Competitive Rivalry and Competitive Dynamics Chapter 5 Competitive Rivalry and Competitive Dynamics How do we compete?

Effect of Competitive Rivalry on a Firm’s Strategies Success of a strategy is determined by: the firm’s initial competitive actions how well it anticipates competitors’ responses to them how well the firm anticipates and responds to its competitors’ initial actions Competitive rivalry affects all types of strategies most dominant influence is on the firm’s business-level strategy or strategies.

From Competitors to Competitive Dynamics To gain an advantageous market position Engage in Why? Competitive rivalry Through competitive behavior Competitive actions Competitive responses How? What results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market

A Model of Competitive Rivalry Outcomes Market position Financial performance Competitive Analysis Market commonality Resource similarity feedback Interim Rivalry Likelihood of Attack First mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence Drivers of Competitive Behavior Awareness Motivation Ability

Competitive Rivalry: Assumptions Firms are mutually interdependent one firm’s competitive actions have noticeable effects on competitors one firm’s competitive actions elicit competitive responses from competitors competitors feel each other’s actions and responses Marketplace success is a function of both individual strategies and the consequences of their use

Competitor Analysis Competitor analysis a technique firms use to understand their competitive environment. Along with the general and industry environments, the competitive environment comprises the firm’s external environment a technique used to help the firm understand its competitors the first step to being able to predict competitors’ behavior in the form of its competitive actions and responses

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 Most industries’ markets are somewhat related in terms of technologies core competencies

Drivers of Competitive Actions and Responses: Market Commonality Market commonality A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets

Model of Interfirm Rivalry: Likelihood of Attack and Response Market commonality Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs For example, airlines price flights similarly but respond quickly when competitors introduce promotional prices 22

Resource Similarity Resource similarity the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount Firms with similar types and amounts of resources are likely to have similar strengths and weaknesses use similar strategies Assessing resource similarity can be difficult if critical resources are intangible rather than tangible

Model of Interfirm Rivalry: Likelihood of Attack and Response Resource similarity Firms are less inclined to attack a firm that is likely to retaliate Firms with similar resources are more likely to be aware of each other’s competitive moves Firms with dissimilar resources are more likely to attack 24

Drivers of Competitive Actions and Responses: Resource Similarity Resource similarity The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response IKEA

First Mover 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 29

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 30

Types of Competitive Actions Strategic Actions Significant commitments of specific and distinctive organizational resources Difficult to implement Difficult to reverse Major Acquisition Example Tactical Actions Relatively easy to implement Relatively easy to reverse Undertaken to “fine tune” strategy Price cut Example 41

Gauging the Likelihood of Response Type of Competitive Action -Tactical vs Strategic 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 44

Gauging the Likelihood of Response Market Dependence Firms that are more dependent on a single industry are more likely to respond than are diversified firms Industry dependent firms will likely respond to either strategic or tactical actions Competitor Resources Smaller firms are more likely to respond to tactical actions Limited resources may lead to alternatives such as Strategic Alliances 46