a primer on and application of competitive dynamics walter ferrier, ph.d. gatton college of business...

A Primer on and Application of Competitive Dynamics

Walter Ferrier, Ph.D.Gatton College of Business & EconomicsUniversity of Kentucky

Presented at Helsinki School of EconomicsMarch 2008

Coke’sStrategicActions

Pepsi’sStrategicActions

Rivalry

CompetitiveOutcomes

IndustryCharacteristics

OrganizationalCharacteristics

Karjala

LapinKulta

LapinKulta

Observable … Relative … Dynamic

Dethronement of the Shoe Leader

Market Share(U.S.)

1980 1990 20051980 1990 2005

Adidas

Nike

Reebok

Dethronement of the Retailing Leader

Market ShareShare

1950 1960 1970 1980 1990 20001950 1960 1970 1980 1990 2000

Wal-MartSears

JC Penney

Dethronement of the Aircraft Leader

Market Share

1950 1960 1970 1980 1990 20001950 1960 1970 1980 1990 2000

McDonnell-Douglass

Boeing

Airbus

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

•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?

Integrated/Contributing Theories

•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

A Pre-Theory of Competitive Inter-Action:

Some Boundary Conditions

•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-Action

•Has impact/consequences on:•Performance

– Relative– Absolute

•Behavior of other firms•Supply chain members

– Customers– Suppliers

•Regulators•Investors•Society


•Other•Uncertainty, unknowability•Imperfect information•Thought, intent, purpose•Not costless


•Awareness•Alertness - attention•Vision•Scanning•Filtering

•Motivation•Intention•Valence•Emotion•Desire

•Capability•Organizational enablers/constraints•Contextual enablers/constraints

Theoretical Scaffolding/Fulcrum

Theoretical Integration Required:“Other theories” supportand explain logic when integrated with this AMC theoretical scaffolding – e.g.:• Behavioral theory of the firm• Institutional theory• Social network theory• RBV

Awareness

Motivation

Cap

abili

ty

Firm 1Strategy

Firm 2Strategy

CompetitiveInter-Action

OrganizationalDrivers

Industry StructureDrivers

InstitutionalDrivers

Socio-Relational

Drivers

Other?

Performance

CognitiveDrivers

An Emerging Theory of Competitive Dynamics

Levels of Analysis

Firm

Finnair

Levels of Analysis

Firm Dyad

Finnair Finnair SAS

Levels of Analysis

Firm Dyad Triad

Finnair

Blue 1

Finnair SAS Finnair SAS

Levels of Analysis

Firm Dyad Triad

Network

Finnair

Lufthansa

Blue 1

US Airways

Virgin


Finnair

KLM

Levels of Analysis

Firm Dyad Triad

GroupNetwork

Finnair

Lufthansa

Blue 1

US Airways

Virgin


Finnair

KLM

Lufthansa

Brussels

Air France

KLM

Blue 1

SAS

Ryanair

eos

Levels of Analysis

Firm Dyad Triad

GroupNetwork Industry(or Population)

Finnair

Lufthansa

Blue 1

US Airways

Virgin


Finnair

KLM

Lufthansa

Brussels

Air France

KLM

Blue 1

SAS

Ryanair

Finnair

Virgin

KLM

Lufthansa

US Airways

Ryanair

British Airways

Alitalia

eoseos

Levels of Aggregation

NewProduct

Introduction

Individual Action(or response)


AdCampaign

NewProduct

Introduction

PriceCut


Action-ResponseDyad


AdCampaign

NewProduct

Introduction

PriceCut


Action-ResponseDyad

CompetitiveRepertoire

6 x Price

1 x Product

4 x Ads

2 x Signaling

1 x Law Suit


AdCampaign

NewProduct

Introduction

PriceCut


Action-ResponseDyad

CompetitiveRepertoire

6 x Price

1 x Product

4 x Ads

2 x Signaling

1 x Law Suit

time

Ad

Product

Price

Ad

Ad Price

Competitive Attack

Signal LegalPrice

Coke

PepsiProduct

attack

counter attack

Network Evolution, Competitive Actions and Performance

MktMkt Prod PriceMkt Mkt PriceProd Price

FocalFirm

A

B

C

DE

t1t2 t3

FocalFirm

A

B

CFocalFirm

A

B

Performance

time

Actions



FocalFirm

A

B

C

DE

t1 t2t3

FocalFirm

A

B

CFocalFirm

A

B

Performance

time

Actions



FocalFirm

A

B

C

DE

t1 t2 t3

FocalFirm

A

B

CFocalFirm

A

B

Performance

time

Actions

Globalization, Competitive Action and Performance


FocalFirm

A

B

C

DE

t1 t2 t3

FocalFirm

A

B

CFocalFirm

A

B

Performance

time

Actions

Think of internationalization and globalization in this way

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

•Music•Perception/appreciation•Composition theory

•Experimental aesthetics•Perception•Interpretation•Subjective judgment

What is Competitive Dynamics?

• Coaching a basketball game• Training a hunting dog• Conversation/argument

between husband & wife

Phenomenon

A Z

K

time

• Rivalry: Airbus vs. Boeing• Negotiating a raise• Writing an operatic duet

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

Questions or Comments

The Fast and the Furious:

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

FocalFirm

Actions

Focal FirmPerformance

Rivals’Performance

Dynamic Competitive Interaction

InvestmentCommunity

Dynamic- Subjective Interpretation and Valuation of…

Stock Risk & Returns

Rivals’Actions

Traditional-Objective Valuation Process

TMT

Who’s making it happen?

What’s happening?

FocalFirm

Actions

Focal FirmPerformance

Empirical Model

Rivals’Actions

TMTHeterogeneity

beta

Industry Characteristics

X

Subjective Valuation of the Top Management TeamDemographic 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

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

Comp. dynamics• Simplicity• Conformity• Predictability• Duration

Outcomes • Recognition of Gestalts or ‘wholes’

• Subjective judgment; hedonic value…”pleasingness”• Subjective judgment of strategy-performance relationship

Pattern Recognition, Interpretive Certitude and Hedonic Value

“Sensory information”

organized into meaningful wholes…Gestalts

• Computer screen pixels• Paintbrush strokes• Musical notes• DNA nucleotides• Pitch sequence• etc.

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

• Pricing• Marketing• New Product• Service• Capacity• Overt Signals

c db ea

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

c db ea

Coke’sActions

Pepsi’sAction

Rivalry

CompetitiveOutcomes

IndustryCharacteristics

OrganizationalCharacteristics

da b ec da b ec

ActionPair 1

ActionPair 2

ActionPair 3

ActionPair 4

Coca-Cola

Pepsi

Action-Reaction Dyads

b b b a

ac c e

Prior Studies: Action “Repertoires”

time

Year-EndTallies

Coca-ColaCoca-Cola

PepsiPepsi

b bb

c

b

ba

c e

b

a

b

c

d

e

ca bec a b de ca bd

Coke Pepsi

d

aa

b

e

c

e

b

a

d

b

c c

Observed Sequence Observed Sequence

Competitive Actions Over Time = Attack

Total

a

b

c

d

e

ca b

d

aca a dc e aad

c c

a a

e

a

d

b

a a aa 7

1

1

2

2

Observed Sequence of Competitive Actions

Competitive Attack Simplicity

Total

a

b

c

d

e

ea b

d

aca c de c bdd

e

c

d

a

c c

d

b b

a

e

a 3

2

2

3

3


Competitive Attack Complexity

a

b

c

d

e

ca eeca bde ca bd

d

e

aa a

d

b

b

e

c cc

Focal Firm in time1 Focal Firm in time2

b


Competitive Attack Predictability

a

b

c

d

e

c ab eca bde ca bd

Focal Firm in time1

d

e

b

aa a

d

bb

e

c cc

Focal Firm in time2


Competitive Attack Unpredictability

a

b

c

d

e

ca beca b de cab d

Focal Firm

d

aa

b

e

c

e

b

a

d

b

c c


Competitive Attack Conformity

Industry Norm

a

b

c

d

e

ca bec a b de ca bd

Focal Firm Industry Norm

d

aa

b

e

c

e

b

a

d

b

c c


Competitive Attack Non-Conformity

a

b

c

d

e

ea b aca de cd

e

c

d

a

c

d

b

a

e

a


Competitive Attack [Long] Duration

timetime

a

b

c

d

e

ac dc

c

a

c

d


Competitive Attack [Short] Duration

timetime

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

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

• 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 Conditionbeta

StrongCollative

Properties

Duration

Predictability

Simplicity

WeakCollativeProperties

Conformity

“Moderated-Effects” SEM Results:

Attack Characteristics in Low TMT Hetero Conditionbeta

StrongCollative

Properties

Duration

Predictability

Simplicity

WeakCollativeProperties

Conformity Support

Opposite

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

The Influence of Verbal Exchange among TMT Members on Decision Quality and Innovation

Extant ResearchTMT

Members

Performance

GroupCohesion

GroupDysfunction

Agreement-seeking

Debate

ConstructiveConflict

DecisionComprehensive-

ness

StrategicConsensus

DecisionSpeed

StrategicChange

CompetitiveDynamics

Innovation

TMTMembers

Performance

GroupCohesion

GroupDysfunction

Agreement-seeking

Debate

ConstructiveConflict

DecisionComprehensive-

ness

StrategicConsensus

DecisionSpeed Strategic

Change

CompetitiveDynamics

Innovation

ConversationAnalysis

“The Decision Funnel”Inputs and Processes Presumed by TMT Demographic Proxies

DecisionOutcomesDecision

Process

RawDecision

Inputs

Field ofVision

Tunnel Vision: Homogenous TMT – Industry Background


Process

RawDecision

Inputs

Field ofVision

Dysfunction: Interpersonal Conflict – Poor Social Cohesion

DecisionOutcomes

DecisionProcess

RawDecision

Inputs

Field ofVision

Constructive Conflict:Cognitive/Experiential Breadth + DA/DI


Process

RawDecision

Inputs

Field ofVision

Decision Process in Real-Time


Process

RawDecision

Inputs

Field ofVision


Conversational, verbal statements uttered in group decision-making sessions

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•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.”

•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?”

•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

•NEW – New idea

•CHAL – Challenge of idea

•AGR – Agreement with idea

•SMALL – Small talk

•VAL – Validation of idea

•DEF – Defense of idea

•HUM - Humor

c db ea

Total

a

b

c

d

e

ea b

d

aca c de c bdd

e

c

d

a

c c

d

b b

a

e

a 3

2

2

3

3

Observed Sequence of Verbal Statements

Conversation Complexity – Low Herfindahl Index

a

b

c

d

e

c ab eca bde ca bd

Focal Team Decision Phase1

d

e

b

aa a

d

bb

e

c cc

Focal Team Decision Phase2


Conversation Unpredictability – High Distance Scores

a

b

c

d

e

ca bec a b de ca bd

Focal Team Industry Norm

d

aa

b

e

c

e

b

a

d

b

c c


Conversation Non-Conformity – High Distance Scores

a

b

c

d

e

ca b

d

eca b de c abd

e

c

b

a

c

b

d

b

a

e

c

a


Conversation Chunking – Low Separation Scores

(+)1.0 -------------------------------------------------------------------------------------- (-)1.0

a

b

c

d

e

ca b

d

eca bde ca bd

e

c

b

a


Conversation Motif – High Variance of Precedence Scores

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.)


• Conversation Phase Predictability• Conversation Complexity• Conversation Motif• Conversation Chunking

Propositions

Innovation & Creativity

Conversational SequenceCharacteristics

Conversation Complexity

Conversation Chunking

Conversation Motif

Conversation Unpredictability

HighLow

Moderated Mediation Model

ConversationalStructure

PerformanceInnovation

TMTComposition-

Demographics-Processes

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

• “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

c db ea

xy wz v

CompetitiveBehavior

OrganizationalProcesses

Thank you

a primer on and application of competitive dynamics walter ferrier, ph.d. gatton college of business...

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