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Competitive Dynamics Latest Revision
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The Strategic Management Process Strategy Formulation
Strategic Intent External Environment Internal Environment Strategic Mission The Strategic Management Process Strategic Outcomes Actions Strategic Inputs Strategy Formulation Strategy Implementation Corporate Governance Structure & Control Business-level Strategy Competitive Dynamics Corporate-Level Strategy International Strategy Strategic Competitiveness Above Average Returns Feedback 10
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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 Competitive dynamics the total set of actions and responses taken by all firms competing within a market
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Factors Leading to More Complex Rivalry
Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC) 6
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From Competitors to Competitive Dynamics
To gain an advantageous market position Engage in Why? Competitive rivalry Competitive actions Competitive responses (Competitive Behavior) How? What results? Competitive Dynamics
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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
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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.
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A Model of Competitive Rivalry
Outcomes Market position Financial performance Competitive Analysis Market commonality Resource similarity feedback Interim Rivalry Likelihood of Attack First mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence Drivers of Competitive Actions or Responses Awareness Motivation Ability
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Competitive 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
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A Framework of Competitor Analysis
High Market Commonality II I III IV Low KEY Low High The shaded area represents degree of market commonality between two firms Resource Similarity Resource endowment A Resource endowment B
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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
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Resource Similarity Resource similarity
In most cases, dissimilar resources may increase the likelihood of an attack while firms with similar resources (overlap between their resource portfolios) will be less likely to attack because resource similarity increases the likelihood of retaliation. 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
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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
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Market Commonality Market commonality
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
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Market Commonality & Resource Similarity Affect the Drivers of Competitive Actions and Responses:
Awareness is the extent to which competitors recognize the degree of their mutual interdependence resulting from Motivation Motivation concerns the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses Ability Ability relates to each firm’s resources the flexibility these resources provide
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Competitive Actions and Responses (Competitive Behavior)
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
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Competitive Actions and Responses (Competitive Behavior)
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 market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse
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Factors Affecting Likelihood of Attack:
First Mover Incentives First mover incentives 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
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Factors Affecting Likelihood of Attack:
Size Large organizations commonly have the slack resources required to launch a larger number of total competitive actions. However, smaller firms have the flexibility needed to launch a greater variety of competitive actions. Thus, the competitive actions a firm will likely encounter from larger competitors will be different than the competitive actions it will encounter from smaller competitors. First mover incentives Size
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Factors Affecting Likelihood of Attack:
Quality First mover incentives Quality exists when the firm’s goods or services meet or exceed customers’ expectations Product quality is no longer a competitive issue but a necessary or mandatory product attribute While quality is necessary, it is not a sufficient product attribute for firms to achieve strategic competitiveness Size Quality
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Factors Affecting Likelihood of Attack:
Quality First mover incentives Product quality dimensions include Performance & Conformance Features, Aesthetics, Perceived quality Reliability, Durability, Serviceability Service quality dimensions include Timeliness, Courtesy, Convenience Accuracy, Completeness, Consistency Size Quality
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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 assess and implement a strategic action delays competitors’ responses
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Factors Affecting Likelihood of Response:
Reputation Type of competitive action 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
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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
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Strategic Conduct is Dynamic
A firm’s strategic conduct is dynamic in nature Actions and responses shape the competitive positions of each firm’s business level strategy Firm B Firm A
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Strategic Conduct is Dynamic
Actions taken by one firm elicits responses from competitors Competitive responses lead to additional actions from the firm that acted originally Firm A Firm B New Actions Actions New Response Response
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strategic conduct is dynamic in nature
A firm’s strategic conduct is dynamic in nature Actions taken by one firm elicit responses from competitors Competitive responses lead to additional actions from the firm that acted originally Competitive Dynamics Actions and responses shape the competitive positions of each firm’s business level strategy 12
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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
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Gradual Erosion of a Sustainable Competitive Advantage
Exploitation Returns from a Sustainable Competitive Advantage Launch Counterattack 5 10 Time (Years)
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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
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Obtaining Temporary Advantages to Create Sustained Advantage
Firm has already moved to next advantage Exploitation Returns from a Series of Replicable Actions Launch Counterattack 5 10 15 Time (Years)
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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 significance of its competitive advantages Firms seek large market shares gain customer loyalty through brand names carefully control operations Fast-cycle markets Standard-cycle markets
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An Action-Based Model of the
Industry Life Cycle Key Task Exploiting Open Niches (Blind Spots) and Competitive Uncertainty Entrepreneurial Actions Key Task Growth-Oriented Actions Exploiting Factors of Production Key Task Market-Power Actions Exploiting Market Position Firm Resource & Market Strength Emerging Stage Growth Stage Mature Stage Time 75
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