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Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Competitors, competitive rivalry, competitive

behavior and competitive dynamics Market commonality and resource similarity:

Building blocks of competitor analysis Competitive actions: Awareness, motivation and

ability Factors driving competitor’s competitive actions Competitor’s response to actions taken against it Competitive dynamics in slow, fast and standard-

cycle markets

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From Competitors to Competitive Dynamics (Figure 5.1)

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Introduction and Definitions

Competitors Firms operating in the same market, offering similar

products and targeting similar customers

Competitive Rivalry Ongoing set of competitive actions and competitive

responses occurring between competitors as they contend with each other for an advantageous market position

Competitive Dynamics The total set of actions and responses of all firms

competing within a market

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Competitive Rivalry

Competitive Behavior (offensive and defensive) Set of competitive actions and competitive responses

the firm takes to build or defend its competitive advantages and to improve its market position

Competitive Action Strategic or tactical action firm takes to build or defend

its competitive advantages or improve its market position

Competitive Response Strategic or tactical action the firm takes to counter

effects of a competitor's action

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Competitive Rivalry

What are the strategic and tactical actions? Strategic actions/responses: market-based

moves that signify a significant commitment of organizational resources to pursue a specific strategy

Difficult to implement and reverse

Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place

Easier to implement and reverse

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A Model of Competitive Rivalry (Figure 5.2)

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Competitor Analysis and Competitive Rivalry

Competitor Analysis (Chapter 2) Is the first step to understanding competitive rivalry and

identifying who your direct competitors are Involves collecting competitive intelligence Focuses on trying to predict competitors’ behavior The question: ‘To what extent are firms competitors’? 2 components to assess

Market Commonality Resource Similarity

Direct competitors have high market commonality & high resource similarity

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Competitor Analysis and Competitive Rivalry

Market Commonality The number of markets with which the firm and a

competitor are jointly involved and the degree of importance of the individual markets to each

Each industry composed of various markets which can be subdivided into segments

Example: Automobile industry Greater market commonality results in greater rivalry Firms may also compete against one another in

several or many product and geographic markets Multimarket Competition

Firms with greater multimarket contact are less likely to attack but more likely to respond when attacked

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Competitor Analysis and Competitive Rivalry

Resource Similarity Extent to which firm’s tangible/intangible resources

are comparable to competitor’s in type and amount Can result in similar strengths and weaknesses and

similar strategies being pursued The more similar the types and amounts of resources

the more direct the competition is between two firms

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A Framework of Competitor Analysis

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3 Drivers of Competitive Actions/Responses

Awareness Extent competitors recognize degree of mutual

interdependence that results from market commonality and resource similarity

Greatest when firms have highly similar resources Affects the extent to which the firm understands the

consequences of its competitive actions and responses A lack of awareness can lead to excessive competition

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3 Drivers of Competitive Actions/Responses

Motivation Firm's incentive to take action, or to respond to a

competitor's attack, as it relates to perceived gains and losses

A firm is more likely to attack a rival with whom it has low market commonality

Responses are more likely to occur when market commonality is high

Ability Firm's resources that allow competitive action and

flexibility to respond Without available resources a firm lacks the ability to

respond

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Additional Factors Affecting the Likelihood of Attack

First Mover Incentives Firm that takes an initial competitive action to build or to

defend its competitive advantages or to improve its market position

Second Movers Late Movers

Quality Customer perception that the firm's goods or services

perform in ways that are important to customers, meeting or exceeding expectations

Lower quality = lower attack/response likelihood

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Additional Factors Affecting the Likelihood of Attack

Organizational Size Affects the likelihood of competitive actions as

well as the types and timing of them Small firms

More likely to launch competitive actions Are more flexible, nimble, and quicker Initiate a greater variety of competitive actions

Large firms Initiate more competitive actions with more strategic

actions during a given period Tend to limit the types of competitive actions used

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Additional Factors Affecting the Likelihood of Response

Types and effectiveness of the competitive action Strategic actions

Receive strategic responses Elicit fewer responses due to resources committed and required

Tactical actions Receive tactical responses Elicit much faster responses

Dependence on the Market Extent to which a firm's revenues or profits are derived

from a particular market High market dependence = more likely to respond

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Additional Factors Affecting the Likelihood of Response

Actor’s Reputation Actor: Firm taking an action or response (in the context of

competitive rivalry) Reputation: positive or negative attribute ascribed by one rival to

another based on past competitive behavior Firms are more likely to respond to market leaders (firms

with good reputations) Past behavior is also a useful predictor of future

behavior Firms are less likely to respond to a company with a

reputation for risky, complex, and unpredictable behavior

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Competitive Dynamics and Market Cycles

Competitive Dynamics: Total set of actions and responses of all firms competing within a market

Competitive dynamics differ in slow-cycle, fast-cycle, and standard-cycle markets

The sustainability of a firm’s competitive advantages also differs across the three market types

Thus, competitive speed differs across markets and this effects competitive dynamics

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Competitive Dynamics: 3 Market Cycles

Slow-Cycle Markets Markets in which the firm's competitive advantages are

shielded from imitation for long periods of time, and in which imitation is costly

Build a one-of-a-kind competitive advantage which creates sustainability

Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage

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Gradual Erosion of a Sustained Competitive Advantage

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Competitive Dynamics: 3 Market Cycles

Fast-Cycle Markets 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

Competitive advantages are not sustainable in fast-cycle markets

Focus: learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation)

Continually try to move on to another temporary competitive advantage before competitors can respond to the first one

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Developing Temporary Advantages to Create Sustained Advantage

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Competitive Dynamics: 3 Market Cycles

Standard-Cycle Markets Markets where firm’s competitive advantages

are moderately shielded from imitation and where imitation is moderately costly

Competitive advantages partially sustained as quality is continuously upgraded

Seek to serve many customers and gain a large market share

Gain brand loyalty through brand names Careful operational control / manage a

consistent experience for the customer