1 Strategic Management: Concepts and Cases Part II: Strategic Actions: Strategy Formulation Chapter 5: Competitive Rivalry and Competitive Dynamics

2 Competition Between HP and Dell: The Battle Rages On Dell lost position as global top-seller of PCs End of 2006: HP 18.1% vs. Dell’s 14.7% 2005 and 2006: 32% overall decline in stock value Dell way: bypass middle-man and sell custom-built computers directly to consumer This single business model lowered costs and hence prices of products, no longer created value to the degree it had historically …. … Why? Competitive actions/reactions HP: found ways to innovate and reinvent itself – since it couldn’t compete with Dell in the direct-sales battlefield they used their strength and developed personal relationships with retailers Dell decides to venture into retail sales – a reaction to HP!

3 From Competitors to Competitive Dynamics

4 Model of Competitive Rivalry  Over time firms take competitive actions/reactions  Pattern shows firms are mutually interdependent  Firm level rivalry is usually dynamic and complex  Strategic and tactical action does not occur within a vacuum Strategic actions/responses: market-based moves that signify a significant commitment of resources Difficult to implement and reverse Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place Easy to implement and reverse

 What industries have high competitive rivalry?  What sort of actions/tactics are taken? 5

Competition in the Pharmaceutical Industry Reps have more than tripled since the 1990s – now over 100K 12B on sales force, 4.5B on ads in 2006 Managed care bet – Pfizer from 14 th to 1 st 529 visits yearly, average length – 2.5 min 8% remember Glaxo can reach 80% of the Drs in a week “Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

Prisoner’s Dilemma SilentS = 6 months S = 10 years T = 0 years TestifyS = 10 years T = 0 years T = 5 years SilentTestify 7

8

What would happen to Coke and Pepsi’s profits if they BOTH stopped advertising? 9

10 A Model of Competitive Rivalry

11 Market Commonality Each industry composed of various markets which can be subdivided into segments To what extent are the firms jointly involved and how important those segments are to each firm Resource Similarity Extent to which firm’s tangible/intangible resources are comparable to competitor’s in type and amount I.e., FedEx and UPS – both have efficient operations and focus on cost reduction Combination of market commonality & resource similarity indicate a firm’s direct competitors

12 A Framework of Competitor Analysis

13 Drivers of Competitive Actions/Responses Market commonality & resource similarity influence three drivers (awareness, motivation and ability) of competitive behavior Awareness Prerequisite to any competitive action Extent competitors recognize degree of mutual interdependence that results from market commonality and resource similarity Motivation Firm's incentive to take action, or to respond to a competitor's attack, as it relates to perceived gains and losses Ability Firm's resources that allow competitive action and flexibility responsiveness

14 Interfirm Rivalry: Likelihood of Attack Factors which may influence the ‘likelihood of response’ actions First Mover Incentives Organizational Size Quality

15 First movers Firm that takes an initial competitive action to build or to defend its competitive advantages or to improve its market position Must have readily available resources  Slack – buffer or cushion provided by actual or obtainable resources not currently used by an organization, resources in excess of the minimum needed to produce a given level of output Often builds upon a strategic foundation of superior research and development skills Tends to be aggressive and willing to experiment with innovation Benefits can be substantial, but so can risks!

16 Second and Late Movers ) Second Mover Cautiously responds to first mover, typically through imitation Tends to study customer reactions to product innovations Reduces risk by learning from the first movers Develops process technologies that are more efficient than first movers, reducing its costs Will not benefit from first mover advantages, lowering potential returns Late Mover Responds to market opportunities only after considerable time has elapsed since first and second movers have taken action Has substantially reduced risks and returns

17 How Size Affects the Likelihood of Attack Small firms Act as nimble and flexible competitors Rely on speed and surprise to defend their competitive advantage Have greater variety of competitive behavior options available Large firms Often have greater slack Have greater likelihood to initiate competitive and strategic actions over time Tend to rely on a limited variety of competitive actions, which can ultimately reduce their competitive success

18 How Quality Affects the Likelihood of Attack Customer perception that the firm's goods or services perform in ways that are important to customers, meeting or exceeding their expectations Firms with lower quality have fewer competitive alternatives

Likelihood of Gaining a Response Types of Competitive Action Strategic vs. Tactical moves Strategic moves elicit fewer responses Actor’s Reputation Market leader vs. company seen as risky, a loose cannon, or unpredictable. Dependence on the Market The more a firm is dependent on a market, the more likely it will respond to attacks 19

Industry characteristics are also a factor in the extent to which an industry is competitively dynamic. Extent to which advantages are shielded from imitation How costly/time consuming is imitation? 20

21 Competitive Dynamics: 3 Market Cycles 1. Slow-Cycle Markets Markets in which the firm's competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly Build a one-of-a-kind competitive advantage which creates sustainability (I.e., proprietary and difficult for competitors to understand) Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage Organizational structure should be used to effectively support strategic efforts

22 Gradual Erosion of a Sustained Competitive Advantage

23 Competitive Dynamics: 3 Market Cycles (Cont’d) 2. Fast-Cycle Markets Markets in which the firm's capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive Sustained performance in these settings are based on learning how to rapidly and continuously develop new competitive advantages - innovation Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation Continually try to move on to another temporary competitive advantage before competitors can respond to the first one

24 Developing Temporary Advantages to Create Sustained Advantage

25 Competitive Dynamics: 3 Market Cycles (Cont’d) 3. Standard-Cycle Markets Markets where firm’s competitive advantages are moderately shielded from imitation and where imitation is moderately costly Competitive advantages partially sustained as quality is continuously upgraded Seek to serve many customers and gain a large market share Gain brand loyalty through brand names Careful operational control / manage a consistent experience for the customer