A Primer on and Application of Competitive Dynamics

1. A Primer on and Application of Competitive Dynamics Walter Ferrier, Ph.D. Gatton College of Business & Economics University of Kentucky Presented at Helsinki School of Economics March 2008

2. Competitive Outcomes Coke’s Strategic Actions Pepsi’s Strategic Actions Rivalry Organizational Characteristics Industry Characteristics

3. Observable … Relative … Dynamic Karjala Lapin Kulta Lapin Kulta

4. Dethronement of the Shoe Leader Market Share (U.S.) Nike Reebok Adidas 1980 1990 2005

5. Dethronement of the Retailing Leader Wal-Mart Market Share Sears JC Penney 1950 1960 1970 1980 1990 2000

6. Dethronement of the Aircraft Leader Market Share Boeing McDonnell- Douglass Airbus 1950 1960 1970 1980 1990 2000

7. What is Competitive Dynamics? • …a paradigm • …a theory • …a pre-theory • …a view • …a reasoning • …a lens • …a method • Research design element • Observational mechanism • Measurement technique

8. Info processing Social networks Managerial cognition Multi-market competition Prospect/Threat rigidity First-mover Institutional theory Complexity Communication Knowledge Signaling Resource-based view Real option theory Game theory Strategic groups Structure-conduct-perform. Dynamic limit pricing Austrian economics Corporate entrepreneurship Dominant firm/Oligopoly Force field (from psychology) Population ecology Integrated/Contributing Theories

9. Integrated/Contributing Theories • What do they explain? • Competitive behavior? • …its antecedents, contexts? • …processes? • Does competitive dynamics “enable” other theories explain, observe, conceptualize, measure: • “behavior” • “competition” • “events” • “dynamic interactive processes” • “change” • other things?

10. A Pre-Theory of Competitive Inter-Action:Some Boundary Conditions • Actor relativity/interdependence • The firm relative to: • Itself (over time) • Dyadic partners • Groups • Industry members • Other non-rivals • On factors/dimensions such as: • Competitive actions • Resources/capabilities • Firm characteristics • Outcomes

11. Pre-Theory of Competitive Inter-Action • Competitive “action” as fundamental element • “…a visible, externally-directed competitive move carried out to improve a firm’s relative competitive position” • Dynamic • Explicitly accounts for: • Time • Change • Evolution • Contingencies • Processes

12. Pre-Theory of Competitive Inter-Action • Has impact/consequences on: • Performance • Relative • Absolute • Behavior of other firms • Supply chain members • Customers • Suppliers • Regulators • Investors • Society

13. Pre-Theory of Competitive Inter-Action • Other • Uncertainty, unknowability • Imperfect information • Thought, intent, purpose • Not costless

14. Theoretical Scaffolding/Fulcrum • Awareness • Alertness - attention • Vision • Scanning • Filtering • Motivation • Intention • Valence • Emotion • Desire • Capability • Organizational enablers/constraints • Contextual enablers/constraints • Theoretical Integration Required: • “Other theories” support • and explain logic when integrated • with this AMC theoretical • scaffolding – e.g.: • Behavioral theory of the firm • Institutional theory • Social network theory • RBV

15. An Emerging Theory of Competitive Dynamics Organizational Drivers Firm 1 Strategy Awareness Industry Structure Drivers Competitive Inter-Action Motivation Capability Performance Cognitive Drivers Firm 2 Strategy Institutional Drivers Socio- Relational Drivers Other?

16. Levels of Analysis Firm Finnair

17. Levels of Analysis Firm Dyad Finnair Finnair SAS

18. Levels of Analysis Triad Firm Dyad Finnair SAS Finnair Finnair SAS Blue 1

19. Levels of Analysis Triad Firm Dyad Finnair SAS Finnair Finnair SAS Blue 1 Network Lufthansa Virgin Finnair US Airways KLM

20. Levels of Analysis Triad Firm Dyad Finnair SAS Finnair Finnair SAS Blue 1 Network Group Lufthansa Air France Lufthansa KLM Virgin eos SAS Finnair Brussels Blue 1 US Airways Ryanair KLM

21. Levels of Analysis Triad Firm Dyad Finnair SAS Finnair Finnair SAS Blue 1 Network Group Industry (or Population) Lufthansa Air France KLM Lufthansa Finnair KLM Lufthansa Virgin eos Virgin eos SAS Finnair British Airways Brussels US Airways Blue 1 US Airways Alitalia Ryanair Ryanair KLM

22. Levels of Aggregation Individual Action (or response) New Product Introduction

23. Levels of Aggregation Individual Action (or response) Action-Response Dyad New Product Introduction Price Cut Ad Campaign

24. Levels of Aggregation Individual Action (or response) Action-Response Dyad Competitive Repertoire New Product Introduction Price Cut Ad Campaign 6 x Price 1 xProduct 4 x Ads 2 x Signaling 1 x Law Suit

25. Levels of Aggregation Individual Action (or response) Action-Response Dyad Competitive Repertoire New Product Introduction Price Cut Ad Campaign 6 x Price 1 xProduct 4 x Ads 2 x Signaling Competitive Attack 1 x Law Suit attack Coke Ad Signal Product Price Legal counter attack Pepsi Ad Ad Product Price Price time

26. Network Evolution, Competitive Actions and Performance t2 t3 t1 A A A B B B Focal Firm Focal Firm Focal Firm C C E D Performance time Mkt Price Mkt Prod Mkt Mkt Prod Price Price Actions

27. Network Evolution, Competitive Actions and Performance t3 t1 t2 A A A B B B Focal Firm Focal Firm Focal Firm C C E D Performance time Mkt Price Mkt Prod Mkt Mkt Prod Price Price Actions

28. Network Evolution, Competitive Actions and Performance t1 t2 t3 A A A B B B Focal Firm Focal Firm Focal Firm C C E D Performance time Mkt Price Mkt Prod Mkt Mkt Prod Price Price Actions

29. Globalization, Competitive Action and Performance t1 t2 t3 A A A B B B Focal Firm Focal Firm Focal Firm C C E Think of internationalization and globalization in this way D Performance time Mkt Price Mkt Prod Mkt Mkt Prod Price Price Actions

30. What is the next “big thing”? • Phenomena • Constructs • Measures • Levels of analysis or aggregation • Data • Unobservables • Analytical techniques • Theory

31. Physics Physical Optical Quantum mechanics Biology Molecular/DNA Virology Medicine Neurology Psychiatry Kinesiology Non-Organizational/Economic Theories • Music • Perception/appreciation • Composition theory • Experimental aesthetics • Perception • Interpretation • Subjective judgment

32. What is Competitive Dynamics? • Coaching a basketball game • Training a hunting dog • Conversation/argument between husband & wife K Phenomenon A Z time • Rivalry: Airbus vs. Boeing • Negotiating a raise • Writing an operatic duet

33. Competitive Dynamics:Instrumentality, Application and Theory An (any?) open-system process that: • Is interactive • Contains multiple actors • Behavior and outcomes relative among actors • Contains distinct, observable elements, events, or happenings • Contains some perceptual and actual uncertainty or unknowability • Requires some thought, intent, purposefulness on behalf of actors • Is not costless

34. Questions or Comments

35. The Fast and the Furious:The Assignment of Stock Risk Based on Investor Perceptions of Competitive Maneuvering and Who’s in the Drivers’ Seat

36. Dynamic Competitive Interaction Focal Firm Actions Rivals’ Actions Focal Firm Performance Rivals’ Performance TMT Traditional-Objective Valuation Process Investment Community Stock Risk & Returns What’s happening? Dynamic- Subjective Interpretation and Valuation of… Who’s making it happen?

37. Empirical Model Focal Firm Actions Rivals’ Actions beta X TMT Heterogeneity Focal Firm Performance Industry Characteristics

38. Subjective Valuation of the Top Management Team Demographic diversity among TMT members serves as a signal for: • Cognitive/experiential breadth • Decision quality/comprehensiveness • Environmental scanning • Legitimacy/reputation …and for: • Interpersonal conflict/dysfunction • Slow decision speed • Lack of agreement-seeking/consensus

39. Subjective Valuation of Competitive Strategy Interpretation and valuation related to perceptions of collative structure in the pattern of competitive behaviors: • Simplicity… complexity • Predictability… unpredictability • Conformity … non-conforming • Long duration … single blip

40. Gestalt psych. Simplicity Proximity Similarity Common direction Exp. aesthetics Simplicity Familiarity Predictability Orderly Stability Perceptions of Gestalts in Sensory Information Comp. dynamics • Simplicity • Conformity • Predictability • Duration • Outcomes • Recognition of Gestalts or ‘wholes’ • Subjective judgment; hedonic value…”pleasingness” • Subjective judgment of strategy-performancerelationship

41. “Sensory information” organized into meaningful wholes…Gestalts Pattern Recognition, Interpretive Certitude and Hedonic Value • Computer screen pixels • Paintbrush strokes • Musical notes • DNA nucleotides • Pitch sequence • etc.

42. Hypotheses Investors will assign higher levels of stock risk to firms with heterogenous TMTs that carry out competitive attacks that are perceived as being: • Simple • Predictable • Conforming • Significant duration

43. Sensory Information: Competitive Actions • Pricing • Marketing • New Product • Service • Capacity • Overt Signals b c d e a

44. Competitive Action Sequences • Ordered sample of “things” ‘Orderliness’ among elements (alphabet) • Logically unified sequence • Succession of market-based decisions • Patterns in stream of behaviors • Coordinated series of actions • Actions in a sequential strategic thrust • COMPETITIVE ATTACK: An uninterrupted series/sequence of competitive actions b c d e a

45. Competitive Outcomes Coke’s Actions Pepsi’s Action Rivalry b c e b c e a d a d Organizational Characteristics Industry Characteristics

46. Action-Reaction Dyads Action Pair 1 Action Pair 2 Action Pair 3 Action Pair 4 b b b a Coca-Cola Pepsi c a c e

47. Prior Studies: Action “Repertoires” b b b b b Coca-Cola c a b Year-End Tallies Pepsi c e time

48. Competitive Actions Over Time = Attack Coke Pepsi a a a b b b c c c d d e e d c e a a b a b c d e c b Observed Sequence Observed Sequence

49. Competitive Attack Simplicity a a a a a a 7 a b 1 c c 2 2 d d e 1 a d a c c a e a d b a a c Observed Sequence of Competitive Actions

50. Competitive Attack Complexity a a 3 a b b 2 c c c 3 d d d 3 e e 2 a d d e c a c c d b b a e Observed Sequence of Competitive Actions