the dynamics of rivalry - strategy dynamics · the dynamics of rivalry kim warren based view of...

Winter 1999

Firms face a constant challenge tounderstand and manage competition overtime: what to do when and how much,for how long, and with what expectedeffect. In this battle, managers useresources they already have to develop thefurther resources they need, faster andmore sustainably than competitors. Justthree forms of rivalry capture thedynamics of these processes: developingpotential customers, capturing rivals'customers and competing for sales toshared customers. Each of these appliesnot only to customers, but also to otherassets that must be won against rivals.In complex industries, interactionsbetween many competitors can besimplified by grouping firms together, andindustry evolution and scenarios for thefuture can be evaluated using extensionsof this approach.

The strategy field of knowledge has long had muchto offer managers wishing to understand a firm'sperformance relative to competitors (see, forexample, Porter 1980, Grant 1995 and de Wit andMeyer 1998). Within this wide field, the resource-

The Dynamics of RivalryKim Warren

based view of strategy (RBV) has extendedunderstanding of competitive advantage to include thefirm's resources or 'strategic assets', moving thestrategy debate beyond the largely financial concernsof cost and value (Collis and Montgomery 1995,Wernerfelt 1984). Alongside RBV, game theory hasprovided new understanding of competitiveinteractions. A step towards true dynamics has resultedfrom representing sequential moves and counter-moveson issues such as pricing and advertising levels (Dixitand Nalebuff 1991, Brandenburger and Nalebuff1995). However, executives typically find game theoryhard to apply to the richness of practical competitivesituations that feature real-world rivalry on multipledimensions.

Efforts to capture the true dynamics of competitiverivalry (ie to explain and manage progress throughtime) include extending established micro-economicsapproaches (Porter 1991), the development ofcompetence-based concepts (Prahalad and Hamel1990, Schoemaker and Amit 1997, Sanchez et al 1996)and use of scenario-planning methods (Wack 1985,Schoemaker 1995).

The Dynamics of Resource-based AdvantageOne particularly promising feature of RBV which mayprovide a key to progress is its inclusion of mechanismsthat can operate only insofar as competing firmsinteract through time. Whilst an organisation mayoften copy, sustain or purchase resources with littledirect interference from actual or potential rivals,developing or capturing them from others inevitablybrings firms into conflict with competitors (Grant1991, Peteraf 1993).

Business Strategy Review, 1999, Volume 10 Issue 4, pp -

Business Strategy Review

In an earlier article (Warren 1999), I built on thesefeatures of RBV, and defined a 'dynamic resource-system view' (DRSV) of firms' strategic architectureto show how performance over time can be understoodand managed only if certain fundamental principlesare captured.

● Performance at any moment is largely determinedby resources the firm owns, or to which it hasaccess, within the limits set by external marketconditions.

● All resources (useful items, whether tangible orintangible) share a characteristic that makes theirbehaviour tricky to understand – they accumulateand deplete over time (Amit and Schoemaker 1993,Dierickx and Cool 1989).

● Each resource can be built or sustained only byusing other resources already in place, creatinginescapable feedback within the firm's resource-system. Such feedback can accelerate or constraingrowth, leading to complex patterns ofperformance over time.

Management's task, therefore, is to design a strategicarchitecture that can build, powerfully and sustainably,the resources needed to deliver strong performance.However, rivals are constantly attempting to achieveprecisely the same resource-building goal, so it followsthat the dynamics of competitive performance mustbe played out largely in rivalry for resources.

Three forms of rivalryWork with a wide variety of organisations hasidentified that, viewed from a resource-systemperspective, rivalry takes just three forms:

● Developing potential customers

● Capturing rivals' customers

● Competing for sales to shared customers.

Each of these will be described below. A further formof rivalry may arise when firms use their understandingof a rival's resource-system to unpick its architectureand inflict damage. However such efforts are rarelyundertaken without some desire to gain from thecompetitor's misfortune, a feature that is covered bythe three principal mechanisms.

Whilst competition in the market-place is wherevictory or defeat generally becomes apparent, firmsmust also compete for access to non-customerresources, such as skilled staff or supplier capacity.

The three forms of rivalry apply equally to these otherresources. This implies that non-commercialorganisations – charities, public services, governmentand armed forces, for example – are not exempt from'competition' simply because they do not operate in aproduct or service market. (Throughout this article,'product' refers to both physical and service-basedproducts.)

Type-1 Rivalry: Developing PotentialCustomersIt is sometimes recommended that firms should focuson developing new markets or extending existing ones,

Case example: 'TV wars'The UK broadcasting industry has recently seenthe launch of digital TV services via terrestrialtransmission. One such company, ONdigital, isengaged in a race to win the potential subscribersfor this new form of service before its majorsatellite-based rival BskyB (Sky) can convert itsviewers to digital. Digital TV offers manychannels, and terrestrial services are receivedthrough normal roof-top aerials.

Though virtually all households receiveconventional terrestrial services, and manyalready subscribe to satellite services (notablyfrom Sky itself), a potential population may stillwish to switch to digital. Viewers are unlikely tosubscribe to more than one such service, soONdigital is engaged in a race to exploit thepotential before Sky. Regrettably for ONdigital,the time-path preferred (by ONDigital) for itsrival, shown in figure 1, is not emerging, withSky already having passed a million subscribers.

Figure 1

Rivalry to develop digital TV

Kim Warren

Winter 1999

rather than seeking to beat competitors (Kim andMauborgne 1999). However, the race to accomplishsuch aims is itself a universal form of rivalry, sincecapturing resources denies them to others. A strategicresource, such as the subscribers for digital terrestrialTV in the case example above, takes the form of a'stock' that accumulates and depletes over time whilebuilding a customer-base depletes another stock ofpotential customers (see Appendix and Warren 1999).

Type-1 rivalry takes the form of a race to drain thestock of potential customers faster than rivals can do.Potential customers flow into a developed customer-base for each rival (figure 2). Depleting this potentialpool creates 'balancing' feedback, imposing limits-to-growth on both firms, and ultimately stoppingprogress altogether.

In figure 2, just two rivals (such as ONdigital andSky) compete to win customers from a potential poolof two million people. Two outcomes are shown, inboth of which the rival wins 3% of the potential pooleach month – initially, 3% of two million, or 60,000per month, as shown in the lower of the two centralcharts. This rate falls quickly, as both firms depletethe potential.

In outcome A, we win 5% per month (initially100,000/month), whilst in scenario B we win 8%(initially 160,000/month). All other influences areignored, such as where the potential subscribers came

from in the first place, and the impact of our rival'sstock of existing customers.

Figure 2 captures the first part of the DRSV viewof type-1 rivalry, and raises important issues:

● Since the stock of resource (customers) determinesperformance, and this stock can be influenced onlyvia the rate of flow from the potential pool,competitive outcomes depend upon the relativewin-rates – the fraction of the potential customer-pool each rival wins in each time-period.

● The initial rate at which the customer-base isdeveloped can be rapid, but slows as the potentialpool is depleted. This unavoidable effect is oftenignored in strategic plans – firms commonly assumethey can win customers at a constant rate until themarket is used up. In practice, development ratesmay slow down still more quickly, since the mostamenable customers will be taken up first.

● Growth of the rival's customer base depends notonly on its own success, but also upon our win-rate. Capturing customers quickly not only buildsour own resources, but also denies them to rivals.

● A point may well arise when a firm fails to winany customers, in spite of having an adequateproduct that would attract them, if it faced asimilarly mediocre rival.

● The rate at which the potential market developsreflects the attractiveness of all rivals' products.Markets may fail to take off, not due to lack ofinterest from customers, but simply becausesuppliers have failed, collectively, to offer productsthat adequately fulfil that interest. The long-awaited dawn of video-on-demand services is acase in point.

Factors driving customer win-rates in practice includeprice, marketing efforts, and the functionality of theproduct (eg how many channels the two TV servicesprovide, and the attractiveness of their programmecontent). This mix of factors frequently confronts firmswith fundamentally dynamic dilemmas, such as whento launch a product. Is it better to improve a productfurther and risk coming second, or launch as soon asthe product seems ready and risk failure because it isnot good enough?

To reflect fully this interaction between firms'respective products requires a clear understanding ofcustomers' reactions to product acceptability. Tocomplicate this judgement, the limit of product

Figure 2Type-1 rivalry to develop potential customers

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The Dynamics of Rivalry


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acceptability is not static, but moves as customers'expectations adjust: so long as only modestly-attractive products are available, a product istolerated; but when a significantly better product isintroduced, firms offering the old standard fall behindin capturing customers.

Developing Potential CustomersFigure 2 assumed a static potential pool of customers,with rivals developing constant fractions of that pooleach month. But feedback may cause self-reinforcinggrowth amongst customers (Warren 1999), and similarmechanisms can accelerate growth for entire markets.As customers begin to take up a novel product, thebenefits they discover become widely known, andother customers take up the product. This replenishesthe potential pool, thus supporting further growth forcompeting firms.

Industry-wide self-reinforcing growth may evenrecur in the same market. Mobile phone users, forexample, have already taken up the early analogueservices, have mostly migrated to digital networks,and will shortly migrate once more to the more

powerful UMTS standard. In each transition, earlyadoption rates are slow until the benefits becomewidely known, when potential interest and actual take-up both accelerate.

To reflect the possible growth in market potential,the framework for type-1 rivalry requires severalfurther features (figure 3):

● Improvements to all firms' products, and changesto prices and marketing (though no effect isincluded in this illustration),

● Reinforcing feedback to grow each firm's customer-base (here, our firm alone creates 5%/month word-of-mouth growth – our rival achieves none),

● Reinforcing feedback to grow the potential poolof customers (also set at 5%/month), and

● Further growth of potential, driven by all firms'marketing and product development (though noeffect is included in this case).

To apply the DRSV framework for type-1 rivalry topractical cases, figure 3 must be extended. 'Productattractiveness' must be specified, its impact on

Figure 3Type-1 rivalry with feedback driving growth of both potential and developed customers

Kim Warren

Winter 1999

customer take-up assessed, along with the resultinggrowth of interest amongst new consumers. The effectof marketing efforts and pricing on customer-migration must also be estimated. However, figure 3illustrates key features of type-1 rivalry in marketdevelopment:

● The base win-rate for each firm is the same, butour firm alone gains further growth from feedback– customers enjoy our service sufficiently torecommend us to others. Consequently, ourcustomer-base soon out-strips the competitor's.

● The potential customer pool starts depleting, butis replenished by industry-wide word-of-mouth.The increasing total of customers that both rivalsdevelop causes the in-flow of new potentialcustomers (A) to escalate rapidly and overtake therate at which the two firms are exploiting them(B+C).

● Consequently, both we and our rival experiencerenewed growth from about month 15.

Some care is needed in using the stock-and-flowstructure in figure 3. The development rate ofcustomers, either to the potential pool or into the activecustomer-base, is rarely clear cut. A population ofcustomers may exhibit a range of responses towardsthe complex mix of product benefits and price on offer.And delays may arise between actual changes inproduct appeal and changes to customers' perception.Yet this perception has to change before customersadjust their behaviour and join the 'potential' pool.

Industry-wide mechanisms illustrated by this casecreate difficulties and dilemmas:

● A range of exogenous and industry factors mayalso stimulate the potential customer pool – socio-economic trends, improving price-performanceratios for the products offered, and so on. Theseadd to the impact of firms' collective efforts. Actualdemand is then a consequence of how effectivelyfirms exploit this potential.

● Trend-based market forecasting is most unlikelyto be reliable. Attempts to assess the 'elasticity ofdemand' – seeking correlations between price (orincome) and demand – are also fatally damagedby the inescapable realities of accumulation,depletion and feedback. Regulatory and industryinterest in the effects of pricing for mobile phones,for example, has been considerable. But prices ofhandsets and usage drive several rates of change –

growth of the potential user-base, rates of newsubscription, levels of usage amongst developedsubscribers, and switching amongst subscribers,both within and between technology generations.No mathematical correlation between price anddemand can come close to presenting a true pictureof market behaviour under such circumstances, andany apparent correlation that does emerge will bechancy and highly misleading.

● Complementary, non-exclusive resources maysubstantially impact upon the dynamics of rivalry.It is increasingly common for firms to benefit frominterdependencies between their own product orservice and industry-wide resources that may notbe under their control. The rapid growth ofsoftware product markets, even for new entrants,is substantially hastened by the existence ofcomplementary resources, e.g. the installed baseof PC users, the shared infrastructure of softwaredealers, and the large community of buyers whoexpect to discover useful new products on theinternet. Such mechanisms further undermine anychance of discovering simple, linear relationshipsbetween price and functionality on the one hand,and demand or market share on the other. Theincreasingly common phenomenon of inferiorproducts defeating objectively superior rivals isreadily explained by the role taken bycomplementary resources.

● The time-path of customer-base growth usuallyexhibits complex dynamics. Such complexity isclearly manifest in figure 3, even though thisillustration excludes many demand-drivers thatapply in practice. If management is to understandchanges in their market, therefore, they must assessits potential as well as its actual demand. Lack ofsuch understanding causes difficulties in manysituations. For example, agencies concerned withsmoking control have invested large sums in marketresearch, but still know little about the number ofsmokers who, at any moment, are activelyconsidering giving up. Yet these form the mostpromising target for anti-smoking products andservices, and potential inspiration to other would-be abstainers. (I am indebted to Rod Brown andcolleagues at SmithKline Beecham for thisexample.)

● Firms often face a dilemma on how much to buildup potential demand. Management can easily find



itself in the unfortunate position of having built amarket to the benefit of its rivals. The rapid growthof UK demand for high-quality coffee shops iscertainly being driven by the marketing efforts ofStarbucks, the established US chain. It is quiteprobable, though, that these efforts are pushingmore total business into the outlets of its rivalsthan into its own. Yet management has little choicebut to undertake these efforts if it is to build itsown business.

Only by laying out the relationships between thevarious customer resource-stocks and assessing thediverse forces causing them to flow through the marketwill it be possible to understand the market'sdevelopment, and identify with confidence powerfulpolicies to drive the future to the firm's own advantage.

capturing rivalry dynamics and other tools can bewielded to attack specific mechanisms. For example,conjoint analysis may be used to track customer-switching through time, as a function of rivals' product-improvement efforts (Green and Kreiger 1997).

Figure 4 shows the resource-system structure fortype-2 rivalry between two suppliers of specialistpaints. In a recent innovation, the two suppliers havebetween them captured all of the potential 500customers. We have 200 customers and the competitorhas 300, though a product improvement by our rivalmeans they are rapidly capturing our customers (start-point for the net customers switching chart = minus35/month).

Price as a strategic resourceAn important implication of this article'sdiscussion of rivalry concerns the role of price.Whilst price may often be accurately understoodas an instantaneous consequence of the balancebetween supply and demand, many firms havesome discretion on their relative price-position.Price may therefore be a strategic resource,whose level needs to be as carefully managed asany other.

The level of price achievable, compared withrivals, can be driven by reputation or quality ofresources, and the level of price can itself be adriver of increases for other resources.

Type-2 rivalry: Capturing rivals' customersOnly in the earliest stages of market development isrivalry largely focused on the race for unexploitedpotential customers. Yet even in developed markets,the framework in figure 3 continues to apply, ifcustomers cease to be active and return to the potentialpool. It is also rare that absolutely no new potentialcustomers emerge. Retail banks, for example, fightfor each new generation of consumers, even thoughoverall penetration of bank accounts is very high.

As markets develop, though, a second mechanismcomes into play – the direct switching of customersbetween rivals. This struggle is a tug-of-war, in whicheach firm tries to pull customers out of their rivals'system and into their own, by offering what they hopeis an attractive product. It is in this context that gametheory makes perhaps the strongest contribution to

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Type-2 rivalry as a tug-of-war for customers

The chart at bottom-left shows our own R&Defforts steadily improving the product (as rated bycustomers on adhesion, gloss, colour-fastness and soon). We are narrowing the gap against our rival'sproduct, and within a few months, the productdifferences are so small that customer-losses stop.

From months 7 to 13, there is too little to choosebetween us for customers to incur the costs and workin switching. However, our R&D efforts continue out-pacing the competitor, until we open up a largeenough advantage to start winning customers backquite quickly – the net customers switching chartbecomes positive. Eventually, the maturing technologyerodes the product differences, and there is littlefurther switching.

Kim Warren

Winter 1999

One interesting observation about this caseconcerns path-dependency. Had we been just 6 monthslater in improving the product, our competitor wouldhave captured so much of the market, and had so muchtime to continue fine-tuning its product, that we wouldnever have caught up. As it is, the modest advantagein our R&D effectiveness enabled us to overtake andleave our competitor irretrievably behind.

This phenomenon of one-time opportunity iscommon. With the opening up of competition inmarkets as diverse as airlines, telecoms and energy,early opportunities occur for new entrants to takecustomers by offering significant price or productadvantages. It is much harder for other entrants orretaliating incumbents to offer further comparablebenefits, and the window of opportunity closes. Theframework in figure 4 thus offers a dynamicperspective on the concept of first-mover advantage,providing insight into the scale and timing of theopportunity, and the nature, scale and duration ofcounter-moves rivals may need to make to keep thewindow closed. It may not, for example, be necessaryto pre-empt fully an attacker's expected price move,merely narrow the gap sufficiently to deter a largeproportion of potential switching.

Type-3 Rivalry: Competing for Sales toShared CustomersCustomers in many markets may commit exclusivelyto one supplier at any one time. Consumers rarelysubscribe to two mobile phone services, and few firmspurchase power from more than one supplier. In suchmarkets, type-1 and 2 rivalry are adequate to capturethe dynamics of competition.

Not all markets are so tidy, however, so type-3rivalry arises – winning a larger share of sales tocustomers who purchase from several suppliers. Forexample, producers of fast-moving consumer goods(FMCG), such as food, drink and cleaning materials,generally compete to supply retailers who stock arange of competing products.

Type-3 rivalry may occur alone, or in combinationwith rivalry types 1 and 2, but its structure is mostclearly illustrated with a customer-base that is bothstatic and completely shared. The appeal of rivalproducts does not now cause customers to switch, butinstead determines the rate of sales each rival enjoys(figure 5).

Figure 5 appears to contain little that might causedynamic complexity, but this is not the case. Notonly will most real cases feature migration of

customers into and out of the shared pool, but thedrivers of normal purchase rates and relativecompetitive success invariably include resource-stocks that accumulate and deplete. FMCG salesdepend upon consumer interest in rivals' products.Suppliers compete to win shelf-space from eachother and from other product-categories, and theyuse sales forces to win this war. In addition to thestores themselves, consumers, shelf-space and thesales force are all resource-stocks that must be built,and all, to varying degrees, must be competed foragainst rivals. Each may exhibit any or all of thethree types of rivalry.

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Competition between many rivalsAll three types of rivalry are most easily understoodby considering competition between just two firms.However, all can be readily extended to capture themore common situation of multi-supplier rivalry.

For type-1 rivalry, as many firms as necessary canbe added to Figure 3, each winning customers fromthe potential pool or losing them again. Growth ofthe pool itself reflects some weighted attractivenessof the portfolio of competing products, and may beaccelerated by the larger number of supplying firms.

Type-2 rivalry in Figure 4 can also be modified tocapture multi-firm situations. For this purpose it isstill important to ensure 'conservation of matter', i.e.customers lost by firms offering poorer products matchthose gained by firms offering better ones, plus orminus any net change in the industry's total customer-

Figure 5Winning sales to a shared customer-base



base. It is then relatively straightforward to estimatethe reallocation of customers amongst competitors(figure 6).

Strategic groupsAll three types of rivalry can become unmanageablein industries with many competitors (eg carmanufacture, internet service providers, law firms ...).However, it is often unnecessary to assess separatelythe prospects for every competitor. Mercedes may needto evaluate carefully the interplay with BMW, Jaguarand other premium manufacturers. However, the low-cost manufacturers can mostly be dealt withcollectively. For example, they may in aggregatedevelop car-ownership in emerging economies, intowhich Mercedes and close rivals will later compete tosell luxury vehicles.

The strategy field already offers an establishedapproach to simplifying the problem – the notion of'strategic groups'. Whilst much work has been doneto refine this concept, an adequate start-point comes fromPorter, 1980, who defines a strategic group as '... thegroup of firms in an industry following the same or asimilar strategy along strategic dimensions'. Theconcept of strategic groups developed significantly overthe following few years (McGee and Thomas 1986).

Much uncertainty remains about the importance(or even the existence) of strategic groups. However,many executives know that clusters of rivals do indeedpursue similar behaviours, even if these differencesare not observable from financial or performanceratios (which is where much academic effort focusesin the hunt for strategic groups).

If firms in a strategic group follow similarbehaviours, then DRSV suggests those behaviours willbe constrained by the resources those firms currentlypossess and be directed at building resources for thefuture that reinforce the strategic architecture of thosefirms. The low-cost car manufacturers lack many ofthe strategic resources needed to attack Mercedes'market – product attributes, dealership quality,reputation and the current customer-base itself. Theirresource-building efforts focus on developing productsand distribution that will accelerate the capture ofcustomers similar to those who have previously boughttheir products.

This resource-constraint on strategy developmentis most evident where firms attempt to enter a differentgroup. Toyota's entry into Mercedes' group requiredthe creation of a new brand – Lexus – and a host ofnew resources both consistent with this new aspirationand distinct from those of Toyota. Mercedes itself iscurrently in the process of tackling the same challengewith it's A-class small vehicle, but is attempting toleverage its existing luxury-car resources to achievethis (e.g. its customer-base, reputation anddealerships).

Combining rivalry mechanismsAn example to clarify the interplay of the three typesof rivalry follows two financial services firms racingto develop a new Euro-mortgage product (a recent,but perhaps premature product innovation). Tosimplify, both firms sell exclusively throughindependent financial advisors (IFAs), and have nodirect channels for distributing the product.

Consumers hear about both products throughmarketing (largely newspaper ads), and may requesteither product from their IFA. The products aresimilarly attractive on objective measures, but havefeatures that appeal to particular consumers. Cash-flows continue for as long as a consumer holds theproduct. However, consumers may switch from onefirm's product to the other if marketing or the IFAspersuade them that the differences are advantageous.

IFAs are motivated to offer a product by suppliers'sales efforts and by demand from consumers – themore consumers purchase a supplier's product, themore commission is received from promoting it. Thebest indicator of likely sales is the current number ofconsumers who hold each firm's product.

The framework that follows is not simple, but someguidelines for using DRSV provide a perspective forthe complexity:

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Kim Warren

Winter 1999

● Resources determine performance at any moment,so revenue from our product is calculated fromthe number of consumers who hold it, whilst costsreflect marketing spend and the number of salespeople.

● Resource-levels are determined only by in- and out-flows over time, so one critical managerialjudgement is 'How fast are we signing up newconsumers?'

● Rates of gain and loss for each resource reflect thelevels of any or all of the resources already in place,so the answer to the previous question can beestimated from our marketing efforts and thepriority IFAs are giving to our product.

Winning Consumers - Types 1 and 2 RivalryLittle word-of-mouth feedback occurs in this market,but the marketing efforts of both rivals build potentialconsumer interest (figure 7).

IFAs feature both products, so we are also engagedin type-3 rivalry – persuading them to give a largershare of effort to our product than to our rival's. IFAsgive priority to our product if a large population ofconsumers already hold our mortgage, and if our saleseffort persuades them to do so. (Strictly speaking, thismechanism includes some type-2 rivalry, since it willtake time for any change in our sales-force to influenceIFAs' attention to our product. For simplicity, thisdetail is ignored).

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Figure 7Consumer take-up for a new financial product:rivalry types 1 and 2

Type-1 rivalry starts as each firm races to win newconsumers. However, type-2 rivalry also emerges aswe try to persuade established consumers to replacethe rival's mortgage with our own.

Figure 8 shows the forces driving consumers intoholding our product. Exactly equivalent efforts aremade by our rival. Note that whilst the flow of newcustomers into our stock constitute the rate of unit-sales of our product (ie new mortgages sold permonth), our revenues derive from the stock ofconsumers holding our mortgage at any time – i.e. theinterest payments we receive.

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Winning IFAs� efforts: rivalry type-3

The interaction between the three rivalrymechanisms is illustrated by a scenario in which therivals have contrasting beliefs regarding the best wayto build the business.



● Our rival believes that marketing alone is key – ifenough consumers want their product, IFAs willsee the potential and promote it. They commit£300,000/month in marketing and only assign 10sales people to building IFA support.

● We know we must build consumer interest, socommit advertising of £200,000/month, but alsobelieve IFA support is critical, and assign 40 salespeople to this task.

Figure 10 combines Figures 7-9 into a compositeresource-system. For clarity, the mirror-image structurefor our rival is not shown. The story plays out asfollows:

● The rival's early marketing is sufficiently strongthat they rapidly develop the few potentialconsumers who are already interested. Thecombined marketing of the two firms quickly pullsconsumers into the potential pool, but the rivalexploits these opportunities fast, so the pool neverbuilds above about 3,000 consumers.

● As the market development rate inevitably slows,so does the exploitation rate advantage to ourcompetitor. Meanwhile, our sales force has wonstrong IFA support. Our rival's customer basebecomes available for us to win, and consumers

start to switch from the competitor's product toours. As the stock of consumers with our productaccelerates, we win still greater support from IFAs.This enables us to catch our competitor's rate ofacquiring new consumers, and this, combined withour success in switching, allows our total customerbase to overtake theirs early in the third year.

Extending Rivalry to Other ResourcesRivalry is rarely restricted to the fight for customersand sales, and often arises with other strategicresources. All kinds of organisation compete for scarcestaff, charities compete to stimulate and developdonors, media firms compete to win advertisers, oilexploration firms encourage governments to releaseexploration rights which they then contest, and firmgroups in telecoms and broadcasting compete foraccess to limited radio spectrum. Fortunately, nofurther frameworks are needed – the three mechanismsalready discussed apply to non-customer resources too.

The extent of such parallels should not beoverstated. Rivalry can arise only when it is feasiblefor competitors to contest a resource. It is not generallypossible, for example, to compete over products. If acompetitor wants the same product as us, they mustdevelop it themselves. Unless we are fighting topurchase or license the product from a third party,

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200

400

Months

£�000/month

0 12 24 36

-400

-200

0

200

400

Figure 10

Combining types 1, 2 and 3 rivalry in building sales of a new financial services product

Kim Warren

Winter 1999

there is no legal means to take a product away fromus. Similarly, it is not generally possible to competefor production facilities, unless they are owned by thirdparties and we are seeking to out-source manufacture.Intangibles, such as reputation and morale are alsorarely contested directly, though a side-effect of ourgains may be losses for our rivals.

Type-1 rivalry: developing and exploitingemerging resourcesCompetition to develop potential resources often arisesin the case of skilled staff. The explosion of Web-basedcommerce in recent years rapidly built demand forJava programmers. Although training of newprogrammers increased, good people remained in shortsupply, so rival firms focused on winning the few staffemerging from training. The resulting 'war for talent'became particularly intense when Microsoft enteredthe fray, trying to overtake the collection of rivalspromoting Sun Microsystems' open standard.

Not only is there a parallel to the development ofthe resource through the system, but there is also aclose analogy to the reinforcing feedback from word-of-mouth. It soon became clear that this emergingindustry would offer attractive employment prospects,

so the flow of new trainees rose rapidly. In othersectors, such as engineering, the inevitable delays inthe system may cause over-shoot, and result in cyclesof over- and under-supply of labour.

The framework for customer-development canbe readily adapted to this new strategic resource(figure 11).

'Tug of war' for established resourcesThe staff-development case is slightly more complexthan the customer-base examples, however, becauseof growth in staff experience during their time withan employer. Firms may not try to compete for newly-qualified staff, but wait to poach experienced peoplefrom others – type-2 rivalry. Citibank and other majorinvestment banks are seen as premier employers fornew graduates. Smaller rivals do not fight in the earlyrecruitment market, but instead target experiencedstaff with especially attractive pay-rates. A salarypremium may be affordable without the heavy costof developing their own staff (Figure 12).

This poaching of experienced staff is widespreadthroughout many sectors, and may seem an intractableproblem. However, two solutions at least have beenfound to be feasible.

Years1 2 3

Ourskilled staff

Ourrecruitsper year

New traineesper year

Ouremployment

attractiveness

Rival�semployment

attractiveness

TOTALindustry

employmentattractiveness

Reinforcingfeedback

Rival�srecruitsper year

Rival�sskilled staff

Recruits fromword-of-mouth

New trainees fromword-of-mouth

Total industryemployees

Recruits fromword-of-mouth

Trainees

Years

Years

Years

1

1

1

2

2

2

3

3

3

R

R

R R

Figure 11

Type-1 rivalry with feedback driving growth of potential and developed specialist staff.



● A British engineering company was a 'top-quartile'recruiter, paying high starting salaries to thebrightest graduates from the best universities.Unfortunately, after just 2-3 years training, thebest recruits were frequently taken, for muchhigher salaries, either by specialist firms orfinancial institutions who valued their systemsskills. A partial solution was found in thecharacteristics of the good staff who had not beenlost. These had often not been the 'best' hiresfrom the 'best' universities, but apparently less-high-flying individuals. They had built moreexperience over a longer period, were more settledin their families and communities, and did notaspire to the glittering careers (sic) of those whohad left. An irony of this case was the possibilitythat the cost of being a top-quartile recruiter mayhave been positively damaging, rather thanadvantageous to this company.

Rivalry for share of attention from non-exclusive resourcesType-3 rivalry – for share of attention from a non-exclusive resource - may also apply to resources otherthan customers. Distributors of computer software andhardware depend on their reputation as reliablesuppliers, able to provide even the latest productsquickly. Yet manufacturers are frequently unable tomeet high levels of final demand and have to rationsupplies. Manufacturers give highest priority todistributors that historically delivered high salesvolumes. There is thus a battle between distributorsto capture share of supply from a non-exclusive set ofsupplier relationships.

Industry Dynamics and ScenariosThe DRSV frameworks in this article can be developedbeyond competition between firms and strategicgroups. If the dynamics of performance outcomes forfirms and firm-groups can be understood, insight willemerge regarding the prospects for entry, exit andgrowth by firms across an entire industry, i.e. theevolution of an entire industry structure. Twoexamples illustrate the potential:

● In 1989, the UK Government regulated the brewingindustry, restricting producers' ownership of pubs.The Monopolies and Mergers Commission thatrecommended the change expected new firms toenter the industry, widening choice and forcingestablished firms to compete intensively bylowering prices. In the event, no new entry occurredand product-ranges across the industry wererationalised. Two major firms engaged in theexpected price-competition, but lost to incumbentswho continued to stress added-value products.Examination of the dynamic interactions at workshowed that, whilst price competition could havetaken some initial market share, the damage to theresource-systems of firms who did so would besevere, and their demise unavoidable.

● The UK internet-service-provider (ISP) sector hasrecently been thrown into turmoil by the launchof an attractive free service by Dixons plc. EstablishedISPs have essentially faced two choices – eitherredesign their resource-systems to join the free-servicesegment, or else find specific sub-segments of userswho value particular features sufficiently to justifythe usage fees. This adaptation process continuesto evolve, with former firm-groups dying orconsolidating, whilst others are emerging.

Ourjuniors

Ourseniors

Ouremployment

attractivenessfor graduates

Experienceand training

Rival�semployment

attractivenessfor seniors

Ouremployment

attractivenessfor seniors

Rival�sjuniors(none)

Rival�sseniors

Figure 12Shifting rivalry to the war for experienced staff

● A US public relations firm also found itself losingthe best of its young professionals. Rather thanresisting this loss by matching competitive offers,the company told leavers that it welcomed theirwish to develop their careers, and kept in touchwith them. Many found their new roles lessattractive than they had hoped, while others gainedexperience that the original employer valued. Alarge fraction of lost staff were re-hired, to boththeir own and the firm's advantage.

Kim Warren

Winter 1999

An extension of the principles concerning rivalry andindustry evolution allows coherent, robust scenariosto be developed. DRSV's application to a single firmessentially captures the mutual evolution of resourceson the demand-side (customers, distributors, reputation...) and the supply-side (capacity, products, staff, unit-cost ...). It is possible to assemble an equivalentarchitecture for an entire industry, and thus assess thetime-path of its evolution. After decades of decline,the cinema industry was turned around by the mutualinvestment of film-makers and cinema owners bothin films people wanted to watch and in facilities in whichto watch them (cinemas). The increasing numbers ofcinema-goers provided cash for further investment,investor confidence in the industry, and a reputationresource to win additional potential consumers, all ofwhich reinforced further industry-wide resources.

The approach can be extended to capture inter-industry 'rivalry', thus further enriching the scenariosof future conditions that may confront executives inany one firm within any one industry. Growth ofinternet usage, for example, can grow only at theexpense of other industries on which consumers mayspend their income or (crucially) their time. Therelative prospects for internet usage, TV-viewing, andother consumer service sectors can thus only beunderstood as a dynamic interplay between thefunctionality, price and 'good use of time' providedby each service.

ConclusionThis article has explained how the dynamic resource-system for a single firm can be extended to quantifythe development of rivalry over time. The method isstrongly fact-based, and provides a rigorous languageand structure for management teams to debate andagree upon competitive policy. Practical applicationof these concepts is proving a powerful approachto solving serious competitive challenges facingfirms, even in situations of rapid change,Glucksman, M. and Morecroft, J (1996), Achi, Z.et al (1995). It is also possible to understand howrivalry may evolve amongst multiple competitorsand assess specif ic, t imed and quantifiedopportunities for building relative advantage.However, the task of assembling the necessaryframeworks and analysis is far from trivial. Teamsare recommended to develop initial skills in strategydyna mics by focusing first on simpler issues withinthe firm's own strategic architecture. This will buildthe confidence to tackle the more complex questionsof rivalry and industry dynamics discussed here.

Kim Warren is a Teaching Fellow in Strategic& International Management at LondonBusiness School


ReferencesAchi, Z. et al (1995) The Paradox of Fast-GrowthTigers, McKinsey Quarterly, 1995, 3, 4-17.Amit, R. and Schoemaker, P. (1993) Strategic Assetsand Organisational Rent, Strategic ManagementJournal, 14, 1, 38-46.Brandenburger, A. and Nalebuff, B. (1995) The RightGame: Use Game Theory to Shape Strategy, HarvardBusiness Review, 73, 4, 57-71.Collis, D. and Montgomery, C. (1995) Competing onResources: Strategy in the 1990s, Harvard BusinessReview, 73, 4, 118-128.Dierickx, I. and Cool, K. (1989) Asset StockAccumulation and Sustainability of CompetitiveAdvantage, Management Science, 35, 1504-1511.Dixit, A. and Nalebuff, B. (1991) ThinkingStrategically: The Competitive Edge in Business,Politics and Everyday Life, Norton & Co, New York.Glucksman, M. and Morecroft, J. (1998) ManagingMetamorphosis McKinsey Quarterly, 1998, 3, 4-17.

Grant, R.M. (1991) A Resource-Based Theory ofCompetitive Advantage: Implications for StrategyFormulation, California Management Review, 33, 3,114-135.Grant, R.M. (1995) Contemporary Strategy Analysis(2nd Edn), Blackwell, Oxford, and de Wit, B. andMeyer, R. (1998) Strategy: Process, Content, Context,(2nd Edn), International Thomson Business Press,London. (Chapter 5).Green, P. and Kreiger, A. (1997) Using ConjointAnalysis to View Competitive Interaction through theCustomer's Eyes in Day, G. and Reibstein, D. Whartonon Dynamic Competitive Strategy, Wiley: ChichesterMcGee, J. and Thomas, H. (1986) Strategic Groups:Theory, Research and Taxonomy, StrategicManagement Journal, 7, 141-160.Kim, W. Chan and Mauborgne, R. (1999) Strategy,Value Innovation, and the Knowledge Economy, SloanManagement Review, 40, 3, 41-49.


Kim Warren

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Warren, 1999 defined the elements of the dynamicresource-system view. Its basic nomenclature is as follows:

resource already in place. These are the curvedconnections in Figure 13, and the calculation at eachstage is made in the variables connected by thesearrows – so 'impact of current resources on the rateof increase in resource A' is calculated from the currentvalues of Resource A and Resources B, C, D ...

The central mathematics of DRSV was describedin Warren, 1999. For theoreticians wishing to studythe further implications of potential-resourcedevelopment and rivalry, those formulations can bereadily extended with the following equations.

A. The rate of accumulation pi of potential resourcePi at time T is a function of all resources R1-n towhich all firms (1 to m) in the industry collectivelyhave access at that time, including Pi itself, as wellas external factors.Eq.1

B. The level of potential resource Pi at time T reflectsits historic rates of net accumulation r since timet=0.Eq.2

C. The net rate of accumulation ri,j of resource Ri,j byfirm j at time T is a function of all resources towhich the firm has access at that time, includingRi,j itself and the potential resources, P1 to Pn, andthe resources of rivals, R1,1 to Rn,m , as well asexternal factors, E.Eq.3

Figure 13

Standard diagram elements for DRSV

Peteraf, M.A. (1993) The Cornerstones of CompetitiveAdvantage: a Resource-Based View, StrategicManagement Journal, 14, 179-192.Porter, M.E. (1980) Competitive Strategy. Free Press,New York.Porter, M.E. (1991) Towards a Dynamic Theory ofStrategy Strategic Management Journal, 12, 95-117.Prahalad, C. and Hamel, G. (1990) The CoreCompetence of the Organisation Harvard BusinessReview, 2, 75-83.Sanchez, R., Heene, A. and Thomas, H. (eds) (1996)Dynamics of Competence-based Competition: Theoryand Practice in the New Strategic Management,Elsevier: Oxford.

Schoemaker, P. (1995) Scenario Planning: A Tool forStrategic Thinking Sloan Management Review 4, 25-40.Schoemaker, P. and Amit, R. (1997) The CompetitiveDynamics of Capabilities: Developing Strategic Assetsfor Alternative Futures in Day, G. and Reibstein, D.Wharton on Dynamic Competitive Strategy, Wiley:Chichester.Wack, P. (1985) Scenarios: Uncharted Waters AheadHarvard Business Review 5, 72-89.Warren, K. (1999) The Dynamics of Strategy, BusinessStrategy Review Volume, 10, 3, 1-16.Wernerfelt, B. (1984) A resource-based view of thefirm Strategic Management Journal, 5, 2, 171-180.

Strategic resources are items (tangible or intangible)that are useful. They accumulate or decay over time,in a similar way to water in a tank (the rectangularcontainers in Figure 13).

Resource-levels are changed only by the in-flowsand out-flows to this tank (the thick, straight arrowsentering and leaving the tank, above), whether bymanagement actions and decisions or other forces.

The tank, with its in- and out-flows, is known asthe stock-and-flow structure.

The rates of flow can be estimated through simplearithmetic, depending upon the existing levels of

Appendix: The DRSV Nomenclature

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