1. ©2004 by South-Western/Thomson Learning 1 Competitive Rivalry and Competitive Dynamics Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 6

2. 2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process Chapter 5 Chapter 5 Business-Level Strategy Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy

3. 3 Discussion Questions Click Here Click Here Click Here More discussion questions Click Here 1. What is competitive dynamics and why is it important? 2. What are the reasons why rivalry increases or decreases between firms? 3. What factors drive awareness of the potential for increased rivalry and competitive attack and response?

4. 4 Discussion Questions (cont.) Click Here Click Here Click Here 4. What factors lead to motivation and ability for competitive attack and response? 5. Besides market commonality and resource similarity, what additional factors might lead a firm to attack? 6. Once competitive action is taken, what factors increase the likelihood of competitive response? Click Here More discussion questions

5. 5 Click Here Discussion Questions (cont.) 7. What strategic approach is necessary to compete in slow versus fast cycle or hyper-competitive markets?

6. 6 Discussion Question 1 What is competitive dynamics and why is it important?

7. 7 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

8. 8 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

9. 9 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?

10. 10 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. Click Here Return to Discussion Questions

11. 11 Discussion Question 2 What are the reasons why rivalry increases or decreases between firms?

12. 12 A Model of Competitive Rivalry Competitive Analysis Market commonalityMarket commonality Resource similarityResource similarity Drivers of Competitive Behavior AwarenessAwareness MotivationMotivation AbilityAbility Interfirm 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

13. 13 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

14. 14 Click Here Return to Discussion Questions 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

15. 15 Discussion Question 3 What factors drive awareness of the potential for increased rivalry and competitive attack and response?

16. 16 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

17. 17 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

18. 18 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

19. 19 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 Click Here Return to Discussion Questions

20. 20 Discussion Question 4 What factors lead to motivation and ability for competitive attack and response?

21. 21 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

22. 22 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

23. 23 Ability Drivers of Competitive Actions and Responses: Dissimilarity refers to the resource imblance between the acting firm and 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 The greater the imbalance, the greater will be the delay in response by the firm with the resource disadvantage Awareness Drivers of competitive behavior Motivation Dissimilarity Dissimilarity

24. 24 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

25. 25 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 Click Here Return to Discussion Questions

26. 26 Discussion Question 5 Besides market commonality and resource similarity, what additional factors might lead a firm to attack?

27. 27 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

28. 28 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

29. 29 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

30. 30 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

31. 31 Click Here Return to Discussion Questions 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

32. 32 Discussion Question 6 Once competitive action is taken, what factors increase the likelihood of competitive response?

33. 33 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

34. 34 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 –a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse

35. 35 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

36. 36 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

37. 37 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 Click Here Return to Discussion Questions

38. 38 Discussion Question 7 What strategic approach is necessary to compete in slow versus fast cycle or hyper- competitive markets?

39. 39 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

40. 40 Gradual Erosion of a Sustainable Competitive Advantage Returns from a Sustainable Competitive Advantage Time (Years) 0 510Launch Exploitation Counterattack

41. 41 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

42. 42 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

43. 43 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