Session 9 © Furrer 2002-2008 1
Corporate StrategyFall 2008
Session 9
Rivalry and Multipoint Competition
Dr. Olivier Furrer
Office: TvA 1-1-11, Phone: 361 30 79e-mail: [email protected]
Office Hours: only by appointment
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In July 1969, Michelin announced plans to establish a plant in Canada which would give a foothold in the North American market, attacking market leader Goodyear. As a countermove, Goodyear entered the European market. Michelin continued to increase its market share in North America and attacked Goodyear in Brazil
(Karnani and Wernerfelt, 1985).
Example
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Competitive Dynamics
Results from a series of competitive actions and competitive responses among firms competing within a particular industry
Competitive Rivalry
Exists when two or more firms jockey with one another in the pursuit of better market position
Definitions
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Multipoint Competition
A situation where firms compete against each other simultaneously in several markets
Definitions (cont’d)
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Focus of this Session
• The process by which multimarket (or multibusiness) affects interfirm rivalry
• The factors that moderate the impact of multimarket (multipoint)) competition on interfirm rivalry
• The implications of multimarket (multipoint) competition for corporate- and business-level strategy
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Factors Leading to More Complex Rivalry
Declining emphasis on single, domestic markets and increasing emphasis on global and multiple markets
Advances in communication technology make coordination easier across multiple markets
Advances in technology and innovation have increased competitiveness of small and medium sized firms
National barriers are falling due to the number and scope of trade agreements (WTO, NAFTA, EU)
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The Rivalry Matrix
Game TheoryWarfare Models,
Multipoint Competition
Scenarios, Simulation, and
Systems DynamicsFrameworks
Decision Variables
Few Many
Un
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Pre
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Nat
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Reference.: Furrer, Olivier and Howard Thomas (2000), “The Rivalry Matrix: Understanding Rivalry and Competitive Dynamics,” European Management Journal, 18 (6), 619-637.
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Relative Size
SpeedInnovation
Quality
Ability for Action and Response
OutcomesDrivers of
Competitive Behavior
AwarenessMotivationCapability
Competitor Analysis
MarketCommonality
ResourceSimilarity
Interfirm Rivalry:Attack & Response
Likelihood of AttackFirst Mover Incentives
Likelihood of ResponseType of Competitive
Action
Dependence on theMarket
Resource Availability
Actor’s Reputation
Competitive
Slow, Standardor Fast Cycle
Market Types
Competitive
SustainedOutcomes
CompetitiveAdvantage
TemporaryAdvantage
EvolutionaryOutcomes
Entrepreneurial
or Market-PowerGrowth-Oriented
ActionsFeedback
Model of Interfirm Rivalry:Likelihood of Attack and Response
Ref.: Chen, 1996
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Multimarket Competition andInterfirm Rivalry:
The Mutual Forbearance Hypothesis
• Mutual forbearance is tacit collusion as a consequence of firms competing in many markets and the resulting increase in their interdependence.
• Tacit collusion, as opposed to direct collusion, which is illegal, is a situation in which two firms understand each other’s motives and strategies and implicitly coordinate to avoid competing intensely.
• Extent theory suggests that two different processes may be responsible for mutual forbearance as a result of higher degree of multimarket contact: familiarity (Baum and Korn, 1999) and deterrence (Bernstein and Whinston, 1990; Edwards, 1955; Porter, 1980).
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Multimarket contactBetween focal firm and
rivals
Ability to hurtLarger revenue exposure
to rivals’ actions
Opportunity to hurtRivals’ opportunity to
retaliate in multiple markets
Larger number ofinteractions with rivals
Better understanding ofinterdependence and overlapping marketfortunes with rivals
Greater attention to rivalsin market scanning andcompetitor information
acquisition
Lower expected payofffrom rivalry
Increased deterrenceIncreased familiarity
MUTUAL FOREARANCE
Lower intensity ofcompetition Ref.: Jayachandran et al.,
1999
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Relative Size
SpeedInnovation
Quality
Ability for Action and Response
OutcomesDrivers of
Competitive Behavior
AwarenessMotivationCapability
Competitor Analysis
MarketCommonality
ResourceSimilarity
Interfirm Rivalry:Attack & Response
Likelihood of AttackFirst Mover Incentives
Likelihood of ResponseType of Competitive
Action
Dependence on theMarket
Resource Availability
Actor’s Reputation
Competitive
Slow, Standardor Fast Cycle
Market Types
Competitive
SustainedOutcomes
CompetitiveAdvantage
TemporaryAdvantage
EvolutionaryOutcomes
Entrepreneurial
or Market-PowerGrowth-Oriented
ActionsFeedback
Model of Interfirm Rivalry:Likelihood of Attack and Response
Ref.: Chen, 1996
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Model of Interfirm Rivalry:Likelihood of Attack and Response
Drivers of Competitive
Behavior
Motivation
Capability
Do managers understand the key characteristics of competitors?
Awareness
Does the firm have appropriate incentives to attack or respond?
Does the firm have the necessary resources to attack or respond?
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Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs
Competitor Analysis Do firms compete with each
other in multiple markets?Market Commonality
For example, airlines price flights similarly, but respond quickly when competitors introduce promotional prices
Model of Interfirm Rivalry:Likelihood of Attack and Response
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Competitor Analysis
Resource Similarity
Do competitors possess similar types or amounts of resources?
Firms are less inclined to attack a firm that is likely to retaliate
Firms with dissimilar resources are more likely to attack
Firms with similar resources are more likely to be aware of each other’s competitive moves
Model of Interfirm Rivalry:Likelihood of Attack and Response
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Market Commonality andResource Similarity
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Multimarket Contact and Intensity of Competition: A Contingency Model
Intensity ofcompetition
Degree ofmultimarket
contact
Sellerconcentration
Organizationalstructure of
competing firms
Resourcesimilarity
Spheres ofinfluence
Ref.: Jayachandran et al., 1999
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Interfirm Rivalry:Attack & Response
Likelihood of AttackFirst Mover Incentives
Likelihood of ResponseType of Competitive Action
Dependence on the Market
Resource Availability
Actor’s Reputation
Firm Mover advantage can be
substantial
Model of Interfirm Rivalry:Likelihood of Attack and Response
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Firms that take an initial competitive action
Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies
Can earn above average profits until competitors respond
Gain customer loyalty, helping to create a barrier to entry by competitors
Advantage depends upon difficulty of imitation
First Mover
Ref.: Lieberman and Montgomery, 1988
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Second Mover
Firms that respond to a First Mover’s actions
Second Movers frequently imitate First Movers
Speed of response often dictates success
Should evaluate customers’ response before moving
“Fast” Second Movers can capture some of initial customers and develop some brand loyalty
Avoid some of the risks associated with First Move
Must possess necessary capabilities to imitate
Ref.: Lieberman and Montgomery, 1988
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Interfirm Rivalry:Attack & Response
Likelihood of AttackFirst Mover Incentives
Likelihood of ResponseType of Competitive Action
Dependence on the Market
Resource Availability
Actor’s Reputation
Whether a Whether a competitor is competitor is
likely to respond likely to respond depends on several depends on several
key factorskey factors
Model of Interfirm Rivalry:Likelihood of Attack and Response
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Types of Competitive Actions
TacticalActions Relatively easy to implement
Relatively easy to reverse
Undertaken to “fine tune” strategy
Price cutExample
Strategic Actions
Significant commitments of specific & distinctive organizational resourcesDifficult to implement
Difficult to reverse
Major AcquisitionExample
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Gauging the Likelihood of Response
Easier to respond to
Require fewer resources to mount a response
Actor’s Reputation
Market leaders are more likely to be copied
“Risk taking” firms are less likely to be copied
“Price Predators” are less likely to be copied
Type of Competitive Action -Tactical or Strategic
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Firms that are more dependent on a single industry are more likely to respond than are multimarket firms
Industry dependent firms will likely respond to either strategic or tactical actions
Competitor Resources
Smaller firms are more likely to respond to tactical actionsLimited resources may lead to alternatives such as Strategic Alliances
Gauging the Likelihood of Response
Market Dependence
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Relative Size
Quality
Innovation
Speed
Firm size can have opposing effects on competitive dynamics
Ability for Action and Response
Large firms may exert market power over rivals and erect barriers to entry against smaller competitors
However, smaller competitors may be more nimble and innovative
Model of Interfirm Rivalry:Likelihood of Attack and Response