positioning to be more upscale) • Tactical Action – Commitment of less specific resources, taken to fine-tune a strategy, that is reversible (e. g. , pricing, advertising)

Competitive Rivalry and Dynamics: Examples • Ex. 1: The “Dell way”: bypass middle-man and sell custom-built computers directly to consumer – This business model lowered costs and hence prices of products – But as of 2006, no longer created value to the degree it had and • End of 2006: HP 18. 1% vs. Dell’s 14. 7% market share Why? • Ex. 2: Fast food industry

The Essence of Competitive Action and Response Industry Environment Company ‘A’ (e. g. , Starbucks) Initiates Competitive Action Industry Environment is Changed Company ‘B’ (e. g. , Mc. Donald’s) Initiates Competitive Response Industry Environment is Changed Again

The World Automobile Industry: Strategic Groups High Ferrari Lamborghini Porsche Mercedes BMW Price Toyota Ford General Motors Chrysler Honda Nissan Hyundai Kia High Low Breadth of Product Line Note: Members of each strategic group are only illustrative – not inclusive.

Cap. Sim and Strategic Groups Low Size Perf. Trad Size High Performance

A Model of Competitive Rivalry

Step 1: Conduct General Competitive Analysis • Purpose: assess similarity of firms to determine the extent to which they are competitors • Two components Market Commonality Resource Similarity Extent of Competitive Rivals

Market Commonality and Resource Similarity • Market Commonality (MC) – Increases when firms compete in similar markets – The more overlapping markets (e. g. , multimarket competition), the higher the MC • E. g. , geographic, product, customer, etc. • Mc. Donald’s and Burger King: High MC • Resource Similarity (RS) – How comparable are competitor’s tangible and intangible resources in type and amount? – Fed. Ex and UPS: high RS

Market Commonality and Resource Similarity (Con’t) • Firms should be less inclined to attack a firm that is likely to retaliate – High MC and RS should reduce likelihood of attack • Firms with high MC and with similar resources are more likely to be aware of each other’s competitive moves • When attacked, similar firms more likely to aggressively retaliate – Can lock firms into mutually destructive competitive situations » Fast food industry participants » Netflix and Blockbuster

Step 2: Study Drivers of Competitive Behavior • Awareness – Are managers aware of and do they understand key competitors? • Motivation – Does the firm have an “incentive” to take action or respond? • Ability – Does the firm have the necessary resources to attack? • Understanding competitor’s awareness, motivation and ability helps the firm to predict competitor behavior

Step 3: Examine Likelihood of Attack & Response • Likelihood of Attack (Lo. A) Factors – First-mover advantages—innovative actions can create competitive advantages. Can result in: • 1) customer loyalty and 2) above-average market share • Be cautious of 2 nd movers who can imitate at 65% of the cost of 1 st movers – Organizational Size • Small firms are nimble/flexible so can more quickly act with a variety of actions; • Large firms actions are more numerous, but often predictable

Step 3: Examine Likelihood of Attack & Response • Likelihood of Response (Lo. R) Factors – A firm is likely to respond when the competitor’s action 1. Might produce a stronger competitive advantage for them 2. Damages the firm’s ability to create/maintain an advantage 3. The firm’s market position is less defensible – Three Factors to consider: 1. Type of competitive action 2. Reputation 3. Market dependence

Competitive Dynamics • Competitive Dynamics concern actions and responses among all firms in a market • Deal with the relative competitive speed in different markets – Slow-cycle – Standard-cycle – Fast-cycle • Different speeds, or cycles, will affect competitive behavior (actions and responses)

Competitive Dynamics Continued • Slow-cycle markets – Often shielded from imitation due to costs and/or very strong brand loyalties – May lead to SCA, but eventually it will erode over time • Pharmaceuticals

Slow-cycle Market Gradual Erosion of SCA Returns from a Sustained Competitive Advantage (SCA) Exploitation Counterattack Launch Time (years) 10

Competitive Dynamics Continued • Standard-cycle markets – Lead to highly competitive pressures despite world class products – Multimarket competition may dampen rivalry somewhat – SCA is possible • Fast-cycle markets – Intensely dynamic; 1 st mover advantage unsustainable – Firms may cannibalize older generation products – SCA unlikely

Developing Temporary Advantages to Create Sustained Advantage in Fast- and Standard-Cycle Markets