Strategic Management: Concepts and Cases

Part II: Strategic Actions: Strategy Formulation Chapter 5: Competitive Rivalry and Competitive Dynamics
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The Strategic Management Process

Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standardcycle markets
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Competition Between HP and Dell: The Battle Rages On

Dell lost position as global top-seller of PCs

End of 2006: HP 18.1% vs. Dells 14.7% 2005 and 2006: 32% overall decline in stock value

Dell way: bypass middle-man and sell custom-built

computers directly to consumer

This single business model lowered costs and hence prices of products, no longer created value to the degree it had historically . Why? Competitive actions/reactions HP: found ways to innovate and reinvent itself since it couldnt compete with Dell in the direct-sales battlefield they used their strength and developed personal relationships with retailers
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Dell decides to venture into retail sales a reaction to HP!

Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standardcycle markets
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Introduction and Definitions

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 contend with each other for an advantageous market position

Competitive Behavior Set of competitive actions and competitive responses the firm takes to build or defend its competitive 6 advantages and to improve its market position

Introduction and Definitions

(Contd)

Multimarket Competition Firms competing against one another in several product or geographic markets Competitive Dynamics Total set of actions and responses of all firms competing within a market

From Competitors to Competitive Dynamics

Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standard-cycle markets
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Model of Competitive Rivalry

Model of Competitive Rivalry Over time firms take competitive actions/reactions Pattern shows firms are mutually interdependent Firm level rivalry is usually dynamic and complex Foundation for successfully building and using capabilities and core competencies to gain an advantageous market position Sequence of events (Figure 5.2) are the components of this chapter

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A Model of Competitive Rivalry

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Competitor Analysis
Competitor Analysis 2 components to assess: Market Commonality and Resource Similarity The question: To what extent are firms competitors?

Number of markets in which firms compete against each other Competitor: High market commonality & resource similarity I.e., Dell and HP are direct competitors

Direct competition does not always imply intense rivalry

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Competitor Analysis
Market Commonality

Each industry composed of various markets which can be subdivided into (segments) I.e., Financial industry

Resource Similarity Extent to which firms tangible/intangible resources are comparable to competitors in type and amount

I.e., FedEx and UPS both have efficient operations and focus on cost reduction

Combination of market commonality & resource

similarity indicate a firms direct competitors

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Competitor Analysis
Examples from text (p. 132)
Industry
Financial

Market
Insurance Brokerage svcs Banks

Market Segment
Commercial, Consumer

Product Segment
Health, life

Geographic Market
East, west

Transportation

Commercial Ground

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A Framework of Competitor Analysis

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Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standardcycle markets
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Drivers of Competitive Actions/Responses

Market commonality & resource similarity influence

three drivers (awareness, motivation and ability) of competitive behavior

Awareness

Prerequisite to any competitive action Extent competitors recognize degree of mutual interdependence that results from market commonality and resource similarity Firm's incentive to take action, or to respond to a competitor's attack, as it relates to perceived gains and losses Firm's resources that allow competitive action and flexibility 17 responsiveness

Motivation

Ability

Drivers of Competitive Actions/Responses

Other influences include resource

dissimilarity

The greater the resource imbalance between acting firm and competitors or potential responders, the greater will be the delay in response

I.e., Wal-Mart initially used cost leadership strategy to compete only in small communities Created a logistics systems and extremely efficient purchasing practices as competitive advantages

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Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standardcycle markets
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Competitive Rivalry
Important to understand competitors awareness,

motivation and ability in order to predict the likelihood of an attack study likelihood of attack factors What are the strategic and tactical actions?

Strategic actions/responses: market-based moves that signify a significant commitment of organizational resources to pursue a specific strategy

Difficult to implement and reverse

Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place

Easy to implement and reverse

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Competitive Rivalry
What are the strategic and tactical actions? Competitive Action

(Contd)

Strategic or tactical action 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 effects of a competitor's action
Market-based move the firm takes in order to fine-tune a strategy

Tactical Action (or Response)

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Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 1. First Mover Incentives 2. Organizational Size 3. Quality

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Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 1. First Mover Incentives

(Contd)

(Contd)

Firm that takes an initial competitive action to build or to defend its competitive advantages or to improve its market position Must have readily available resources
Slack buffer or cushion provided by actual or obtainable resources not currently used by an organization, resources in excess of the minimum needed to produce a given level of output

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Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 1. First Mover Incentives (Contd)

(Contd)

(Contd)

Often builds upon a strategic foundation of superior research and development skills Tends to be aggressive and willing to experiment with innovation Tends to take higher, yet reasonable, risks Needs to have liquid resources (slack) that can be quickly allocated to support actions Benefits can be substantial, but remember the learning curve!
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Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 1. First Mover Incentives: Responses to

(Contd)

(Contd)

Second Mover
Responds to first mover, typically through imitation Is more cautious than first movers Tends to study customer reactions to product innovations Tends to learn from the mistakes of first movers, reducing its risks Takes advantage of time to develop processes and technologies that are more efficient than first movers, reducing its costs Will not benefit from first mover advantages, lowering potential returns

Late Mover
Responds to market opportunities only after considerable time has elapsed since first and second movers have taken action 25 Has substantially reduced risks and returns

Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 2. Organizational Size

(Contd)

(Contd)

Small firms
Act as nimble and flexible competitors Rely on speed and surprise to defend their competitive advantage Have greater variety of competitive behavior options available

Large firms
Often have greater slack

Have greater likelihood to initiate competitive and strategic actions over time
Tend to rely on a limited variety of competitive actions, which can ultimately reduce their competitive success
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Interfirm Rivalry: Likelihood of Attack

Three possible likelihood of response actions 3. Quality

(Contd)

(Contd)

Customer perception that the firm's goods or services perform in ways that are important to customers, meeting or exceeding their expectations

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Interfirm Rivalry: Likelihood of Response

Additional factors affect the likelihood a firm will

competitively respond to a competitors actions:

1. Types and effectiveness of the competitive action 2. Actors Reputation

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

3. Dependence on the Market

Extent to which a firm's revenues or profits are derived from a particular market

Finally, if the

action significantly strengthens or weakens the firm's competitive position

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Chapter 5: Competitive Rivalry and Competitive Dynamics

Overview: Six content areas Competitors, competitive rivalry, competitive behavior and competitive dynamics Market commonality and resource similarity: Building blocks of competitor analysis Competitive actions: Awareness, motivation and ability Factors driving competitors competitive actions Competitors response to actions taken against it Competitive dynamics in slow, fast and standard-cycle markets
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Competitive Dynamics: 3 Market Cycles

1. Slow-Cycle Markets Markets in which the firm's competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly Build a one-of-a-kind competitive advantage which creates sustainability (I.e., proprietary and difficult for competitors to understand) Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage Organizational structure should be used to effectively support strategic efforts
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Gradual Erosion of a Sustained Competitive Advantage

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Competitive Dynamics: 3 Market Cycles

2. Fast-Cycle Markets

(Contd)

Markets in which the firm's capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive Focus: learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation) Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation Continually try to move on to another temporary competitive advantage before competitors can respond 32 to the first one

Developing Temporary Advantages to Create Sustained Advantage

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Competitive Dynamics: 3 Market Cycles

(Contd)

3. Standard-Cycle Markets Markets where firms competitive advantages are moderately shielded from imitation and where imitation is moderately costly Competitive advantages partially sustained as quality is continuously upgraded Seek to serve many customers and gain a large market share Gain brand loyalty through brand names Careful operational control / manage a consistent experience for the customer
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