Chapter 5: Competitive Rivalry and Competitive Dynamics
Competitive Rivalry and Competitive Dynamics
Learning Objectives
By the end of this chapter, you should be able to:
Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.
Explain the types of competitive actions, competitive responses, and non-market strategies rival firms engage in as they compete with each other.
Describe market commonality and resource similarity as the building blocks of competitor analysis.
Explain awareness, motivation, and ability as drivers of competitive behavior.
Discuss factors affecting the likelihood a firm will take actions to attack its competitors.
Explain factors affecting the likelihood a firm will respond to actions its competitors take.
Describe competitive dynamics in slow-cycle, fast-cycle, and standard-cycle markets.
5-1 Defining and Understanding Competitors
Competitors: Firms operating in the same market, offering similar products, and targeting similar customers.
Interaction with Competitors: Firms interact with competitors as part of the broad context in which they operate while attempting to earn above-average returns.
Industry Evolution: Industries evolve through actions of direct competitors and other firms within their ecosystems (e.g., suppliers provide new supplies and components).
A Basic Understanding of Competitive Rivalry (1 of 2)
Competitive Rivalry: Describes competitive actions and competitive responses among firms as they maneuver for advantageous market positions.
Competitive Behavior: The set of competitive actions and responses a firm takes to build or defend competitive advantages and improve its market position.
Multipoint Competition: Occurs when firms compete against each other across multiple product or geographic markets.
Competitive Dynamics: The total set of competitive actions and responses taken by all firms competing within a market.
A Basic Understanding of Competitive Rivalry (2 of 2)
Strategy Success Factors: A strategy's success is a function of:
The firm’s initial competitive actions.
How well the firm anticipates competitors’ responses.
How well the firm responds to its competitors’ actions.
Influence on Strategies: Competitive rivalry affects all types of strategies, dominating business-level strategies.
5-2 Strategic and Tactical Actions and Responses
Competitive Action: A strategic or tactical action taken by a firm to build or defend competitive advantages or improve market position.
Competitive Response: A strategic or tactical action taken by a firm to counter effects of a competitor’s action.
Strategic Action: A market-based move involving significant resource commitment, difficult to implement and reverse.
Tactical Action: A market-based move that fine-tunes a strategy, involving fewer resources, relatively easy to implement and reverse.
Non-market Strategies
Focus: Altering a firm’s institutional environment as part of its competitive strategy.
Institutional Environment Components:
Government Influences: Regulations that establish industry "rules of the game."
A regulation enacted by the government mandates compliance from all companies in the market or industry.
Norms: Informal rules dominant within a market or industry.
A Model of Competitive Rivalry
Evolution of Competitive Rivalry: Arises from the pattern of actions and responses wherein one firm’s competitive actions elicit responses from competitors.
Key Characteristics:
Firms are mutually interdependent.
Competitors’ actions and responses affect each other’s market position.
Marketplace success is determined both by individual strategies and their consequences.
5-3 Competitor Analysis
Competitor Analysis: The first step a firm takes to predict competitors’ actions and responses by studying:
Future objectives
Current strategies
Assumptions
Capabilities
Predicting Behavior: Understanding competitors allows for predictions regarding their competitive actions and responses, avoiding competitive blind spots.
Market Commonality
Definition: Concerns the number of markets in which a firm and a competitor jointly engage, and the significance of these markets to each.
Multipoint Competition's Effect: Competing in multiple markets generally reduces competition, though firms may still attack when the potential rewards are substantial.
Resource Similarity
Definition: The extent to which a firm’s tangible and intangible resources compare favorably to a competitor’s regarding type and amount.
Consequences of Similarity: Firms with similar resources generally have similar strengths and weaknesses, leading to similar strategic choices.
5-4 Drivers of Competitive Behavior
Drivers Defined: Market commonality and resource similarity influence the firm’s:
Awareness: Recognition of mutual interdependence. Highest when firms have similar resources in multiple markets.
Motivation: The incentive to take action; firms may lack motivation if the perceived impact on their market position is neutral.
Ability: The quality and amount of resources available for attacks and responses; limited resources hinder actions.
Resource Dissimilarity: Influences competitive actions; greater differences result in longer delays by disadvantaged firms in responding, though firms are generally compelled to act to avoid failure.
5-5 Actions That Drive Competitive Rivalry
Influencing Factors: In addition to commonality, similarity, and the core drivers, three more factors affecting competitive actions include:
First-mover benefits
Organizational size
Quality
First-Mover Benefits (1 of 5)
First Mover: A firm taking the initial competitive action to build or defend advantages or improve market position, emphasizing R&D to create valued innovations.
Significance: Critical in industries with rapid technology advancements and short product life cycles.
First-Mover Benefits (2 of 5)
Advantages Gained:
Earn above-average returns until competitors respond.
Gain customer loyalty and market share.
Characteristics of First Movers:
Aggressive and willing to innovate.
Open to taking calculated risks.
First-Mover Benefits (3 of 5)
Requirements: To be successful as a first mover, firms need:
Significant resources for R&D.
-能力 for rapid and effective production and marketing of innovative products.
Organizational Slack: Resources exceeding minimum requirements enabling firms to be first movers.
First-Mover Benefits (4 of 5)
Second Mover Advantages: A second mover analyzes first mover’s actions, learning from consumers' reactions and initial mistakes, allowing for better, more efficient processes and technologies.
Timing: Successful second movers strike a balance in their reaction times.
First-Mover Benefits (5 of 5)
Late Mover Definition: A firm responding to competitive actions significantly after first and second movers.
Success Factors: Late movers typically achieve less success due to delays in understanding customer value.
Organizational Size
Impact of Size on Competitive Actions:
Small firms are quicker to launch competitive actions and rely on speed.
Large firms have more slack resources and can initiate a higher volume of actions.
Quality
Definition of Quality: Exists when products meet or exceed customer expectations.
Customer Perception: Quality is evaluated on multiple dimensions and a product must at least satisfy basic expectations to be bought or used.
5-6 Likelihood of Response
Response Factors: A firm is likely to respond when:
A competitor’s action enhances their competitive capabilities or market position.
The action threatens the firm’s core competencies or market position.
Likelihood of Response (2 of 2)
Evaluation Factors: In addition to commonality and resource similarity, firms consider:
Type of competitive action
Actor’s reputation
Market dependence
Type of Competitive Action
Response Frequency: There are typically more tactical responses than strategic ones due to the resource commitment required for strategic actions.
Response Timing: Quick responses are common for tactical actions while significant responses occur for strategic actions.
Actor’s Reputation
Reputation Defined: The perceived attribute ascribed to a firm based on past actions. Strong action by market leaders elicits responses, while firms with unpredictable reputations face lesser reactions.
Market Dependence
Definition of Market Dependence: Reflects the extent to which a firm’s revenues come from a particular market; higher dependence usually results in stronger responses to market threats.
5-7 Competitive Dynamics in Different Types of Markets
Competitive Dynamics: Refers to the overall actions and responses among all firms in a market, differing across market types: slow, fast, and standard-cycle.
Sustainability Factors: The speed and cost of imitation are critical for the sustainability of competitive advantages.
Slow-Cycle Markets (1 of 2)
Characteristics: In slow-cycle markets, competitors cannot easily imitate advantages, allowing for prolonged advantages and less risk in major actions.
Action Orientation: Actions are focused on protecting and extending the advantage gained through proprietary capabilities.
Slow-Cycle Markets (2 of 2)
Far-Reaching Impacts: A firm can extend the lifecycle of its advantage until competitors begin their counteractions.
Fast-Cycle Markets (1 of 2)
Characteristics: Here, competition is fierce due to quick and inexpensive imitation of capabilities; rapid change increases pressure on managers.
Knowledge Acquisition: Reverse engineering is often employed to quickly assimilate competitive knowledge.
Fast-Cycle Markets (2 of 2)
Technology Characteristics: The focus is on continuous and rapid development of temporary competitive advantages through quick strategic responses.
Standard-Cycle Markets (1 of 2)
Nature of Imitation: Imitation occurs at moderate costs, making competitive advantages partially sustainable if capabilities can be continuously upgraded.
Importance of Innovation: Both incremental and radical innovations are vital for achieving competitiveness.
Standard-Cycle Markets (2 of 2)
Battle for Market Share: Intense competition driven by volume and scale economies, with firms striving for brand loyalty and improved operations in the face of large mass markets.