1. ©2003 Southwestern Publishing Company 1 Competitive Rivalry and Competitive Dynamics Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Chapter 5

2. 2 Strategy Implementation Chapter 13 Chapter 13 Strategic Entrepreneurship Chapter 11 Chapter 11 Organizational Structure and Structure and Controls Chapter 10 Chapter 10 Corporate Governance Chapter 12 Chapter 12 Strategic Leadership Strategy Formulation Strategic Competitiveness Above-Average Returns Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 2 Chapter 2 The External The External Environment Chapter 3 Chapter 3 The Internal The Internal Environment The Strategic Management Process Feedback Strategic Inputs Strategic Actions Strategic Outcomes Chapter 5 Chapter 5 Competitive Rivalry Competitive Rivalry and Competitive and Competitive Dynamics Chapter 4 Chapter 4 Business-Level Strategy

3. 3 Definitions Competitors Competitors –firms operating in the same market, offering similar products and targeting similar customers Competitive rivalry 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

4. 4 Definitions Competitive behavior Competitive behavior –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 Competitive dynamics –the total set of actions and responses taken by all firms competing within a market

5. 5 From Competitors to Competitive Dynamics Competitors Through competitiveThrough competitivebehavior Competitive actionsCompetitive actions Competitive responsesCompetitive responses To gain an advantageousTo gain an advantageous market position Competitive Dynamics Competitive actions and responses taken by allCompetitive actions and responses taken by all firms competing in a market Competitiverivalry Engage in What results? Why? How?

6. 6 Effect of Competitive Rivalry on a Firm’s Strategies Success of a strategy is determined by: 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 Competitive rivalry –affects all types of strategies –most dominant influence is on the firm’s business-level strategy or strategies.

7. 7 A Model of Competitive Rivalry Competitive Analysis Market commonalityMarket commonality Resource similarityResource similarity Drivers of Competitive Behavior AwarenessAwareness MotivationMotivation AbilityAbility Interim Rivalry Likelihood of AttackLikelihood of Attack First mover incentivesFirst mover incentives Organizational sizeOrganizational size QualityQuality Likelihood of ResponseLikelihood of Response Type of competitive actionType of competitive action ReputationReputation Market dependenceMarket dependence Outcomes Market positionMarket position Financial performanceFinancial performance feedback

8. 8 Competitive Rivalry Firms are mutually interdependent 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 Marketplace success is a function of both individual strategies and the consequences of their use

9. 9 Competitor Analysis 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

10. 10 Market Commonality Market Commonality is concerned with 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 Most industries’ markets are somewhat related in terms of –technologies –core competencies Multimarket competition Multimarket competition –Firms competing in several markets

11. 11 Resource Similarity 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 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 Assessing resource similarity can be difficult if critical resources are intangible rather than tangible

12. 12 A Framework of Competitor Analysis MarketCommonality High Low LowHigh ResourceSimilarity The shaded area represents degree of market commonality between two firms Resource endowment B Resource endowment A KEY III IIIIV

13. 13 Drivers of Competitive Actions and Responses: Awareness is the extent to which competitors recognize the degree of their mutual interdependence Awareness is the extent to which competitors recognize the degree of their mutual interdependence –mutual interdependence results from market commonalitymarket commonality resource similarityresource similarity Awareness Awareness Drivers of competitive behavior

14. 14 Motivation Drivers of Competitive Actions and Responses: Motivation concerns the firm’s incentive 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 Drivers of competitive behavior Motivation

15. 15 Ability Drivers of Competitive Actions and Responses: Ability relates Ability relates –to each firm’s resources –the flexibility these resources provide Without available resources the firm lacks the ability Without available resources the firm lacks the ability –to attack a competitor –to respond to the competitor’s actions Awareness Drivers of competitive behavior Motivation Ability

16. 16 Drivers of Competitive Actions and Responses: 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 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 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 Marketcommonality Drivers of competitive behavior influenced by Market Commonality

17. 17 Resourcesimilarity Drivers of Competitive Actions and Responses: 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 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 When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response Drivers of competitive behavior influenced by Marketcommonality Resource Similarity

18. 18 Competitive Rivalry Competitive action Competitive action –a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position Competitive response Competitive response –a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action

19. 19 Strategic and Tactical Actions Strategic action or a strategic response 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 Tactical action or a tactical response –market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse

20. 20 Factors Affecting Likelihood of Attack: First movers allocate funds for First movers allocate funds for –product innovation and development –aggressive advertising –advanced research and development First movers can gain 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 First mover incentives First Mover Incentives

21. 21 Size Factors Affecting Likelihood of Attack: Small firms are more likely Small firms are more likely –to launch competitive actions –to be quicker in doing so Small firms are perceived as 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 Small firms have the flexibility needed to launch a greater variety of competitive actions First mover incentives Size

22. 22 Factors Affecting Likelihood of Attack: Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period 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 Large organizations commonly have the slack resources required to launch a larger number of total competitive actions First mover incentives Size 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 - Herb Kelleher, Former CEO, Southwest Airlines

23. 23 Quality Factors Affecting Likelihood of Attack: Quality exists when the firm’s goods or services meet or exceed customers’ expectations Quality exists when the firm’s goods or services meet or exceed customers’ expectations First mover incentives Size Quality Product quality dimensions include Product quality dimensions include –Performance –Features –Flexibility –Durability –Conformance –Serviceability –Aesthetics –Perceived quality

24. 24 Quality Factors Affecting Likelihood of Attack: Quality exists when the firm’s goods or services meet or exceed customers’ expectations Quality exists when the firm’s goods or services meet or exceed customers’ expectations First mover incentives Size Quality Service quality dimensions include Service quality dimensions include –Timeliness –Courtesy –Consistency –Convenience –Completeness –Accuracy

25. 25 Factors Affecting Likelihood of Response Firms study three factors to predict how a competitor is likely to respond to competitive actions Firms study three factors to predict how a competitor is likely to respond to competitive actions –type of competitive action –reputation –market dependence

26. 26 Factors Affecting Likelihood of Response: Strategic actions receive strategic responses Strategic actions receive strategic responses Tactical responses are taken to counter the effects of tactical actions Tactical responses are taken to counter the effects of tactical actions Strategic actions elicit fewer total competitive responses Strategic actions elicit fewer total competitive responses A competitor likely will respond quickly to a tactical action A competitor likely will respond quickly to a tactical action The time needed to implement and assess a strategic action delays competitors’ responses The time needed to implement and assess a strategic action delays competitors’ responses Type of competitiveaction Type of Competitive Action

27. 27 Reputation Factors Affecting Likelihood of Response: An actor is the firm taking an action or response 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 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 The firm studies responses that a competitor has taken previously when attacked to predict likely responses Type of competitiveaction Reputation

28. 28 Marketdependence Factors Affecting Likelihood of Response: Market dependence is 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 In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position Type of competitiveaction Reputation Market Dependence

29. 29 Competition Competitive Dynamics Competitive Dynamics –competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions Competitive Rivalry Competitive Rivalry –building and sustaining competitive advantages are at the core of competitive rivalry –competitive advantages are the link to an advantageous market position

30. 30 Strategic Conduct is Dynamic A firm’s strategic conduct is dynamic in natureA firm’s strategic conduct is dynamic in nature Actions and responses shape the competitive positions of each firm’s business level strategyActions and responses shape the competitive positions of each firm’s business level strategy Firm B Firm A

31. 31 Firm B Firm A Strategic Conduct is Dynamic Actions taken by one firm elicits responses from competitorsActions taken by one firm elicits responses from competitors Competitive responses lead to additional actions from the firm that acted originallyCompetitive responses lead to additional actions from the firm that acted originally Actions Response New Actions New Response

32. 32 Competitive Dynamics: 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 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 A proprietary, one-of-a-kind competitive advantage leads to competitive success in a slow-cycle market Slow-cyclemarkets Slow-Cycle Markets

33. 33 Gradual Erosion of a Sustainable Competitive Advantage Returns from a Sustainable Competitive Advantage Time (Years) 0 510Launch Exploitation Counterattack

34. 34 Fast-cyclemarkets Competitive Dynamics: Fast-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 Competitive advantages aren’t sustainable Competitors use reverse engineering to quickly imitate or improve on the firm’s products Competitors use reverse engineering to quickly imitate or improve on the firm’s products Non-proprietary technology is diffused rapidly Non-proprietary technology is diffused rapidly Slow-cyclemarkets Fast-Cycle Markets

35. 35 Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Series of Replicable Actions Time (Years) 0 5 1015Launch Exploitation Counterattack Firm has already moved to next advantage

36. 36 Competitive Dynamics: Standard-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 Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages Firms Firms –seek large market shares –gain customer loyalty through brand names –carefully control operations Slow-cyclemarkets Fast-cyclemarkets Standard-cyclemarkets Standard-Cycle Markets