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Chapter 5 Competitive Rivalry and Competitive Dynamics

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1 Chapter 5 Competitive Rivalry and Competitive Dynamics
Diane M. Sullivan, Ph.D., 2010 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

2 The Strategic Management Process
After selecting a business-level strategy, firms must remain aware of competitive rivalry and dynamics that affect the success of their competitive actions and that allow them to predict competitor’s actions Insert figure 1.1 graphic

3 Competitive Rivalry and Dynamics: Key Definitions
Competitors Firms operating in the same market, offering similar products and targeting similar customers Competitive Rivalry (firm-to-firm competitive actions) Ongoing set of actions and responses occurring between competitors as they contend with each other for an advantageous market position Also called interfirm rivalry Competitive Dynamics (sum of all firm competitive actions) Total set of actions and responses of all firms competing within a market Strategic Action Significant commitment of a specific and distinctive resource that is irreversible (Boeing’s midsized jet liner; Guess positioning to be more upscale) Tactical Action Commitment of less specific resources, taken to fine-tune a strategy, that is reversible (e.g., pricing, advertising)

4 Competitive Rivalry and Dynamics: Examples
Ex. 1: The “Dell way”: bypass middle-man and sell custom-built computers directly to consumer This business model lowered costs and hence prices of products But as of 2006, no longer created value to the degree it had and End of 2006: HP 18.1% vs. Dell’s 14.7% market share Why? Ex. 2: Fast food industry

5 The Essence of Competitive Action and Response
Industry Environment is Changed Industry Environment Industry Environment is Changed Again Company ‘B’ (e.g., McDonald’s) Initiates Competitive Response Company ‘A’ (e.g., Starbucks) Initiates Competitive Action

6 The World Automobile Industry: Strategic Groups
* Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive. Ferrari Lamborghini Porsche Toyota Ford General Motors Chrysler* Honda Nissan Mercedes* BMW High Hyundai Kia Breadth of Product Line Low Price

7 CapSim and Strategic Groups
Performance Size Low Perf. Trad High Size

8 A Model of Competitive Rivalry

9 Step 1: Conduct General Competitive Analysis
Purpose: assess similarity of firms to determine the extent to which they are competitors Two components Market Commonality Resource Similarity Extent of Competitive Rivals

10 Market Commonality and Resource Similarity
Market Commonality (MC) Increases when firms compete in similar markets The more overlapping markets (e.g., multimarket competition), the higher the MC E.g., geographic, product, customer, etc. McDonald’s and Burger King: High MC Resource Similarity (RS) How comparable are competitor’s tangible and intangible resources in type and amount? FedEx and UPS: high RS

11 Market Commonality and Resource Similarity (Con’t)
Firms should be less inclined to attack a firm that is likely to retaliate High MC and RS should reduce likelihood of attack Firms with high MC and with similar resources are more likely to be aware of each other’s competitive moves When attacked, similar firms more likely to aggressively retaliate Can lock firms into mutually destructive competitive situations Fast food industry participants Netflix and Blockbuster

12 Step 2: Study Drivers of Competitive Behavior
Awareness Are managers aware of and do they understand key competitors? Motivation Does the firm have an “incentive” to take action or respond? Ability Does the firm have the necessary resources to attack? Understanding competitor’s awareness, motivation and ability helps the firm to predict competitor behavior

13 Step 3: Examine Likelihood of Attack & Response
Likelihood of Attack (LoA) Factors First-mover advantages—innovative actions can create competitive advantages. Can result in: 1) customer loyalty and 2) above-average market share Be cautious of 2nd movers who can imitate at 65% of the cost of 1st movers Organizational Size Small firms are nimble/flexible so can more quickly act with a variety of actions; Large firms actions are more numerous, but often predictable

14 Step 3: Examine Likelihood of Attack & Response
Likelihood of Response (LoR) Factors A firm is likely to respond when the competitor’s action Might produce a stronger competitive advantage for them Damages the firm’s ability to create/maintain an advantage The firm’s market position is less defensible Three Factors to consider: Type of competitive action Reputation Market dependence

15 Deal with the relative competitive speed in different markets
Competitive Dynamics Competitive Dynamics concern actions and responses among all firms in a market Deal with the relative competitive speed in different markets Slow-cycle Standard-cycle Fast-cycle Different speeds, or cycles, will affect competitive behavior (actions and responses)

16 Competitive Dynamics Continued
Slow-cycle markets Often shielded from imitation due to costs and/or very strong brand loyalties May lead to SCA, but eventually it will erode over time Pharmaceuticals

17 Slow-cycle Market Gradual Erosion of SCA
Returns from a Sustained Competitive Advantage (SCA) Exploitation Counterattack Launch Time (years) 10 60

18 Competitive Dynamics Continued
Standard-cycle markets Lead to highly competitive pressures despite world class products Multimarket competition may dampen rivalry somewhat SCA is possible Fast-cycle markets Intensely dynamic; 1st mover advantage unsustainable Firms may cannibalize older generation products SCA unlikely

19 Developing Temporary Advantages to Create Sustained Advantage in Fast- and Standard-Cycle Markets

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