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PowerPoint slides by:
R. Dennis MiddlemistColorado State University
Copyright 2004 South-Western
All rights reserved.
Chapter 5
Competitive
Rivalry andCompetitiveDynamics
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Knowledge Objectives
Studying this chapter should provide you with thestrategic management knowledge needed to:
Define competitors, competitive rivalry, competitivebehavior, and competitive dynamics.
Describe market commonality and resource similarity asthe building blocks of a competitor analysis.
Explain awareness, motivation, and ability as drivers ofcompetitive behavior.
Discuss factors affecting the likelihood a competitor willtake competitive actions.
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Knowledge Objectives (contd)
Studying this chapter should provide you with thestrategic management knowledge needed to:
Discuss factors affecting the likelihood a competitor willrespond to actions taken against it.
Explain competitive dynamics in slow-cycle, fast-cycle, andstandard-cycle markets.
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Figure 1.1
Copyright 2004 South-Western. All rights reserved.
The StrategicManagement
Process
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Definitions
CompetitorsFirms operating in the same market, offering
similar products and targeting similar customers
Competitive rivalry
The ongoing set of competitive actions andresponses occurring between competitors
Competitive rivalry influences an individualfirms ability to gain and sustain competitive
advantages
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Definitions
Competitive behaviorThe set of competitive actions and competitive
responses the firm takes to build or defend itscompetitive advantages and to improve itsmarket position
Competitive dynamicsThe total set of actions and responses taken by
all firms competing within a market
Multimarket competitionFirms competing against each other in severalproduct or geographic markets
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From Competitors to Competitive Dynamics
SOURCE: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry:Toward a theoretical integration, Academy of Management Review, 21: 100134. Figure 5.1
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Competitive Rivalrys Effect on Strategy
Success of a strategy is determined by:The firms initial competitive actions
How well it anticipates competitors responses to
them
How well the firm anticipates and responds to itscompetitors initial actions
Competitive rivalry:
Affects all types of strategiesHas the strongest influence on the firms
business-level strategy or strategies
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A Model of Competitive Rivalry
Firms are mutually interdependentA firms competitive actions have noticeable
effects on its competitors
A firms competitive actions elicit competitiveresponses from its competitors
Competitors feel each others actions and
responses
Marketplace success is a function of bothindividual strategies and the consequencesof their use
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A Model of Competitive Rivalry
SOURCE: Adapted from M.-J. Chen, 1996, Competitor
analysis and interfirm rivalry:Toward a theoretical integration,
Academy of Management Review, 21: 100134. Figure 5.2
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Competitor Analysis
Competitor analysis is used to help a firmunderstand its competitors
The firm studies competitors future
objectives, current strategies, assumptions,and capabilities
With the analysis, a firm is better able topredict competitors behaviors when
forming its competitive actions andresponses
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Market Commonality
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 Firms competing against one another in
several or many markets engage inmultimarket competition
A firm with greater multimarket contact is lesslikely to initiate an attack, but more likely to morerespond aggressively when attacked
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Resource Similarity
Resource SimilarityHow comparable the firms tangible and
intangible resources are to a competitors interms of both types and amounts
Firms with similar types and amounts ofresources are likely to:
Have similar strengths and weaknesses
Use similar strategies
Assessing resource similarity can bedifficult if critical resources are intangiblerather than tangible
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A Framework of Competitor Analysis
Figure 5.3
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Drivers of Competitive Behavior
Awareness is the extent to which
competitors recognizethe degree of their
mutual interdependencethat results from:
Market commonality
Resource similarity
Awareness
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Drivers of Competitive Behavior (contd)
Motivation concerns
the firms incentive to
take action
or to respond to acompetitors attack
and relates toperceived gains and
losses
Awareness
Motivation
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Drivers of Competitive Behavior (contd)
Ability relates to
each firms resources
the flexibility theseresources provide
Without availableresources the firmlacks the ability to
attack a competitor respond to the
competitors actions
Awareness
Motivation
Ability
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Drivers of Competitive Behavior (contd)
A firm is more likely to attackthe rival with whom it haslow market commonalitythan the one with whom itcompetes in multiple
markets Given the high stakes of
competition under marketcommonality, there is a highprobability that the attacked
firm will respond to itscompetitors action in an
effort to protect its positionin one or more markets
Awareness
Motivation
Market
Commonality
Ability
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Drivers of Competitive Behavior (contd)
The greater the resourceimbalance between the actingfirm and competitors orpotential responders, the
greater will be the delay inresponse by the firm with aresource disadvantage
When facing competitors withgreater resources or more
attractive market positions,firms should eventuallyrespond, no matter howchallenging the response
ResourceDissimilarity
Awareness
Motivation
Market
Commonality
Ability
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Competitive Rivalry
Competitive actionA strategic or tactical action the firm takes to
build or defend its competitive advantages orimprove its market position
Competitive responseA strategic or tactical action the firm takes to
counter the effects of a competitors competitive
action
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Strategic and Tactical Actions
Strategic action or a strategic responseA market-based move that involves a significant
commitment of organizational resources and isdifficult to implement and reverse
Tactical action or a tactical responseA market-based move that is taken to fine-tune a
strategy:
Usually involves fewer resources
Is relatively easy to implement and reverse
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Factors Affecting Likelihood of Attack
First movers allocate funds for: Product innovation and
development
Aggressive advertising
Advanced research and
development First movers can gain:
The loyalty of customers whomay become committed to thefirms goods or services
Market share that can bedifficult for competitors to takeduring future competitive rivalry
First Mover
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Factors Affecting Likelihood of Attack (contd)
Second mover responds to thefirst movers competitive action,
typically through imitation:
Studies customers reactions to
product innovations
Tries to find any mistakes thefirst mover made, and avoidthem
Can avoid both the mistakes andthe huge spending of the first-
movers May develop more efficient
processes and technologies
First Mover
Second Mover
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Factors Affecting Likelihood of Attack (contd)
Late mover responds to acompetitive action only afterconsiderable time has elapsed
Any success achieved will beslow in coming and much lessthan that achieved by first andsecond movers
Late movers competitive action
allows it to earn only averagereturns and delays itsunderstanding of how to createvalue for customers
First Mover
Second Mover
Late Mover
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Factors Affecting Likelihood of Attack (contd)
Small firms are more likely:
To launch competitive actions
To be quicker in doing so
Small firms are perceived as:
Nimble and flexible competitors
Relying on speed and surprise todefend competitive advantagesor develop new ones whileengaged in competitive rivalry
Having the flexibility needed tolaunch a greater variety ofcompetitive actions
First Mover
Second Mover
Late Mover
Organizational
Size
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Factors Affecting Likelihood of Attack (contd)
Large firms are likely to initiatemore competitive actions as wellas strategic actions during agiven time period
Large organizations commonlyhave the slack resourcesrequired to launch a largernumber of total competitiveactions
Think and act big and well getsmaller. Think and act small andwell get bigger.
Herb Kelleher
Former CEO, Southwest Airlines
First Mover
Second Mover
Late Mover
Organizational
Size
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Factors Affecting Likelihood of Attack (contd)
Quality exists when thefirms goods or services
meet or exceed customers
expectations
Product quality dimensionsinclude:
Performance
Features Flexibility
Durability
Conformance
Serviceability Aesthetics
Perceivedquality
First Mover
Second Mover
Quality(Product)
Late Mover
Organizational
Size
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Quality Dimensions of Goods
Product Quality Dimensions1. PerformanceOperating characteristics
2. FeaturesImportant special characteristics
3. FlexibilityMeeting operating specifications over some
period of time4. DurabilityAmount of use before performance deteriorates
5. ConformanceMatch with preestablished standards
6. ServiceabilityEase and speed of repair
7. AestheticsHow a product looks and feels
8. Perceived qualitySubjective assessment of characteristics(product image)
Table 5.1a
SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St.Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The FreePress; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
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Factors Affecting Likelihood of Attack (contd)
Service quality dimensions
include: Timeliness
Courtesy
Consistency
Convenience Completeness
Accuracy
First Mover
Second Mover
Quality(Product)
Late Mover
Organizational
Size
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Quality Dimensions of Services
Service Quality Dimensions1. TimelinessPerformed in the promised period of time
2. CourtesyPerformed cheerfully
3. ConsistencyGiving all customers similar experiences each time
4. ConvenienceAccessibility to customers
5. CompletenessFully serviced, as required
6. AccuracyPerformed correctly each time
Table 5.1b
SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St.Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The FreePress; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
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Factors Affecting Likelihood of Response
Firms study three other factors to predicthow a competitor is likely to respond tocompetitive actions:
Type of competitive action
Reputation
Market dependence
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Factors Affecting Strategic Response
Strategic actions receivestrategic responses
Strategic actions elicit fewertotal competitive responses
The time needed to implementand assess a strategic actiondelays competitors responses
Tactical responses are takento counter the effects of
tactical actions
Competitor likely will respondquickly to a tactical actions
Type ofCompetitive
Action
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Factors Affecting Strategic Response (contd)
An actor is the firm taking anaction or response
Reputation is the positive ornegative attribute ascribed by
one rival to another based onpast competitive behavior
The firm studies responsesthat a competitor has taken
previously when attacked topredict likely responses
Type ofCompetitive
Action
ActorsReputation
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Factors Affecting Strategic Response (contd)
Market dependence is theextent to which a firms
revenues or profits arederived from a particular
market In general, firms can predict
that competitors with highmarket dependence are likely
to respond strongly toattacks threatening theirmarket position
Type ofCompetitive
Action
ActorsReputation
Dependenceon the market
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Competitive Dynamics versus Rivalry
CompetitiveDynamics
Ongoing actions andresponses taking
place between allfirmscompetingwithin a market foradvantageous
positions
CompetitiveRivalry
Ongoing actions andresponses taking
place between anindividual firm andits competitorsfor anadvantageous
market position
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Competitive Dynamics Versus Rivalry(contd)
Competitive Rivalry(Individual firms)
Market commonality
and resource similarity Awareness, motivation
and ability
First mover incentives,
size and quality
Competitive Dynamics(All firms)
Market speed (slow-cycle,
fast-cycle, and standard-cycle)
Effects of market speedon actions and responsesof all competitors in the
market
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Competitive Dynamics
Competitive advantages areshielded from imitation forlong periods of time andimitation is costly
Competitive advantages aresustainable in slow-cyclemarkets
All firms concentrate on
competitive actions andresponses to protect, maintainand extend proprietarycompetitive advantage
Slow-CycleMarkets
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Gradual Erosion of a Sustained Competitive Advantage
Figure 5.4SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamicsby taking strategic initiative, Academy of Management Executive, 11(2): 111118.
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Competitive Dynamics (contd)
The firms competitiveadvantages arent shielded
from imitation
Imitation happens quickly and
somewhat inexpensively Competitive advantages arent
sustainable
Competitors use reverse
engineering to quickly imitate orimprove on the firms products
Non-proprietary technology isdiffused rapidly
Slow-CycleMarkets
Fast-CycleMarkets
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Obtaining Temporary Advantages to CreateSustained Advantage
SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamicsby taking strategic initiative, Academy of Management Executive, 11(2): 111118. Figure 5.5
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Competitive Dynamics (contd)
Moderate cost of imitation mayshield competitive advantages.
Competitive advantages arepartially sustainable if their
quality is continuouslyupgraded
Firms
Seek large market shares
Gain customer loyalty throughbrand names
Carefully control operations
Slow-CycleMarkets
Fast-CycleMarkets
Standard-CycleMarkets