Chapter 6Competitive Rivalry and Competitive Dynamics

Chapter 6: Competitive Rivalry and Competitive Dynamics

CHAPTER SUMMARY

This chapter begins with definitions of several key terms used throughout the discussion
and an acknowledgement of the distinctiveness of this new, intense age of competition, which is
marked by accelerating actions and reactions amongst competitive players.
An integrative competitive rivalry model is presented at the firm level.
Market commonality and resource similarity are described as building blocks of
competitor analysis.
The effects of organizational characteristics on firms competitive behavior are reviewed,
and discussion of the factors that affect the likelihood of competitive action and response guide a
detailed examination of competitive rivalry.
How competitive rivalry is affected by the market cycle closes the chapters discussion
on competitive dynamics.

CHAPTER OUTLINE

A Model of Competitive Rivalry

Competitor Analysis
Market Commonality
Resource Similarity
Drivers of Competitive Actions and Responses
Competitive Rivalry
Strategic and Tactical Actions
Likelihood of Attack
First Mover Incentives
Organizational Size
Quality
Likelihood of Response
Type of Competitive Action
Actors Reputation
Dependence on the Market
Competitive Dynamics
Slow-Cycle Markets
Fast-Cycle Markets
Standard-Cycle Markets
Summary

KNOWLEDGE OBJECTIVES

1. Define competitors, competitive rivalry, competitive behavior, and competitive

dynamics.
2. Describe market commonality and resource similarity as the building blocks of a
competitor analysis.
3. Explain awareness, motivation, and ability as drivers of competitive behavior.
4. Discuss factors affecting the likelihood a competitor will take competitive actions.

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5. Discuss factors affecting the likelihood a competitor will respond to actions taken
against it.
6. Explain competitive dynamics in slow-cycle, fast-cycle, and standard-cycle markets.

LECTURE NOTES

See slides 1-4. Key Terms

Competitors - firms operating in the same market, offering
similar products and targeting similar customers.
Competitive Rivalry - ongoing set of competitive actions and
competitive responses occurring between competitors as they
See Figure 6.1: From
contend with each other for an advantageous market position.
Competitors to
Competitive Competitive Behavior - set of competitive actions and
Dynamics (slide 5). competitive responses the firm takes to build or defend its
competitive advantages and to improve its market position.
Competitive Dynamics - total set of actions and responses all
firms competing within a market take.
See Additional Notes
Multimarket Competition - firms competing against each other
Below.
in several product or geographic markets.

Additional Discussion Notes for Competitive Rivalry - These notes

include additional materials that cover the concept of competitive
rivalry, including an example illustrating the signals and rules of
engagement in the airline industry and an example of personality-driven
competition in the electronics industry.

From Competitors to Competitive Dynamics

Firms use a variety of tactics to draw out and assess the competition. For
example, rivals frequently signal their rules of engagement, which
involves letting the competition know ones intentions and to draw the
competition out and examine how it responds. To examine how the
competition responds, or to test its counter moves, a firm can always
bluff. Signaling and rules of engagement in the airline industry are
rather clear and common.
As an example, Delta was known for briefly lowering fares
significantly on a particular route, say Atlanta to Los Angeles, in
response to another carrier lowering the fares on the same route. The
signal: If you want to lower fares on this route, you are in for a bloody
battle. The other airline most often responded by raising fares along
this route because Delta had the resources to enter into a long and
grueling fare war on the route. If, on the other hand, rivals reacted by
lowering fares even further, Delta had to interpret this signal as they
wished to compete with us for business along this route. Of course, not
all types of signaling are legal, but here are a couple of common signals:
price movements, prior announcements (well meet or beat any
competitors price), media (press releases), counterattacks/moves,
announcement of results, and litigation.

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Strategists must also note that firms might get into competitions that are
not economically driven, but rather are personality driven. These
competitive rivalries are based on an initial competition for resources or
revenuesbut that over time can become personal battles between
CEOs. Sony and Matsushita have been battling for world dominance in
the consumer electronics industry for decades. The rivalry has become
so personal between the two CEOs that they refuse to attend the same
dinner parties or events. It escalated to the point where in 1989, after
Sonys Akio Morita closed the deal to purchase Columbia Pictures for
$3.4 billion, Matsushitas Masaharu Matsushita, not willing to be one-
upped by his rival, responded by purchasing MCA for $6.1 billion less
than a year later.
Understanding competition is important, as research shows that
intensified rivalry within an industry may result in decreased industry
average profitability. As discussed in the textbook, in 2001, Dell
launched an intense price war in the PC and server business, causing
prices to drop by as much as 50%. Profit margins declined for all firms,
including Dell. CEO Michael Dell believed that his direct-sales model
would enable Dell to better endure its own reduced profitability than
rivals who seek economies of scale could. Competitors, however,
responded to Dells pricing competitive action. For example, to increase
their advantage from economies of scale and scope, Hewlett-Packards
merged with Compaq Computer Corporation. While it remains to be
seen whether the new HP would be able to sustain the intense rivalry,
Dells strategy may contribute to its ability to outperform its rivals.
Indeed, it has been suggested that Dell sets the pace for the PC industry,
reflecting the strength of its direct sales strategy, and its superior cash
flow management.

A Model of Competitive Rivalry - This section presents a straightforward, yet integrative,

model of competitive rivalry at the firm level to provide a useful way to discuss the various
aspects of competitive dynamics.

See Figure 6.2: A 1. Describe the major components of the competitive rivalry
Model of model.
Competitive Rivalry a. Competitor Analysis
(slide 6).
b. Drivers of Competitive Behavior
c. Interim Rivalry
d. Outcomes
2. How do the patterns of action and response that result in
competitive rivalry influence a firms business-level strategy?
a. The mutual interdependence of competitors actions.
b. The intensity of rivalry within a market.

See slide 7. 3. What determines the intensity of rivalry within a market?

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a. The total number of competitors

b. Market characteristics
c. Quality of individual firms strategies
d. Drivers of competitive behavior

Competitor Analysis - This section discusses how the concept of competitor analysis was
addressed earlier in the text and is now extended to describe what firms study as the first step to
being able to predict competitors behavior in the form of its competitive actions and responses.

See slide 8. 4. What determines the extent to which firms are competitors?
a. Market commonality - the number of shared markets
b. Resource similarity - the similarity in resources

Market Commonality - This section presents the concepts of market commonality, multi-market
competition and how the potential to respond competitively across markets complicates and
impacts the rivalry between competitors.

See slide 9. Key Terms

Market Commonality - number of markets with which the firm
and a competitor are jointly involved and the degree of
importance of the individual markets to each.

Additional Discussion Notes for Competitor Analysis - These notes

include additional materials that cover market commonality, providing
several marketplace situations that illustrate the concept.

Market Commonality
Firms with high market commonality and highly similar resources are
direct and mutually acknowledged competitors. However, direct rivals
do not always intensify their competition. The drivers of competitive
behavioras well as the likelihood that a competitor will initiate
competitive actions or reactionsinfluence the intensity of rivalry, even
for direct competitors.
Market Commonality is concerned with the number of markets
with which the firm and a competitor are jointly involved and the degree
of importance of the individual markets to each. For example,
McDonalds and Burger King compete against each other in multiple
global fast-food markets, while Prudential and Cigna
(financial/insurance) compete against each other in several market
segments (institutional and retail) as well as product markets such as life
insurance and health insurance. Airlines, chemicals, and
pharmaceuticals are other industries in which firms often simultaneously
engage each other in multiple market competitions. More recently. AOL

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and Microsoft entered into a stiff competition for Internet Service

Provider (ISP) dominance. The key to ISP profits is in selling add-ons
and auxiliary products and services to its customers. AOL has a
significant size advantage with 31 million subscribers to Microsofts
seven million. The rivalry between the two firms for customers is
becoming increasingly intense. When AOL increased rates, Microsoft
responded by holding its rates and offering three free months to new
subscribers. AOL responded by initiating negotiations with PC
manufacturers to install AOL on new PC desktops. The two firms also
compete for the instant messaging application market. While AOL
pioneered the concept, Microsoft developed many added features and
optimized its application. In an effort to capture even greater market
share Microsoft began to bundle MSN Messenger with its newest
Windows operating system, Windows XP. While research suggests that
market commonality and multimarket competition may occur by chance,
once it begins, the rivalry becomes intentional and oftentimes intense.

Resource Similarity - This section presents the concept of resource similarity, how firms with
similar types and amounts of resources are likely to have similar strengths, weaknesses, and
strategies, and the difficulty of assessing competitor resources (particularly, intangible resources).

See slide 10. Key Terms

Resource Similarity - extent to which the firms tangible and
intangible resources are comparable to competitors resources in
terms of both type and amount.

See Figure 6.3: A 5. Discuss how mapping a firms competitor analysis can show the
Framework of extent to which firms in an industry compete.
Competitive Analysis a. Referring to Figure 6.3, firms in Quadrant I are direct
(slide 11). and mutually-acknowledged competitors.
b. Referring to Figure 6.3, firms in Quadrant III share few
See Additional Notes markets and have little resource similarity.
Below.

Additional Discussion Notes for Competitor Analysis - These notes

include additional materials that cover resource similarity, providing
marketplace situations that illustrate the concept.

Resource Similarity
Resource Similarity is the extent to which the firms resources are
comparable to a rivals in terms of both type and amount. Firms with
similar types and amounts of resources tend to have similar strengths
and weaknessesand use similar strategies. The rivalry between CVS
and Walgreens demonstrates these expectations in the retail pharmacy
business. These firms are using the integrated cost
leadership/differentiation strategy to offer relatively low-cost goods with

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some differentiated features, such as services. Resource similarity (net

income of $746 million for CVS vs. $776.9 million for Walgreens;
4,133 CVS stores in 34 states vs. 3,165 Walgreens stores in 43 states)
suggests that the firms might suffer from strategy convergence and
industry orthodoxy.

Drivers of Competitive Actions and Responses - This section discusses the factors that
influence competitive behavior.

See slides 12. 6. What are the drivers of competitive behavior?

a. Awareness - extent to which competitors recognize the
degree of their mutual interdependence (resulting from
market commonality and resource similarity) and the
potential consequences of competitive behavior.
b. Motivation - firms incentive to take action or to
respond to a competitors attack as it relates to
perceived gains and losses.
c. Ability - firms resources that allow competitive action
See Additional Notes and flexible responsiveness.
Below. d. Resource dissimilarity - resource disadvantages that
delay speed of response to competitive actions.

Additional Discussion Notes for Competitor Analysis - These notes

include additional materials that cover resource similarity, providing
marketplace situations that illustrate the concepts.

Resource Dissimilarity
Resource Dissimilarity also influences competitive actions and re-
sponses between firms. For example, Wal-Mart initially used its cost-
leadership strategy to compete only in small communities (population of
25,000 or less). Using logistics systems and extremely efficient purchas-
ing practices as competitive advantages, Wal-Mart created what was at
that time a new type of valuewide selections of products at the lowest
competitive pricesfor customers in small retail markets. Local stores
lacked the ability to marshal resources at the pace required to respond
quickly and effectively. However, even when facing competitors with
greater resources or ability, firms should respond, no matter how daunt-
ing doing so seems. Choosing not to respond can ultimately result in
failure (or greater failure), as happened with many local retailers who
didnt respond to Wal-Marts competitive actions.

Competitive Rivalry - This section highlights the importance of studying the ongoing
competitive action-response sequence between competitors because of its effect on performance
and the successful use of strategies. Understanding competitors awareness, motivation, and
ability helps to predict the likelihood of competitive action and response.

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Strategic and Tactical Actions - This section defines the nature of competitive actions and
responses used by firms engaged in competitive rivalry.

See slide 13. Key Terms

Competitive Action - strategic or tactical action the firm takes
to build or defend its competitive advantages or improve its
market position.
Competitive Response - strategic or tactical action the firm
takes to counter the effects of a competitors action.
Tactical Action (or Response) - market-based move that is taken
to fine-tune a strategy.

See slide 14. 7. What are the differences between strategic and tactical
actions/responses?
a. Strategic actions/responses are market-based moves that
signify a significant commitment of organizational
resources to pursue a specific strategy. They are
difficult to implement and reverse.
b. Tactical actions/responses are market-based moves
taken to fine-tune a strategy that is already in place,
involving fewer resources. They are relatively easy to
implement and reverse.

Likelihood of Attack - This section presents factors (other than market commonality, resource
similarity, and the drivers of competitive behavior) which affect the likelihood a firm will use
strategic and tactical actions to attack its competitors.

See slide 15. 8. What other factors affect the likelihood a firm will use strategic
and tactical actions to attack its competitors?
a. First mover incentives
b. Organizational size
c. Quality

First Mover Incentives - This section categorizes the firms within a marketplace based on
the timing of their competitive behavior. How this timed behavior affects their strategy is
also discussed.

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See slides 16-17. Key Terms

First Mover - firm that takes an initial competitive action to
build or to defend its competitive advantages or to improve its
market position.
Second Mover - firm that responds to the first movers
competitive action, typically through imitation.
Late Mover - firm that responds to a competitive action, but
only after considerable time has elapsed after the first movers
action and the second movers response.
Slack - buffer or cushion provided by actual or obtainable
resources not being currently used by an organization,
resources in excess of the minimum needed to produce a
given level of output.

See slide 18. 9. What are some of the characteristics of first movers?
a. Often build upon a strategic foundation of superior
research and development skills.
b. Tend to be aggressive and willing to experiment
with innovation.
c. Tend to take higher, yet reasonable, risks.
d. Need to have liquid resources (slack) that can be
quickly allocated to support actions.
See slide 19.
10. What are some of the potential benefits of being a successful
first mover?
a. Above-average returns
b. Customer loyalty
c. An early hold on market share
See slide 20. 11. What are some of the potential risks of being a first mover in
the market?
a. Difficult to accurately estimate potential returns.
b. Substantial costs of product innovation, which reduces
slack available for other opportunities.
c. Lower likelihood of introducing (or converting to) the
product that becomes the industry standard as the
market evolves.
See slide 21.
12. Compared to first movers, what are some of the characteristics
of second movers?
a. Respond to first mover, typically through imitation.
b. More cautious than first movers.
c. Tend to study customer reactions to product
innovations.
d. Tend to learn from the mistakes of first movers,
reducing their risks.
e. Take advantage of time to develop processes and

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technologies that are more efficient than first movers,

reducing their costs.
f. Will not benefit from first mover advantages, lowering
potential returns.
13. Compared to first and second movers, what are some of the
See slide 22.
characteristics of late movers?
a. Respond to market opportunities only after considerable
time has elapsed after first and second movers,
substantially reducing risks and returns.

Organizational Size - This section describes how an organizations size affects its likelihood of
taking competitive actions.

See slides 23-24. 1. What is the difference between large and small firms in terms of
their likelihood of taking competitive actions?
a. Small firms are nimble and flexible competitors who
rely on speed and surprise to defend their competitive
advantage. This allows greater variety of competitive
behavior options available to the small firm.
b. Large firms have a greater likelihood to initiate
competitive and strategic actions over time because they
often have greater slack. However, they tend to rely on
a limited variety of competitive actions, which can
ultimately reduce their competitive success.

Quality - This section describes how quality affects competitive rivalry and the need for
managers to create an organizational culture that focuses on quality across all value chain
activities.

See slides 25. Key Terms

Quality - customer perception that the firms goods or services
perform in ways that are important to the customer, meeting or
exceeding customers expectations.

See Table 6.1: 14. What are some examples of product dimensions that customers
Quality Dimensions use to measure quality?
of Goods and a. Product quality dimensions - performance, features,
Services (slide 26). flexibility, durability, conformance, serviceability,
aesthetics, perceived quality.
b. Service quality dimensions - timeliness, courtesy,
consistency, convenience, completeness, accuracy.

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Likelihood of Response - This section presents factors (other than market commonality, resource
similarity, and the drivers of competitive behavior) which affect the likelihood a firm will
competitively respond to actions by its competitors.

See slide 27. 15. What other factors affect how a firm is likely to respond to
actions by its competitors?
a. Types and effectiveness of the competitive action
b. Reputation of the firm making competitive actions
c. Dependence on the market
d. Whether the action significantly strengthens or weakens
the firms competitive position

Type of Competitive Action - This section explains that strategic actions generally elicit fewer
responses than tactical actions because of the significant resource commitment and the amount of
time needed for implementation.

Actors Reputation - This section discusses how a firms reputation to its competitors influences
the likelihood of a competitive response to their competitive actions.

See slide 28. Key Terms

Actor - firm taking an action or response (in the context of
competitive rivalry).
Reputation - positive or negative attribute ascribed by one rival
to another based on past competitive behavior.

Additional Discussion Notes for Actor Reputation - These notes

include additional materials that cover the impact of actors reputation
on competitive response, providing marketplace situations that illustrate
the concept.

Actor Reputation
Competitors are more likely to respond to strategic and tactical actions
taken by market leaders. For example, Home Depotthe worlds largest
home improvement retailer and the second largest U.S. retailer (behind
Wal-Mart)is known as an innovator in the home improvement market
and for its ability to develop new store formats (EXPO Design Centers
and Villagers Hardware Stores). As such, Home Depot knows that its
rivals study its strategic actions and respond to them. For example,
watching Home Depot, Lowes has transformed from a chain of small
stores into a chain of home improvement warehouses, thus increasing
the similarity of its store design with Home Depots.
Similarly, evidence shows that successful strategic actions are
quickly imitated, almost regardless of the actors reputation. For
example, although a second mover, IBM committed significant

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resources to enter the PC market. When IBM succeeded in this

endeavor, rivals (Dell, Compaq, and Gateway) responded with strategic
actions (imitation) to enter the market. IBMs reputation as well as its
successful strategic action strongly influenced entry by these
competitors. Thus, in terms of competitive rivalry, IBM could predict
that responses would follow its entry to a market if that entry proved
successful. In addition, IBM could predict that those competitors would
try to create value in slightly different ways, such as Dells direct sales
and built-to-order rather than to use storefronts as a distribution channel.

Dependence on the Market - This section describes why competitors with high market
dependence are likely to respond strongly to attacks threatening their market position.

See slide 29. Key Terms

Market Dependence - extent to which a firms revenues or
profits are derived from a particular market.

Competitive Dynamics - This section explains the effects of varying rates of competitive speed
in different markets on the behavior of all competitors within a given market. Sustainability of
competitive advantage is an important difference among the three market types that are outlined.

See slide 30. 16. What are the three market types determined by the prevalent
speed of competition within the market?
a. Slow-cycle markets
b. Fast-cycle markets
c. Standard-cycle markets

Slow-Cycle Markets - This section discusses how firms achieve success in low-velocity
environments.

See slide 31. Key Terms

Slow-Cycle Markets - markets in which the firms competitive
advantages are shielded from imitation for what are commonly
long periods of time and where imitation is costly.

See slide 32. 17. How do firms achieve competitive success in a slow-cycle
market?
See Figure 6.4: a. Build a one-of-a-kind competitive advantage that is
Gradual Erosion of a proprietary and difficult for competitors to understand -
Sustained sustainability.
Competitive b. Once a proprietary advantage is developed, competitive
Advantage (slide 33). behavior should be oriented to protecting, maintaining,

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and extending that advantage.

See Additional Notes c. Organizational structure that an organization should use
Below. to effectively support its strategic efforts.

Additional Discussion Notes for Competitive Rivalry - These notes

include additional materials that cover slow-cycle markets, providing
marketplace situations that illustrate the concept.

Slow-Cycle Markets
Slow-Cycle Markets are markets in which competitive advantages are
shielded from imitation for longer periods of time and/or where
imitation is costly. Historical conditions, causal ambiguity, social
complexity, copyrights, location, patents, and proprietary information
could all lead to one-of-a-kind advantages.
Walt Disney Co. continues to extend its proprietary characters,
such as Mickey Mouse, Minnie Mouse, and Goofy. These characters
have a unique historical development. Because patents shield it, the
proprietary nature of Disneys advantage in terms of animated
characters protects the firm from imitation by competitors (e.g., the
company once sued a day-care center, forcing it to remove the likeness
of Mickey Mouse from a wall of the facility).
Once a patent expires, a firm is no longer shielded from
competition. For example, in 2002 Merck got rocked by the loss of
revenue as the patent protection for leading drugs, such as
gastroesophageal reflux soother Prilosec, cholesterol drug Mevacor, and
hypertension medication Prinivil, expired.

Fast-Cycle Markets - This section discusses how firms achieve success in high-velocity
environments.

See slide 34. Key Terms

Fast-Cycle Markets - markets in which the firms capabilities
that contribute to competitive advantages are not shielded from
imitation and where imitation is often rapid and inexpensive.

See slides 35. 18. How do firms achieve competitive success in a fast-cycle
market?
See Figure 6.5: a. Focus on learning how to rapidly and continuously
Obtaining Temporary develop new competitive advantages that are superior to
Advantages to Create those they replace - innovation.
Sustained Advantage b. Avoid loyalty to any of their products, possibly
(slide 36). cannibalizing their own current products to launch new
ones before competitors learn how to do so through
successful imitation.

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See Additional c. Continually try to move on to another temporary

Notes Below. competitive advantage before competitors can respond
to the first one.

Additional Discussion Notes for Competitive Rivalry - These notes

include additional materials that cover fast-cycle markets, providing
marketplace situations that illustrate the concept.

Fast-Cycle Markets
Fast-Cycle Markets are markets in which competitive advantages are not
shielded from imitation and where imitation happens quickly and
somewhat inexpensively. Competitive advantages are not sustainable in
fast-cycle markets. The pace of competition in fast-cycle markets is
almost frenzied as companies rely on ideas and the innovations resulting
from them as the engines of their growth. Because prices fall quickly in
these markets, companies need to introduce new or improved product
faster. For example, rapid declines in the prices of Intels and Advanced
Micro Devices (AMD) microprocessor chips made it possible for PC
manufacturers to continuously reduce their prices to end users. Imitation
of many fast-cycle products is relatively easy. Dell and Gateway have
imitated IBMs initial PC design to create their own PCs. Continuous
declines in the cost of parts, as well as the fact that the information and
knowledge required to assemble a PC isnt complicated and is readily
available, made it possible for additional competitors to enter this
market without significant difficulty.

Standard-Cycle Markets - This section discusses how firms achieve success in moderate-
velocity environments.

See slide 37. Key Terms

Standard-Cycle Markets - markets in which the firms
competitive advantages are moderately shielded from imitation
and where imitation is moderately costly.

See slides 38. 19. How do firms achieve competitive success in a standard-cycle
market?
a. Competitive advantages can be partially sustained when
their quality is continuously upgraded.
b. Seek to serve many customers and gain a large market
share.
c. Gain brand loyalty through brand names.
d. Carefully control operations to manage a consistent
experience for the customer.

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Ethical Questions - Recognizing the need for firms to effectively interact with stakeholders
during the strategic management process, all strategic management topics have an ethical
dimension. A list of ethical questions appears after the Summary section of each chapter in the
textbook. The topic of ethics is best covered throughout the course to emphasize its prevalence
and importance. We recommend posing at least one of these questions during your class time to
stimulate discussion of ethical issues relevant to the chapter material that you are covering. (See
slides 39-43.)

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