Chapter 5: Competitive Rivalry and Competitive Dynamics

Learning Objectives

• By the end of this chapter, you should be able to:
  • 5.1 Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.
  • 5.2 Explain the types of competitive actions, competitive responses, and non-market strategies rival firms engage in as they compete with each other.
  • 5.3 Describe market commonality and resource similarity as the building blocks of competitor analysis.
  • 5.4 Explain awareness, motivation, and ability as drivers of competitive behavior.
  • 5.5 Discuss factors affecting the likelihood a firm will take actions to attack its competitors.
  • 5.6 Explain factors affecting the likelihood a firm will respond to actions its competitors take.
  • 5.7 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, targeting similar customers.
  • Firms interact with competitors as part of the broad context of their operational landscape while attempting to earn above-average returns.
  • Industries evolve through competitive interactions, involving direct competitors and actions of other firms within their ecosystems, including suppliers who provide necessary resources for innovation.

A Basic Understanding of Competitive Rivalry (1 of 2)

• Competitive rivalry: Describes the competitive actions and responses of firms as they attempt to obtain an advantageous market position.
• Competitive behavior: The set of competitive actions and responses a firm undertakes to build or defend its competitive advantages and improve market position.
• Multipoint competition: Occurs when firms compete against each other in multiple product or geographic markets.
• Competitive dynamics: The total set of competitive actions and responses taken by all firms competing within a particular market.

A Basic Understanding of Competitive Rivalry (2 of 2)

• A strategy’s success depends on:
  • The firm’s initial competitive actions.
  • The ability to anticipate competitors’ responses.
  • The effectiveness of the firm’s responses to the competitors’ actions.
• Competitive rivalry influences all types of strategies, with a dominant effect on business-level strategy.

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 enhance market position.
• Competitive response: An action taken by a firm as a strategic or tactical reaction to a competitor’s competitive action.
• Strategic action: A market-based move involving significant resource commitments, difficult to implement and reverse.
• Tactical action: A market-based move that fine-tunes a strategy, requiring fewer resources and easier to implement and reverse.

Non-market Strategies

• Non-market strategies: Strategies aimed at altering a firm’s institutional environment as part of its competitive strategy.
  • Institutional environment: Includes government regulations establishing market rules and informal norms prevalent within a market or industry.

A Model of Competitive Rivalry

• Competitive rivalry evolves from actions and responses that firms take, such that:
  • Firms display mutual interdependence.
  • Competitors’ actions affect each other.
  • Marketplace success is influenced by both individual strategies and their outcomes.

5-3 Competitor Analysis

• Competitor analysis: The initial step firms take to predict rivals’ actions and responses by studying competitors’:
  • Future objectives.
  • Current strategies.
  • Assumptions.
  • Capabilities.
• Understanding competitors enables prediction of their competitive actions, preventing competitive blind spots—situations where a firm lacks awareness of rivals’ objectives and strategies.

Market Commonality

• Market commonality: Refers to the number of markets involved with competitors and the significance of each market to the firms.
  • Firms competing across several markets engage in multipoint competition which generally reduces rivalry.

Resource Similarity

• Resource similarity: The extent to which the firm's resources (both tangible and intangible) compare favorably with a competitor’s resources.
  • Competitors with similar resource types and amounts tend to exhibit similar strengths, weaknesses, and strategies.

5-4 Drivers of Competitive Behavior

• Market commonality and resource similarity influence:
  • Awareness: The extent of competitors recognizing their mutual interdependence, highest when firms have similar resources across multiple markets.
  • Motivation: The firm’s incentive to act or respond, influenced by perceived potential market position changes.
  • Ability: The quality and type of resources available to a firm for competitive action.

Resource Dissimilarity

• The level of difference in resources affects competitive actions and responses:
  • Significant discrepancies may delay responses by disadvantaged firms.
  • Firms must eventually respond, as inaction may lead to failure.

5-5 Actions That Drive Competitive Rivalry

• Additional factors influencing competitive actions include:
  • First-mover benefits.
  • Organizational size.
  • Quality.

First-Mover Benefits (1 of 5)

• A first mover is a firm that initiates competitive action to build or defend advantages.
  • First movers prioritize R&D to innovate valuable products.
  • Benefits are critical in industries with:
    • Rapid technological changes.
    • Short product life cycles.

First-Mover Benefits (2 of 5)

• First movers can achieve:
  • Above-average returns until competitors respond.
  • Customer loyalty and increased market share.
• Typically first movers are aggressive, innovative, and willing to take reasonable risks.

First-Mover Benefits (3 of 5)

• To be a successful first mover, a firm needs:
  • Resources to invest in R&D.
  • Capability to produce and market innovative products efficiently.
• Organizational slack: Excess resources that enable first movers to maintain operational flexibility.

First-Mover Benefits (4 of 5)

• A second mover responds to the first mover by studying reactions and avoiding mistakes.
  • The second mover's advantage lies in having time to develop more efficient processes.

First-Mover Benefits (5 of 5)

• A late mover reacts significantly later and usually has lower success rates compared to first and second movers due to delayed understanding of competitive dynamics.

Organizational Size

• A firm's size impacts its ability to take competitive actions:
  • Small firms are nimble, more likely to launch actions, and quick to respond with varied strategies.
  • Large firms may have more slack resources, enabling a higher number of competitive actions, but may lack the speed of smaller firms.

Quality

• Quality is measured by the extent to which products meet customer expectations:
  • Perceived quality aligns with performance measures important to consumers.
  • Customers will not purchase until they validate that products satisfy their quality expectations.

5-6 Likelihood of Response

• Firms are likely to respond to competitors’ actions when:
  • The action enables better capabilities or improves market position.
  • The action jeopardizes the firm’s core competencies.
  • The market position becomes increasingly defensible.

Additional Factors Influencing Response

• Besides market commonality, resource similarity, awareness, motivation, and ability, firms assess:
  • Type of competitive action.
  • Actor’s reputation.
  • Market dependence.

Type of Competitive Action

• Generally, a higher number of tactical responses than strategic ones due to:
  • Resource commitment involved in strategic responses.
  • Timing delays in assessing strategic actions.
  • Quick reactions to tactical actions when deemed significant.

Actor’s Reputation

• The actor refers to a firm engaging in actions.
  • Reputation influences how firms are perceived based on past competition.
  • Responses are more likely to occur when market leaders act.
  • Less likely responses occur from firms with a reputation for unpredictability.

Market Dependence

• Market dependence: The degree to which a firm’s profits are derived from a market.
  • Firms highly dependent on a market tend to respond vigorously when attacked.

5-7 Competitive Dynamics in Different Types of Markets

• Competitive dynamics span all firms competing for advantageous positions, differentiated by slow, fast, and standard cycle markets, influencing sustainability of advantages based on imitation costs and speed.

Slow-Cycle Markets (1 of 2)

• In slow-cycle markets, firms cannot easily imitate advantages:
  • Competitive advantages can last significantly long.
  • Firms focus on building unique capabilities to maintain advantages.
  • Actions typically protect and extend advantages with comparatively lower risks.

Slow-Cycle Markets (2 of 2)

• Firms may launch proprietary products and capitalize on competitive advantages until competitors counterattack successfully.

Fast-Cycle Markets (1 of 2)

• In fast-cycle markets, firms can imitate advantages easily and quickly:
  • This rapid competitive environment necessitates fast strategic decisions.
  • Techniques like reverse engineering are commonplace.
  • Technology diffuses rapidly, impacting competitive behaviors.

Fast-Cycle Markets (2 of 2)

• Firms continuously develop new competitive advantages, launching products and subsequently striving to create further advantages before competitors respond.

Standard-Cycle Markets (1 of 2)

• Standard-cycle markets are characterized by moderate imitation costs:
  • Competitive advantages are sustainable only if firms can continuously enhance quality.
  • Imitation is slower and costlier than in fast-cycle markets.
  • Both gradual and radical innovations are vital for maintaining strategic competitiveness.

Standard-Cycle Markets (2 of 2)

• Firms in these markets imitate competitive actions to:
  • Seek larger market shares and customer loyalty through branding.
  • Carefully control operations while competing in high-volume mass markets to achieve scale economies.