Competitor Analysis and Inter firm Rivalry: Toward a Theoretical Integration Written By MING-JER CHEN Academy of Management Review (1996) Summarised by RUMAJI Doctoral Student in Management Science Economics and Business Faculty Airlangga University 2013

“Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.” Sun Tzu, “The Art of War”, approx. 500 BC

INTRODUCTION The study of competitor analysis (Hamel & Prahalad, 1990; Porac & Thomas, 1990; Porter, 1980, 1985; Zajac & Bazerman, 1991) and of interfirm rivalry (Bettis & Weeks, 1987; D'Aveni, 1994; MacMillan, McCaffery, & Van Wijk, 1985; Smith, Grimm, & Gannon, 1992) occupies a central position in strategy. 2. Researchers have examined factors that influence competitive responses and their ensuing performance implications (Chen, Smith, & Grimm, In press) and patterns of entry into and exit from rivals' markets (Baum & Korn, In press).

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.

Definitions Competitive Behavior Multimarket Competition The set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position. Multimarket Competition Firms competing against each other in several product or geographic markets. Competitive Dynamics The total set of actions and responses taken by all firms competing within a market.

Competitor Analysis : An Overview THEORITICAL BACKGROUND Competitor Analysis : An Overview “Competitor analysis is defined an assesment of the strengths and weaknesess of current and potential competitors. Competitor analysis is used to help a firm understand its competitors. The firm studies competitors’ future objectives, current strategies, assumptions, and capabilities. With the analysis, a firm is better able to predict competitors’ behaviors when forming its competitive actions and responses.

Competitor Analysis Technique : a competitor array Define your industry – scope and nature of industry. Determine who your competitors are. Determine who your customers are and what benefits they expect. Determine what the key success factors in your industry. Rank the key success factors by giving each weighing. Rate each competitor on each of the key success factors.

From Competitors to Competitive Dynamics Why? To gain an advantageous market position Engage in Competitive Rivalry Competitive Behavior Competitive actions Competitive responses How? What Results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134.

Competitive Rivalry’s Effect on Strategy 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. Has the strongest influence on the firm’s business-level strategy or strategies.

A Model of Competitive Rivalry Firms are mutually interdependent A firm’s competitive actions have noticeable effects on its competitors. A firm’s competitive actions elicit competitive responses from its competitors. Competitors feel each other’s actions and responses. Marketplace success is a function of both individual strategies and the consequences of their use.

A Model of Competitive Rivalry Competitive Analysis Market commonality Resource similarity Drivers of Competitive Behavior Awareness Motivation Ability Feedback Interfirm Rivalry Likelihood of Attack First-mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence Outcomes Market position Financial performance Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134.

Market Commonality Market commonality is concerned with: A Framework of Competitor Analysis 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. Firms competing against one another in several or many markets engage in multimarket competition. A firm with greater multimarket contact is less likely to initiate an attack, but more likely to more respond aggressively when attacked.

Resource Similarity Resource Similarity A Framework of Competitor Analysis Resource Similarity Resource Similarity How comparable the firm’s tangible and intangible resources are to a competitor’s in terms of both types and amounts. 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.

FIGURE of the Framework of Competitor Analysis Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134.

Drivers of Competitive Behavior Awareness Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from: Market commonality Resource similarity

Drivers of Competitive Behavior (cont’d) Awareness Motivation concerns the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses Motivation

Drivers of Competitive Behavior (cont’d) Awareness Ability relates to each firm’s resources the flexibility these resources provide Without available resources the firm lacks the ability to attack a competitor respond to the competitor’s actions Motivation Ability

Drivers of Competitive Behavior (cont’d) Awareness 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. Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets. Motivation Ability Market Commonality

Drivers of Competitive Behavior (cont’d) Awareness 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. Motivation Ability Market Commonality Resource Dissimilarity

Competitive / Interim Rivalry Competitive Action A strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. Competitive Response A strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

Strategic and Tactical Actions Strategic Action (or Response) A market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. Tactical Action (or Response) A market-based move that is taken to fine-tune a strategy: Usually involves fewer resources. Is relatively easy to implement and reverse.

Factors Affecting Likelihood of Attack 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. First Mover A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second mover responds to the first mover’s competitive action, typically through imitation: Studies customers’ reactions to product innovations. Tries to find any mistakes the first mover made, and avoid them. Can avoid both the mistakes and the huge spending of the first-movers. May develop more efficient processes and technologies. Second Mover Incentives

Factors Affecting Likelihood of Attack (cont’d) First Mover Late mover responds to a competitive action only after considerable time has elapsed. Any success achieved will be slow in coming and much less than that achieved by first and second movers. Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create value for customers. Second Mover Late Mover

Factors Affecting Likelihood of Attack (cont’d) First Mover 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 competitive advantages or develop new ones while engaged in competitive rivalry. Having the flexibility needed to launch a greater variety of competitive actions. Second Mover Late Mover Organizational Size- Small

Factors Affecting Likelihood of Attack (cont’d) First Mover 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 Think and act big and we’ll get smaller. Think and act small and we’ll get bigger. Herb Kelleher Former CEO, Southwest Airlines Second Mover Late Mover Organizational Size -Large

Factors Affecting Likelihood of Attack (cont’d) First Mover Quality exists when the firm’s goods or services meet or exceed customers’ expectations Product quality dimensions include: Second Mover Late Mover Organizational Size Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality Quality (Product)

Quality Dimensions of Goods and Services Product Quality Dimensions 1. Performance—Operating characteristics 2. Features—Important special characteristics 3. Flexibility—Meeting operating specifications over some period of time 4. Durability—Amount of use before performance deteriorates 5. Conformance—Match with preestablished standards 6. Serviceability—Ease and speed of repair 7. Aesthetics—How a product looks and feels 8. Perceived quality—Subjective assessment of characteristics (product image) SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St. Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The Free Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Service quality dimensions include: Timeliness Courtesy Consistency Convenience Completeness Accuracy Late Mover Organizational Size Quality (Service)

Quality Dimensions of Goods and Services (cont’d) Service Quality Dimensions 1. Timeliness—Performed in the promised period of time 2. Courtesy—Performed cheerfully 3. Consistency—Giving all customers similar experiences each time 4. Convenience—Accessibility to customers 5. Completeness—Fully serviced, as required 6. Accuracy—Performed correctly each time SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St. Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The Free Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.

Likelihood of Response Responses to a competitor’s action are taken when the action: Leads to better use of the competitor’s capabilities to gain or produce stronger competitive advantages or an improvement in its market position. Damages the firm’s ability to use its capabilities to create or maintain an advantage. Makes the firm’s market position becomes less defensible.

Factors Affecting Likelihood of Response Firms study three other factors to predict how a competitor is likely to respond to competitive actions: Type of competitive action Reputation Market dependence

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

Factors Affecting Strategic Response (cont’d) 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. Actor’s Reputation

Factors Affecting Strategic Response (cont’d) 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. Actor’s Reputation Dependence on the market

Competitive Dynamics versus Rivalry Competitive Rivalry (Individual firms) Market commonality and resource similarity Awareness, motivation and ability First mover incentives, size and quality Competitive Dynamics (All firms) Market speed (slow-cycle, fast-cycle, and standard-cycle Effects of market speed on actions and responses of all competitors in the market

Competitive Dynamics Slow-Cycle Markets Competitive advantages are shielded from imitation for long periods of time and imitation is costly. Competitive advantages are sustainable in slow-cycle markets. All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage.

Competitive Dynamics (cont’d) Slow-Cycle Markets The firm’s competitive advantages aren’t shielded from imitation. Imitation happens quickly and somewhat expensively 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’d) Slow-Cycle Markets Moderate cost of imitation may shield competitive advantages. Competitive advantages are partially sustainable if their quality is continuously upgraded. Firms Seek large market shares Gain customer loyalty through brand names Carefully control operations Fast-Cycle Markets Standard-Cycle Markets

Competitor Mapping

Market Commonality and Interim Rivalry SOME PROPOSITIONS Market Commonality and Interim Rivalry Proposition 1a: The greater B’s market commonality with A, the less likely A is to initiate an attack against B, all else being equal. Proposition 1b: The greater A’s market commonality with B, the More likely B is to respond to A’s attack, all else being equal.

Resource Similarity and Interim Rivalry SOME PROPOSITIONS Resource Similarity and Interim Rivalry Proposition 2a: The greater B’s resource similarity with A, the less likely A is to initiate an attack against B, all else being equal. Proposition 2b: The greater A’s resource similarity with B, the More likely B is to respond to A’s attack, all else being equal.

Market Commonality and Resource Similarity SOME PROPOSITIONS Market Commonality and Resource Similarity Proposition 3: market commonality is a stronger predictor of competitive attack and respond that is resource similarity

Competitive Asymmetry and Interm Rivalry SOME PROPOSITIONS Competitive Asymmetry and Interm Rivalry Proposition 4a: Competitive asymmetry is likely to exist within a pair of competitors. That is, any two firms are unlikely to have identical degrees of market commonality and resource similarity with each other. Proposition 4b: Because of Competitive asymmetry in the market commonality and in resource similarity , the likelihood that A will attack B will differ from likelihood that B will attack A. the same will hold true for response likelihood.

The Implications The article highlights the significance of the market in which competitive battles play out and the importance of comparing the overall market profiles of firms. This article spans various analytical levels: firm, group, industry, market, competitive move and focus on competition within industry or at the business level not corporate level.

The Implications The idea for framing the competitor analysis also would be applicable to mapping global competitors in various country markets (Franko, 1989) or rivals competing where industry boundaries are unclear or ill defined (e.g., multimedia industries), and to examining competition among nations (Porter, 1992). This action/response dichotomy has implications to an important issue in competitive studies, whether similar firms tend to compete more aggressively or less aggressively with one another.

The Implications The article suggests that the issue is not whether similar firms are aggressive toward one another in an absolute sense or across all conditions, but rather how they are likely to behave in a given context, as attackers or as defenders. Competitive Asymmetry has implication to firm’s manager to analyze the competitive environment from the point of view of each of its competitors.

Limitations and Future Directions The article only focus on existing competitors in a industry, but it is important to develop a conceptualization of potential competitors. The action and response variables only examined a subset (group of similar object) of rivalrous behavior rather than a selection of the dependent variables (market signals, strategic commitment, speed of decision, market entry and exit. The propositions presented should be examined empirically to test significance of market commonality and resource similarity in predicting rivalry

Limitations and Future Directions It would be useful to conduct interindustry longitudinal studies to develop a fuller understanding of the relationship between market commonality and resource similarity over time. It would be useful for authors to explore the relationships between objective and subjective notions of competition, the extent to which these two perspectives may correspond, and to what extent this correspondence may relate to firm performance.

SUMMARY The present article, drawing on a diverse set of theories and spanning different analytical levels, raises a number of theoretical issues that contribute to researchers' understanding of interfirm competition. The conceptualization of market commonality refines the important idea of market interdependence, which prevails in the management literature.

SUMMARY The idea of competitive asymmetry introduced here offers a unique perspective that can be used by theorists to gain a deeper understanding of competition; it also brings to the fore the fundamental question of perceptual versus objective views of competition. The microfocus on firm-specific competitive relationships and on individual competitive moves contributes toward the ultimate goal of building a predictive theory of microcompetitive behavior.

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