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

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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