Chapter 5

1. Chapter 5 Competitive Dynamics Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing

2. Inputs Strategic Strategic Outcomes Chapter 2 The Strategic Management Process External Environment Strategic Intent Strategic Mission Chapter 3 Internal Environment Strategy Formulation Strategy Implementation Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11 Business-Level Competitive Corporate-Level Corporate Structure Strategy Dynamics Strategy Governance & Control Actions Strategic Chapter 8 Chapter 7 Chapter 9 Chapter 12 Chapter 13 Entrepreneurship & Innovation International Acquisitions & Cooperative Strategic Strategy Restructuring Strategies Leadership Strategic Competitiveness Above Average Feedback Returns

3. Factors Leading to More Complex Rivalry Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)

4. Competitive Dynamics Results from a series of competitive actions and competitive responses among firms competing within a particular industry Competitive Rivalry Exists when two or more firms jockey with one another in the pursuit of better market position

5. A firm’s strategic conduct is dynamic in nature Actions taken by one firm elicit responses from competitors Competitive responses lead to additional actions from the firm that acted originally Competitive Dynamics Actions and responses shape the competitive positions of each firm’s business level strategy

6. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

7. Do managers understand the key characteristics of competitors? Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability

8. Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Does the firm have appropriate incentives to attack or respond? Motivation Capability

9. Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Does the firm have the necessary resources to attack or respond? Capability

10. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

11. Market Commonality Do firms compete with each other in multiple markets? Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity

12. Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs For example, airlines price flights similarly but respond quickly when competitors introduce promotional prices Market Commonality Resource Similarity

13. Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity Do competitors possess similar types or amounts of resources?

14. Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Firms are less inclined to attack a firm that is likely to retaliate Resource Similarity Firms with similar resources are more likely to be aware of each other’s competitive moves Firms with dissimilar resources are more likely to attack

15. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

16. Likelihood of Attack First Mover advantage can be substantial First Mover Incentives Model of Interfirm Rivalry: Likelihood of Attack and Response Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor’s Reputation Dependence on the Market Resource Availability

17. Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies Can earn above average profits until competitors respond Gain customer loyalty, helping to create a barrier to entry by competitors Advantage depends upon difficulty of imitation First Mover

18. Firms that respond to a First Mover’s actions Second Movers frequently imitate First Movers Speed of response often dictates success Should evaluate customers’ response before moving “Fast” Second Movers can capture some of initial customers and develop some brand loyalty Avoid some of the risks associated with First Move Must possess necessary capabilities to imitate Second Mover

19. Model of Interfirm Rivalry: Likelihood of Attack and Response Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Whether a competitor is likely to respond depends on several key factors Action Actor’s Reputation Dependence on the Market Resource Availability

20. Significant commitments of specific and distinctive organizational resources Strategic Actions Difficult to implement Difficult to reverse Major Acquisition Example Undertaken to “fine tune” strategy Tactical Actions Relatively easy to implement Relatively easy to reverse Price cut Example Types of Competitive Actions

21. Easier to respond to Require fewer resources to mount a response Market leaders are more likely to be copied “Risk taking” firms are less likely to be copied “Price Predators” are less likely to be copied Gauging the Likelihood of Response Type of Competitive Action -Tactical or Strategic Actor’s Reputation

22. Firms that are more dependent on a single industry are more likely to respond than are diversified firms Industry dependent firms will likely respond to either strategic or tactical actions Smaller firms are more likely to respond to tactical actions Limited resources may lead to alternatives such as Strategic Alliances Gauging the Likelihood of Response Market Dependence Competitor Resources

23. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

24. Firm size can have opposing effects on competitive dynamics Relative Size Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Innovation Quality

25. “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.” -- Herb Kelleher, CEO, Southwest Airlines Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Large firms may exert market power over rivals and erect barriers to entry against smaller competitors However, smaller competitors may be more nimble and innovative Relative Size Speed Innovation Quality

26. Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Quick response is crucial to both the first mover and the fast second mover Speed Innovation Quality

27. Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Consistent innovation is required for market leadership in many dynamic industries Innovation Quality

28. Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Innovation Exceeding customer expectations is a necessity to compete in the 21st century Quality

29. Performance Operating characteristics Features Important special characteristics Flexibility Meeting operating specifications over time Durability Amount of use before performance deteriorates Conformance Match with pre-established standards Serviceability Ease and speed of repair or normal service Aesthetics How a product looks and feels Perceived quality Subjective assessment of characteristics (product image) Quality Dimensions of Goods & Services Product Quality Dimensions:

30. Timeliness Performed in promised period of time Courtesy Performed cheerfully Consistency Giving all customers similar experiences Convenience Accessibility to customers Completeness Fully serviced, as required Accuracy Performed correctly each time Quality Dimensions of Goods & Services Service Quality Dimensions:

31. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

32. Competitive Market Types Slow cycle markets are frequently shielded by monopoly power or very strong brand loyalties Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage This market outcome and lack of interfirm rivalry may lead to sustained competitive advantage Temporary Advantage Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Evolutionary Actions Growth-Oriented Actions Market-Power Actions

33. Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Standard cycle markets often lead to highly competitive pressures despite world class products Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Firms with multimarket competition may dampen rivalry somewhat Temporary Advantage Evolutionary Outcomes Sustained competitive advantage is a possible outcome in this instance Evolutionary Actions Growth-Oriented Actions Market-Power Actions

34. Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Fast cycle markets are intensely dynamic and a first mover advantage is often unsustainable Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Firms may cannibalize older generation products while introducing new innovative premium products Advantage Temporary Advantage Evolutionary Outcomes Evolutionary Actions Growth-Oriented Actions Market-Power Actions Sustainable competitive advantage is unilkely

35. Exploitation Counterattack Launch Gradual Erosion of a Sustained Competitive Advantage Returns from a Sustained Competitive Advantage Time (years) 10

36. Disrupting the Status Quo 1 Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety Creating Temporary Advantage 2 Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers Seizing the Initiative 3 Move aggressively into new areas of competition to create new advantage and undermine a competitor’s old advantage 4 Sustaining the Momentum Take several actions in a row in order to seize the initiative and create momentum to develop new advantages Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative

37. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Exploitation Counterattack Launch 5 10 15 Time (years)

38. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Firm has already moved on to Advantage No. 2 Exploitation Counterattack Launch 5 10 15 Time (years)

39. Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Firm continues to move on to the next Advantage Exploitation Counterattack Launch 5 10 15 Time (years)

40. Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Strategies may be deter-mined by the life cycle of the industry Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Younger firms and emerging industries are generally characterized by entrepreneurial actions Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Growth-oriented and Market-power strategies dominate established or mature industries Evolutionary Actions Growth-Oriented Actions Market-Power Actions

41. Market Commonality Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Market Types Awareness Slow, Standard Motivation Relative Size or Fast Cycle Likelihood of Attack Capability First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Sustained Quality Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Evolutionary Resource Availability Outcomes Entrepreneurial Growth-Oriented Feedback or Market-Power Actions

42. Key Task Key Task Key Task Exploiting Open Niches (Blind Spots) and Competitive Uncertainty Exploiting Factors of Production Exploiting Market Position Market-Power Actions Growth-Oriented Actions Entrepreneurial Actions Emerging Stage Growth Stage Mature Stage Time An Action-Based Model of the Industry Life Cycle Firm Resource & Market Strength