Corporate Strategy Rivalry and Multipoint Competition Session 9 Dr. Olivier Furrer e-mail: o.furrer@fm.ru.nl

Example 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: Microsoft’s Xbox In the late 1990s, Microsoft recognized that Sony could emerge as an important rival. Although Sony functioned in a different industry (i.e., consumer electronics rather than software), Microsoft noted that the Sony PlayStation was, in essence, nothing more than a specialized computer and, even worse, one that did not use a Microsoft operating system. Microsoft thus worried that Sony might use the PlayStation II, which came equipped with Web browsing potential, as a “Trojan horse” that would gain control of consumers’ Web browsing and computing habits from their living rooms, ultimately taking those customers away from PCs with Microsoft operating systems. The desire to keep Sony’s ambitions in check was a significant part of the rationale for Microsoft’s diversification into the video game industry, with the launch of its Xbox.

Example: Disney and AOL–Time Warner Multipoint competition between The Walt Disney Company and AOL–Time Warner in the early 1990s. Disney operates in the theme park, movie and television production, and television broadcasting industries; AOL–Time Warner operates in the theme park and movie and television production industries, while also operating a significant magazine business (publishing Time, People, Sports Illustrated, and others). Disney spends millions of dollars to advertise its theme parks in AOL–Time Warner magazines. Despite this substantial revenue, AOL–Time Warner initiated an aggressive advertising campaign, aimed at wooing customers away from Disney theme parks to its own. Disney retaliated by canceling all of its advertising in AOL–Time Warner magazines. AOL–Time Warner responded by canceling a corporate meeting that was to be held at Disney World. Disney in turn responded to AOL–Time Warner’s meeting cancellation by refusing to broadcast AOL–Time Warner theme park advertisements on its Los Angeles television station. 4

Definitions Competitive Dynamics Competitive Rivalry 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 (cont’d) Multipoint Competition A situation where firms compete against each other simultaneously in several markets

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

Multipoint Competition III II IV Firm A Firm B Businesses

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)

The Rivalry Matrix Decision Variables Few Many Warfare Models, Multipoint Competition Predictable Game Theory Nature of the Environment Scenarios, Simulation, and Systems Dynamics Uncertain Frameworks Source.: Furrer, Olivier and Howard Thomas (2000), “The Rivalry Matrix: Understanding Rivalry and Competitive Dynamics,” European Management Journal, 18 (6), 619–637.

Model of Interfirm Rivalry: Likelihood of Attack and Response Relative Size Speed Innovation Quality Ability for Action and Response Outcomes Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Resource Availability Actor’s Reputation Competitive Slow, Standard or Fast Cycle Market Types Sustained Advantage Temporary Evolutionary Entrepreneurial or Market-Power Growth-Oriented Actions Feedback Model of Interfirm Rivalry: Likelihood of Attack and Response Session 7 © Furrer 2002-2012 Source: Chen, 1996

Multimarket Competition and Interfirm 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).

Between focal firm and rivals Multimarket contact Between focal firm and rivals Larger number of interactions with rivals Ability to hurt Larger revenue exposure to rivals’ actions Opportunity to hurt Rivals’ opportunity to retaliate in multiple markets Better understanding of interdependence and overlapping market fortunes with rivals Greater attention to rivals in market scanning and competitor information acquisition Lower expected payoff from rivalry Increased familiarity Increased deterrence MUTUAL FORBEARANCE Lower intensity of competition Source: Jayachandran et al., 1999

Model of Interfirm Rivalry: Likelihood of Attack and Response Relative Size Speed Innovation Quality Ability for Action and Response Outcomes Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Resource Availability Actor’s Reputation Competitive Slow, Standard or Fast Cycle Market Types Sustained Advantage Temporary Evolutionary Entrepreneurial or Market-Power Growth-Oriented Actions Feedback Model of Interfirm Rivalry: Likelihood of Attack and Response Session 7 © Furrer 2002-2012 Source: Chen, 1996

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Do managers understand the key characteristics of competitors? Does the firm have appropriate incentives to attack or respond? Motivation Does the firm have the necessary resources to attack or respond? Capability

Model of Interfirm Rivalry: Likelihood of Attack and Response 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 Competitor Analysis Do competitors possess similar types or amounts of resources? 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

Market Commonality and Resource Similarity Source: Chen, 1996

Multimarket Contact and Intensity of Competition Low contact Medium contact High contact Degree of multimarket contact 19 19

Multimarket Contact and Intensity of Competition: A Contingency Model Degree of multimarket contact Seller concentration Organizational structure of competing firms Resource similarity Spheres of influence Opportunities for scope economies CEO’s tenure Source: Furrer, 2010; Jayachandran et al., 1999

Model of Interfirm Rivalry: Likelihood of Attack and Response Attack & Response Likelihood of Attack Firm Mover advantage can be substantial First Mover Incentives Likelihood of Response Type of Competitive Action Actor’s Reputation Dependence on the Market Resource Availability

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 Source: Lieberman and Montgomery, 1988

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 Source: Lieberman and Montgomery, 1988

Model of Interfirm Rivalry: Likelihood of Attack and Response Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Whether a competitor is likely to respond depends on several key factors Actor’s Reputation Dependence on the Market Resource Availability

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

Source: Karnani and Wernerfelt, 1985

Source.: Smith and Wilson, 1995

Gauging the Likelihood of Response Type of Competitive Action: Tactical or 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

Gauging the Likelihood of Response Market Dependence 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 actions Limited resources may lead to alternatives such as Strategic Alliances

Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Firm size can have opposing effects on competitive dynamics Relative Size Speed Large firms may exert market power over rivals and erect barriers to entry against smaller competitors Innovation Quality However, smaller competitors may be more nimble and innovative