Chapter 5 Competitive Rivalry and Competitive Dynamics Diane M. Sullivan, Ph.D., 2012 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

The Strategic Management Process After selecting a business-level strategy, firms must remain aware of competitive rivalry and dynamics that affect the success of their competitive actions and that allow them to predict competitor’s actions Insert figure 1.1 graphic

Competitive Rivalry and Dynamics: Key Definitions Competitors Firms operating in the same market, offering similar products and targeting similar customers Competitive Rivalry (firm-to-firm competitive actions) Ongoing set of actions and responses occurring between competitors as they contend with each other for an advantageous market position Also called interfirm rivalry Competitive Dynamics (sum of all firm competitive actions) Total set of actions and responses of all firms competing within a market Strategic Action Significant commitment of a specific and distinctive resource that is irreversible (Boeing’s midsized jet liner; Guess positioning to be more upscale) Tactical Action Commitment of less specific resources, taken to fine-tune a strategy, that is reversible (e.g., pricing, advertising)

Competitive Rivalry and Dynamics: Examples Ex. 1: The “Dell way”: bypass middle-man and sell custom-built computers directly to consumer This business model lowered costs and hence prices of products But as of 2006, no longer created value to the degree it had and End of 2006: HP 18.1% vs. Dell’s 14.7% market share Why? Ex. 2: Fast food industry

The Essence of Competitive Action and Response Industry Environment is Changed Industry Environment Industry Environment is Changed Again Company ‘B’ (e.g., McDonald’s) Initiates Competitive Response Company ‘A’ (e.g., Starbucks) Initiates Competitive Action

The World Automobile Industry: Strategic Groups Note: Members of each strategic group are only illustrative – not inclusive. Ferrari Lamborghini Porsche Toyota Ford General Motors Chrysler Honda Nissan Mercedes BMW High Hyundai Kia Breadth of Product Line Low Price

CapSim and Strategic Groups Performance Size Low Perf. Trad High Size

A Model of Competitive Rivalry

Step 1: Conduct General Competitive Analysis Purpose: assess similarity of firms to determine the extent to which they are competitors Two components Market Commonality Resource Similarity Extent of Competitive Rivals

Market Commonality and Resource Similarity Market Commonality (MC) Increases when firms compete in similar markets The more overlapping markets (e.g., multimarket competition), the higher the MC E.g., geographic, product, customer, etc. McDonald’s and Burger King: High MC Resource Similarity (RS) How comparable are competitor’s tangible and intangible resources in type and amount? FedEx and UPS: high RS

Market Commonality and Resource Similarity (Con’t) Firms should be less inclined to attack a firm that is likely to retaliate High MC and RS should reduce likelihood of attack Firms with high MC and with similar resources are more likely to be aware of each other’s competitive moves When attacked, similar firms more likely to aggressively retaliate Can lock firms into mutually destructive competitive situations Fast food industry participants Netflix and Blockbuster

Step 2: Study Drivers of Competitive Behavior Awareness Are managers aware of and do they understand key competitors? Motivation Does the firm have an “incentive” to take action or respond? Ability Does the firm have the necessary resources to attack? Understanding competitor’s awareness, motivation and ability helps the firm to predict competitor behavior

Step 3: Examine Likelihood of Attack & Response Likelihood of Attack (LoA) Factors First-mover advantages—innovative actions can create competitive advantages. Can result in: 1) customer loyalty and 2) above-average market share Be cautious of 2nd movers who can imitate at 65% of the cost of 1st movers Organizational Size Small firms are nimble/flexible so can more quickly act with a variety of actions; Large firms actions are more numerous, but often predictable

Step 3: Examine Likelihood of Attack & Response Likelihood of Response (LoR) Factors A firm is likely to respond when the competitor’s action Might produce a stronger competitive advantage for them Damages the firm’s ability to create/maintain an advantage The firm’s market position is less defensible Three Factors to consider: Type of competitive action Reputation Market dependence

Deal with the relative competitive speed in different markets Competitive Dynamics Competitive Dynamics concern actions and responses among all firms in a market Deal with the relative competitive speed in different markets Slow-cycle Standard-cycle Fast-cycle Different speeds, or cycles, will affect competitive behavior (actions and responses)

Competitive Dynamics Continued Slow-cycle markets Often shielded from imitation due to costs and/or very strong brand loyalties May lead to SCA, but eventually it will erode over time Pharmaceuticals

Slow-cycle Market Gradual Erosion of SCA Returns from a Sustained Competitive Advantage (SCA) Exploitation Counterattack Launch Time (years) 10 60

Competitive Dynamics Continued Standard-cycle markets Lead to highly competitive pressures despite world class products Multimarket competition may dampen rivalry somewhat SCA is possible Fast-cycle markets Intensely dynamic; 1st mover advantage unsustainable Firms may cannibalize older generation products SCA unlikely

Developing Temporary Advantages to Create Sustained Advantage in Fast- and Standard-Cycle Markets