Understanding Competitive Dynamics in Market Rivalry

1. Definitions • Competitors • 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 • rivalry affects a firm’s ability to gain and sustain competitive advantages

2. Definitions • Competitive behavior • the actions and responses the firm takes to build or defend its competitive advantages and to increase market power • Competitive dynamics • the total of actions and responses taken by all firms competing within a market

3. To gain improved • market position/power Competitive rivalry Competitors • Through competitive • behavior • actions • responses What results? What results? • Competitive Dynamics • Competitive actions and responses taken by all • firms competing in a market From Competitors to Competitive Dynamics Engage in Why? How?

4. Effect of Competitive Rivalry on a Firm’s Strategies • Success of a competitive move is determined by: • the firm’s initial competitive actions • how well the firm anticipates competitors’ responses • how well the firm 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. • Is primarily concerned with capabilities/resources

5. Outcomes • Market position • Financial performance • Competitive Analysis • Market commonality • Resource similarity • Interim Rivalry • Likelihood of Attack • First mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation • Market dependence • Drivers of Competitive • Behavior • Awareness • Motivation • Ability Model of Competitive Rivalry feedback

6. 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 • Success depends on individual strategies (deployment of capabilities/resources) and the consequences of their use

7. Competitor Analysis • Competitor analysis • a technique firms use to understand their competitive environment – think of competitive environment as the industry and general environments in motion. • a technique used to help the firm identigy/understand its competitors • the first step in predicting competitors’ behavior (competitive actions and responses)

8. 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 • Industries’ markets are related in terms of • technologies • core competencies • Multimarket competition • Firms competing in several overlapping markets

9. Resource Similarity • Resource similarity • How comparable are the resources deployed by a firm and the resources deployed by that firm’s competitors (in both type and amount)? • Firms with similar types/amounts of resources are likely to: • have similar strengths and weaknesses • use similar strategies (deploy resources in the same way) • Assessing resource similarity can be difficult if critical resources are intangible rather than tangible

10. A Framework of Competitor Analysis High II I Market Commonality III IV Low KEY The shaded area represents degree of market commonality between two firms Low High Resource Similarity Resource endowment A Resource endowment B

11. Source: J. McGill 2005 Tech Knowledge & Alliances Among Competitors, Int’l Journal of Technology Management

12. Awareness Drivers of Competitive Behavior • Awareness is the extent to which competitors recognize the degree of their mutual interdependence • mutual interdependence results from • market commonality • resource similarity • current & future!

13. Motivation Awareness Drivers of Competitive Behavior • Motivation concerns the firm’s incentive • to take action • or to respond to a competitor’s attack • and relates to perceived gains and losses

14. Ability Awareness Motivation Drivers of Competitive Behavior • Ability relates • to each firm’s resources • the flexibility these resources provide • Without available resources the firm lacks the ability • to attack a competitor • to respond to the competitor’s actions

15. Market commonality Drivers of Competitive Behavior • 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 potential loss of market power under market commonality, there is a high probability that the attacked firm will respond to its competitor’s action to protect its position

16. Market commonality Resource similarity Drivers of Competitive Behavior • The greater the resource imbalance between the acting firm and competitors, the greater the delay in response by the firm with a resource disadvantage • So, when facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response

17. Strategic and Tactical Actions • 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

18. First mover incentives Likelihood of Attack: • First movers’ resources • product innovation and development • aggressive advertising • R&D • First movers can gain • customer loyalty • Network effects market share that can be difficult for competitors to take during future competitive rivalry

19. Size First mover incentives Likelihood of Attack: • Small firms are more likely • to launch competitive actions • to be quicker in doing so • Small firms - • nimble and flexible • use speed and surprise to defend their competitive advantages or develop new ones • Potentially launch a greater variety of competitive actions

20. First mover incentives Size “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.” - Herb Kelleher, Former CEO, Southwest Airlines Likelihood of Attack: • Large firms are likely to initiate more strategic & tactical actions • Large firms often have slack resources required to launch a larger number of total competitive actions

21. Likelihood of Response • Firms study three factors to predict how a competitor is likely to respond to competitive actions • type of competitive action • reputation • market dependence

22. Type of competitive action Likelihood of Response: • 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 implement and assess a strategic action delays competitors’ responses

23. Type of competitive action Reputation Likelihood of Response: • An actor is the firm taking an action or response • 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

24. Type of competitive action Market dependence Reputation Likelihood of Response: • Market dependence is • the extent to which a firm’s revenues or profits are derived from a particular market • Firms can assume that competitors with high market dependence are likely to respond strongly to attacks threatening their market position

25. Slow-cycle markets Competitive Dynamics: • 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

26. 10 5 0 Gradual Erosion of a Sustainable Competitive Advantage Exploitation Returns from a Sustainable Competitive Advantage Counterattack Launch Time (Years)

27. Fast-cycle markets Slow-cycle markets Competitive Dynamics: • 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

28. 15 10 5 0 Obtaining Temporary Advantages to Create Sustained Advantage Firm has already moved to next advantage Exploitation Returns from a Series of Replicable Actions Launch Counterattack Time (Years)

29. Slow-cycle markets Fast-cycle markets Standard-cycle markets Competitive Dynamics: • 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 quality of its competitive advantages • Firms • seek large market shares • gain customer loyalty through brand names • carefully control operations