Chapter 5 Competitive Rivalry and Competitive Dynamics Michael

Chapter 5 Competitive Rivalry and Competitive Dynamics Michael A. Hitt R. Duane Ireland Robert E. Hoskisson © 2003 Southwestern Publishing Company 1

Strategic Inputs Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment Strategic Outcomes Strategic Actions Strategy Formulation Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics The Strategic Management Process Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 12 Strategic Leadership Chapter 13 Strategic Entrepreneurship Strategic Competitiveness Above-Average Returns Feedback 2

Definitions l Competitors – firms operating in the same market, offering similar products and targeting similar customers l Competitive rivalry – the ongoing set of competitive actions and responses occurring between competitors – competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages 3

Definitions l Competitive behavior – the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position l Competitive dynamics – the total set of actions and responses taken by all firms competing within a market 4

From Competitors to Competitive Dynamics Competitors Engage in Why? Competitive rivalry What results? How? • To gain an advantageous market position • Through competitive behavior • Competitive actions • Competitive responses What results? Competitive Dynamics • Competitive actions and responses taken by all firms competing in a market 5

Effect of Competitive Rivalry on a Firm’s Strategies l Success of a strategy is determined by: – the firm’s initial competitive actions – how well it anticipates competitors’ responses to them – how well the firm anticipates and responds to its competitors’ initial actions l Competitive rivalry – affects all types of strategies – most dominant influence is on the firm’s business-level strategy or strategies. 6

A Model of Competitive Rivalry Competitive Analysis • Market commonality • Resource similarity Drivers of Competitive Behavior • Awareness • Motivation • Ability feedback Outcomes • Market position • Financial performance Interim Rivalry • Likelihood of Attack • First mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation 7 • Market dependence

Competitive Rivalry l Firms are mutually interdependent – one firm’s competitive actions have noticeable effects on competitors – one firm’s competitive actions elicit competitive responses from competitors – competitors feel each other’s actions and responses l Marketplace success is a function of both individual strategies and the consequences of their use 8

Competitor Analysis l Competitor analysis – a technique firms use to understand their competitive environment. Along with the general and industry environments, the competitive environment comprises the firm’s external environment – a technique used to help the firm understand its competitors – the first step to being able to predict competitors’ behavior in the form of its competitive actions and responses 9

Market Commonality l Market Commonality is concerned with – the number of markets with which a firm and a competitor are jointly involved – the degree of importance of the individual markets to each competitor l Most industries’ markets are somewhat related in terms of – technologies – core competencies l Multimarket competition – Firms competing in several markets 10

Resource Similarity l Resource similarity – the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount l Firms with similar types and amounts of resources are likely to – have similar strengths and weaknesses – use similar strategies l Assessing resource similarity can be difficult if critical resources are intangible 11 rather than tangible

A Framework of Competitor Analysis High II I III IV Market Commonality Low KEY The shaded area represents degree of market commonality between two firms Low Resource Similarity High Resource endowment A Resource endowment B 12

Drivers of Competitive Actions and Responses: Awareness Drivers of competitive behavior Awareness l Awareness is the extent to which competitors recognize the degree of their mutual interdependence – mutual interdependence results from • market commonality • resource similarity 13

Drivers of Competitive Actions and Responses: Motivation Drivers of competitive behavior Awareness Motivation l Motivation concerns the firm’s incentive – to take action – or to respond to a competitor’s attack – and relates to perceived gains and losses 14

Drivers of Competitive Actions and Responses: Ability Drivers of competitive behavior Awareness Motivation Ability relates – to each firm’s resources – the flexibility these resources provide l Without available resources the firm lacks the ability – to attack a competitor – to respond to the competitor’s actions l 15

Drivers of Competitive Actions and Responses: Market Commonality Drivers of competitive behavior influenced by Market commonality A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets l Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets l 16

Drivers of Competitive Actions and Responses: Resource Similarity Drivers of competitive behavior influenced by Market commonality Resource similarity The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage l When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response l 17

Competitive Rivalry l Competitive action – a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position l Competitive response – a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action 18

Strategic and Tactical Actions l Strategic action or a strategic response – a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse l Tactical action or a tactical response – market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse 19

Factors Affecting Likelihood of Attack: First Mover Incentives First mover incentives First movers allocate funds for – product innovation and development – aggressive advertising – advanced research and development l First movers can gain – the loyalty of customers who may become committed to the firm’s goods or services – market share that can be difficult for competitors to take during 20 future competitive rivalry l

Factors Affecting Likelihood of Attack: Size First mover incentives Size Small firms are more likely – to launch competitive actions – to be quicker in doing so l Small firms are perceived as – nimble and flexible competitors – relying on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry l Small firms have the flexibility needed to launch a greater variety of 21 competitive actions l

Factors Affecting Likelihood of Attack: Size First mover incentives Size Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period l Large organizations commonly have the slack resources required to launch a larger number of total competitive actions l “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger. ” - Herb Kelleher, Former CEO, Southwest Airlines 22

Factors Affecting Likelihood of Attack: Quality First mover incentives Size Quality exists when the firm’s goods or services meet or exceed customers’ expectations l Product quality dimensions include l – – – – Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality 23

Factors Affecting Likelihood of Attack: Quality First mover incentives Size Quality exists when the firm’s goods or services meet or exceed customers’ expectations l Service quality dimensions include l – – – Timeliness Courtesy Consistency Convenience Completeness Accuracy 24

Factors Affecting Likelihood of Response l Firms study three factors to predict how a competitor is likely to respond to competitive actions – type of competitive action – reputation – market dependence 25

Factors Affecting Likelihood of Response: Type of Competitive Action Type of competitive action l l l Strategic actions receive strategic responses Tactical responses are taken to counter the effects of tactical actions Strategic actions elicit fewer total competitive responses A competitor likely will respond quickly to a tactical action The time needed to implement and assess a strategic action delays competitors’ responses 26

Factors Affecting Likelihood of Response: Reputation Type of competitive action Reputation An actor is the firm taking an action or response l Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior l The firm studies responses that a competitor has taken previously when attacked to predict likely responses l 27

Factors Affecting Likelihood of Response: Market Dependence Type of competitive action Reputation Market dependence is – the extent to which a firm’s revenues or profits are derived from a particular market l In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position l 28

Competition l Competitive Dynamics – competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions l Competitive Rivalry – building and sustaining competitive advantages are at the core of competitive rivalry – competitive advantages are the link to an advantageous market position 29

Strategic Conduct is Dynamic • A firm’s strategic conduct is dynamic in nature • Actions and responses shape the competitive positions of each firm’s business level strategy Firm A Firm B 30

Strategic Conduct is Dynamic • Actions taken by one firm elicits responses from competitors • Competitive responses lead to additional actions from the firm that acted originally Firm A Actions New Response Firm B 31

Competitive Dynamics: Slow-Cycle Markets Slow-cycle markets – the firm’s competitive advantages are shielded from imitation for long periods of time – imitation is costly l Competitive advantages are sustainable in slow-cycle markets l A proprietary, one-of-a-kind competitive advantage leads to competitive success in a slow-cycle market l 32

Returns from a Sustainable Competitive Advantage Gradual Erosion of a Sustainable Competitive Advantage Exploitation Counterattack Launch 0 5 Time (Years) 10 33

Competitive Dynamics: Fast-Cycle Markets Slow-cycle markets Fast-cycle markets – the firm’s competitive advantages aren’t shielded from imitation – imitation happens quickly and somewhat inexpensively l Competitive advantages aren’t sustainable l Competitors use reverse engineering to quickly imitate or improve on the firm’s products l Non-proprietary technology is diffused rapidly l 34

Returns from a Series of Replicable Actions Obtaining Temporary Advantages to Create Sustained Advantage Firm has already moved to next advantage Exploitation Launch Counterattack 0 5 10 Time (Years) 15 35

Competitive Dynamics: Standard-Cycle Markets Slow-cycle markets Fast-cycle markets Standard-cycle markets – the firm’s competitive advantages may be shielded from imitation – imitation is moderately costly l Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages l Firms – seek large market shares – gain customer loyalty through brand names 36 – carefully control operations l