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8. 6
© 2011, Jens Mueller

9. Model of Competitive Dynamics
Decide on a competitive advantage,
Analyze threats from competition
Can they copy you?
Can they imitate your core – if not that is your magic
Perhaps they may not be motivated to respond (e.g., ODG)
What types of competitive action will they engage
(Delta sued Southwest airlines, patent infringement, direct competition etc.)
What is the chance of that reaction happening and
What is the chance of it being successful
Sources: Adapted from Chen, M-J Competitor analysis and interfirm rivalry: Toward a theoretical integration. Academy of Management Review, 21(1): ; Ketchen, D.J., Snow, C. C., Hoover, V.L Research on competitive dynamics: Recent accomplishments and future challenges. Journal of Management, 30(6): ; and Smith, K.G., Ferrier, W.J., & Grimm, C.M King of the hill: Dethroning the industry leader. Academy of Management Executive, 15(2):

10. Definitions Competitors Competitive rivalry
firms operating in the same market, offering similar products and targeting similar customers
Competitive rivalry
the ongoing set of competitive actions and responses occurring between competitors
competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages

11. Definitions Competitive behavior Competitive dynamics
the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position
Competitive dynamics
the total set of actions and responses taken by all firms competing within a market

12. 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?
From Competitors to Competitive Dynamics
Competitive Rivalry (Supplements discussion of rivalry on pp. 174ff)
Firms use a variety of tactics to draw out and assess the competition. For example, rivals
frequently signal their “rules of engagement,” which involves letting the competition know
one’s intentions and to draw the competition out and examine how it responds. To examine
how the competition responds, or to test its counter moves, a firm can always bluff. Signaling
and rules of engagement in the airlines industry are rather clear and common.
As an example, Delta was known for briefly lowering fares significantly on a particular
route, say Atlanta to Los Angeles, in response to another carrier lowering the fares on the
same route. The signal: “If you want to lower fares on this route, you are in for a bloody
battle.” The other airline most often responded by raising fares along this route because
Delta had the resources to enter into a long and grueling fare war on the route. If, on the
other hand, rivals reacted by lowering fares even further, Delta had to interpret this signal
as “they wished to compete with us for business along this route.” Of course, not all types
of signaling are legal, but here are a couple of common signals: price movements, prior announcements
(“we’ll meet or beat any competitor’s price”), media (press releases), counter
attacks/moves, announcement of results, and litigation.
(Continued on next slide.)
Competitive Dynamics
Competitive actions and responses taken by all
firms competing in a market

13. 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 (cont.)
Competitive Rivalry (Supplements discussion of rivalry on pp. 174ff) (cont.)
Strategists must also note that firms might get into competitions that are not economically
driven, but rather are personality driven. These competitive rivalries are based on an initial
competition for resources or revenues—but that over time can become personal battles
between CEOs. Sony and Matsushita have been battling for world dominance in the
consumer electronics industry for decades. The rivalry has become so personal between
the two CEOs that they refuse to attend the same dinner parties or events. It escalated to
the point where in 1989, after Sony’s Akio Morita closed the deal to purchase Columbia
Pictures for $3.4 billion, Matsushita’s Masaharu Matsushita, not willing to be one-upped
by his rival, responded by purchasing MCA for $6.1 billion less than a year later.
Understanding competition is important as research shows that intensified rivalry
within an industry may results in decreased industry average profitability. As discussed in
the textbook, in 2001, Dell launched an intense price war in the PC and server business,
causing prices to drop by as much as 50%. Profit margins declined for all firms, including
Dell. CEO Michael Dell believed that his direct sales model would enable Dell to better
endure its own reduced profitability than rivals who seek economies of scale could. Competitors,
however, responded to Dell’s pricing competitive action. For example, to increase
their advantage from economies of scale and scope, Hewlett-Packard’s merged with Compaq
Computer Corporation. While it remains to be seen whether the new HP would be able
to sustain the intense rivalry Dell’s strategy may contribute to its ability to outperform its
rivals. Indeed, it has been suggested that Dell sets the pace for the PC industry, reflecting
the strength of its direct sales strategy, and its superior cash flow management.

14. A Model of Competitive Rivalry
Outcomes
Market position
Financial performance
Competitive Analysis
Market commonality
Resource similarity
feedback
Interfirm 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
A Model of Competitive Rivalry
Competitor Analysis (p. 175)
Firms with high market commonality and highly similar resources are direct and mutually
acknowledged competitors. However, direct rivals do not always intensify their competition.
The drivers of competitive behavior—as well as the likelihood that a competitor will
initiate competitive actions or reactions—influence the intensity of rivalry, even for direct
competitors.
Market Commonality is concerned with the number of markets with which the firm and
a competitor are jointly involved and the degree of importance of the individual markets to
each. For example, McDonalds and Burger King compete against each other in multiple
global fast-food markets, while Prudential and Cigna (financial/insurance) compete against
each other in several market segments (institutional and retail) as well as product markets
such as life insurance and health insurance. Airlines, chemicals, and pharmaceuticals are
other industries in which firms often simultaneously engage each other in multiple market
competitions. More recently AOL and Microsoft entered into a stiff competition for Internet
Service Provider (ISP) dominance. The key to ISP profits is in selling add-ons and auxiliary
products and services to its customers. AOL has a significant size advantage with 31
million subscribers to Microsoft’s 7 million. The rivalry between the two firms for customers
is becoming increasingly intense. When AOL increased rates Microsoft responded by
holding its rates and offering three free months to new subscribers. AOL responded by initiating
negotiations with PC manufacturers to install AOL on new PC desktops. The two
firms also compete for the instant messaging application market. While AOL pioneered the
concept, Microsoft developed many added features and optimized its application. In an effort
to capture even greater market share Microsoft began to bundle MSN Messenger with
its newest Windows operating system, Windows XP. While research suggests that market
commonality and multimarket competition may occur by chance, once it begins, the rivalry
becomes intentional and oftentimes intense.
(Continued on next slide.)

15. Competitive Rivalry 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
Competitive Rivalry
Resource Similarity
Resource Similarity is the extent to which the firm’s resources are comparable to a rival’s
in terms of both type and amount. Firms with similar types and amounts of resources tend
to have similar strengths and weaknesses—and use similar strategies. The rivalry between
CVS and Walgreen demonstrates these expectations in the retail pharmacy business.
These firms are using the integrated cost leadership/differentiation strategy to offer
relatively low-cost goods with some differentiated features, such as services. Resource
similarity (net income of $746 million for CVS vs. $776.9 million for Walgreen; 4,133
CVS stores in 34 states vs. 3,165 Walgreen stores in 43 states) suggests that the firms
might suffer from strategy convergence and industry orthodoxy.
Resource Dissimilarity
Resource Dissimilarity also influences competitive actions and responses between firms.
For example, Wal-Mart initially used its cost leadership strategy to compete only in small
communities (population of 25,000 or less). Using logistics systems and extremely efficient
purchasing practices as competitive advantages, Wal-Mart created what was at that
time a new type of value—wide selections of products at the lowest competitive prices—
for customers in small retail markets. Local stores lacked the ability to marshal resources
at the pace required to respond quickly and effectively. However, even when facing competitors
with greater resources or ability, firms should respond, no matter how daunting
doing so seems. Choosing not to respond can ultimately result in failure (or greater failure),
as happened with many local retailers who didn’t respond to Wal-Mart’s competitive
actions.

16. 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
Competitive Analysis
Reputation (p. 187)
Competitors are more likely to respond to strategic and tactical actions taken by market
leaders. For example, Home Depot—the world’s largest home improvement retailer and
the second largest U.S. retailer (behind Wal-Mart)—is known as an innovator in the home
improvement market and for its ability to develop new store formats (EXPO Design Centers
and Villager’s Hardware Stores). As such, Home Depot knows that its rivals study its
strategic actions and respond to them. For example, watching Home Depot, Lowe’s has
transformed from a chain of small stores into a chain of home improvement warehouses,
thus increasing the similarity of its store design with Home Depot’s.
Similarly, evidence shows that successful strategic actions are quickly imitated, almost
regardless of the actor’s reputation. For example, although a second mover, IBM
committed significant resources to enter the PC market. When IBM succeeded in this endeavor,
rivals (Dell, Compaq, and Gateway) responded with strategic actions (imitation)
to enter the market. IBM’s reputation as well as its successful strategic action strongly
influenced entry by these competitors. Thus, in terms of competitive rivalry, IBM could
predict that responses would follow its entry to a market if that entry proved successful.
In addition, IBM could predict that those competitors would try to create value in slightly
different ways, such as Dell’s direct sales and built-to-order rather than to use storefronts
as a distribution channel.

17. 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
Multimarket competition
Firms competing in several markets

18. 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

19. Drivers of Competitive Actions and Responses:
Awareness
Drivers of competitive behavior
Awareness is the extent to which competitors recognize the degree of their mutual interdependence
mutual interdependence results from
market commonality
resource similarity
Awareness

20. Drivers of Competitive Actions and Responses:
Motivation
Drivers of competitive behavior
Motivation concerns the firm’s incentive
to take action
or to respond to a competitor’s attack
and relates to perceived gains and losses
Awareness
Motivation

21. Drivers of Competitive Actions and Responses:
Ability
Drivers of competitive behavior
Ability relates
to each firm’s resources
the flexibility these resources provide
Without available resources the firm lacks the ability
to attack a competitor
to respond to the competitor’s actions
Awareness
Motivation
Ability

22. Drivers of Competitive Actions and Responses:
Dissimilarity
Drivers of competitive behavior
Dissimilarity refers to the resource imblance between the acting firm and
competitors
potential responders
The greater the imbalance, the greater will be the delay in response by the firm with the resource disadvantage
Awareness
Motivation
Ability
Dissimilarity

23. Drivers of Competitive Actions and Responses:
Market Commonality
Drivers of competitive behavior influenced by
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
Market
commonality

24. Drivers of Competitive Actions and Responses:
Resource Similarity
Drivers of competitive behavior influenced by
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
Market
commonality
Resource
similarity

25. Factors Affecting Likelihood of Attack:
First Mover Incentives
First mover
incentives
First movers allocate funds for
product innovation and development
aggressive advertising
advanced research and development
First movers can gain
the loyalty of customers who may become committed to the firm’s goods or services
market share that can be difficult for competitors to take during future competitive rivalry

26. Factors Affecting Likelihood of Attack:
Size
First mover
incentives
Small firms are more likely
to launch competitive actions
to be quicker in doing so
Small firms are perceived as
nimble and flexible competitors
relying on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry
Small firms have the flexibility needed to launch a greater variety of competitive actions
Size

27. Factors Affecting Likelihood of Attack:
Size
First mover
incentives
Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period
Large organizations commonly have the slack resources required to launch a larger number of total competitive actions
Size
“Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”
- Herb Kelleher,
Former CEO, Southwest Airlines

28. Factors Affecting Likelihood of Attack:
Quality
First mover
incentives
Quality exists when the firm’s goods or services meet or exceed customers’ expectations
Size
Product quality dimensions include
Performance
Features
Flexibility
Durability
Conformance
Serviceability
Aesthetics
Perceived quality
Quality

29. Factors Affecting Likelihood of Attack:
Quality
First mover
incentives
Quality exists when the firm’s goods or services meet or exceed customers’ expectations
Size
Service quality dimensions include
Timeliness
Courtesy
Consistency
Convenience
Completeness
Accuracy
Quality

30. Factors Affecting Likelihood of Response
Firms study three factors to predict how a competitor is likely to respond to competitive actions
type of competitive action
reputation
market dependence

31. Strategic and Tactical Actions
Strategic action or a strategic response
a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse
Tactical action or a tactical response
a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse

32. Factors Affecting Likelihood of Response:
Type of Competitive Action
Type of
competitive
action
Strategic actions receive strategic responses
Tactical responses are taken to counter the effects of tactical actions
Strategic actions elicit fewer total competitive responses
A competitor likely will respond quickly to a tactical action
The time needed to implement and assess a strategic action delays competitors’ responses

33. Factors Affecting Likelihood of Response:
Reputation
Type of
competitive
action
An actor is the firm taking an action or response
Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior
The firm studies responses that a competitor has taken previously when attacked to predict likely responses
Reputation

34. Factors Affecting Likelihood of Response:
Market Dependence
Type of
competitive
action
Market dependence is
the extent to which a firm’s revenues or profits are derived from a particular market
In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position
Reputation
Market
dependence

35. Competitive Dynamics:
Slow-Cycle Markets
Slow-cycle
markets
Slow-cycle markets
the firm’s competitive advantages are shielded from imitation for long periods of time
imitation is costly
Competitive advantages are sustainable in slow-cycle markets
A proprietary, one-of-a-kind competitive advantage leads to competitive success in a slow-cycle market
Competitive Dynamics
Slow-Cycle Markets (p. 189)
Slow-Cycle Markets are markets in which competitive advantages are shielded from imitation
for longer periods of time and/or where imitation is costly. Historical conditions,
causal ambiguity, social complexity, copyrights, location, patents, and proprietary information
could all lead to one-of-a-kind advantages.
Walt Disney Co. continues to extend its proprietary characters, such as Mickey
Mouse, Minnie Mouse, and Goofy. These characters have a unique historical development.
Because patents shield it, the proprietary nature of Disney’s advantage in terms of
animated characters protects the firm from imitation by competitors (e.g., the company
once sued a day-care center, forcing it to remove the likeness of Mickey Mouse from a
wall of the facility).
Once a patent expires, a firm is no longer shielded from competition. For example, in
2002 Merck got rocked by the loss of revenue as the patent protection for leading drugs,
such as gastroesophageal reflux soother Prilosec, cholesterol drug Mevacor, and hypertension
medication Prinivil, expired.

36. Competitive Dynamics:
Fast-Cycle Markets
Slow-cycle
markets
Fast-cycle markets
the firm’s competitive advantages aren’t shielded from imitation
imitation happens quickly and somewhat inexpensively
Competitive advantages aren’t sustainable
Competitors use reverse engineering to quickly imitate or improve on the firm’s products
Non-proprietary technology is diffused rapidly
Fast-cycle
markets
Competitive Dynamics (cont.)
Fast-Cycle Markets (p. 189)
Fast-Cycle Markets are markets in which competitive advantages are not shielded from
imitation and where imitation happens quickly and somewhat inexpensively. Competitive
advantages are not sustainable in fast-cycle markets. The pace of competition in fastcycle
markets is almost frenzied as companies rely on ideas and the innovations resulting
from them as the engines of their growth. Because prices fall quickly in these markets,
companies need to introduce new or improved product faster. For example, rapid declines
in the prices of Intel’s and Advanced Micro Devices’ (AMD) microprocessor chips made
it possible for PC manufacturers to continuously reduce their prices to end users. Imitation
of many fast-cycle products is relatively easy. Dell and Gateway have imitated
IBM’s initial PC design to create their own PCs. Continuous declines in the costs of
parts, as well as the fact that the information and knowledge required to assemble a PC
isn’t complicated and is readily available, made it possible for additional competitors to
enter this market without significant difficulty.

37. Competitive Dynamics:
Standard-Cycle Markets
Slow-cycle
markets
Standard-cycle markets
the firm’s competitive advantages may be shielded from imitation
imitation is moderately costly
Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages
Firms
seek large market shares
gain customer loyalty through brand names
carefully control operations
Fast-cycle
markets
Standard-cycle
markets

38. Case work
Case 1, Page 381
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