Chapter 5 Competitive Dynamics 1

The Strategic Management Process Strategy Formulation Chapter 2 The Strategic Management Process External Strategic Inputs 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 Strategic Actions Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13 Acquisitions & International Cooperative Strategic Entrepreneurship & Innovation Restructuring Strategy Strategies Leadership Strategic Outcomes Strategic Competitiveness Above Average Feedback Returns 2

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) 6

Competitive Dynamics Competitive Rivalry 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 8

strategic conduct is dynamic in nature 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 12

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 14

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Do managers understand the key characteristics of competitors? Awareness Awareness Motivation Capability 15

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 17

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 18

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 19

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Do firms compete with each other in multiple markets? Market Commonality Market Commonality Resource Similarity 20

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 22

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity Do competitors possess similar types or amounts of resources? 23

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 24

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 25

Model of Interfirm Rivalry: Likelihood of Attack and Response Attack & Response Likelihood of Attack First Mover Incentives First Mover advantage can be substantial Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor’s Reputation Dependence on the Market Resource Availability 26

First Mover 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 29

Second Mover 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 30

Interfirm Rivalry: 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 32

Types of Competitive Actions Strategic Actions Significant commitments of specific and distinctive organizational resources Difficult to implement Difficult to reverse Major Acquisition Example Tactical Actions Relatively easy to implement Relatively easy to reverse Undertaken to “fine tune” strategy Price cut Example 41

Gauging the Likelihood of Response Type of Competitive Action -Tactical or Strategic Easier to respond to Require fewer resources to mount a response Actor’s Reputation 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 44

Gauging the Likelihood of Response Market Dependence 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 Competitor Resources Smaller firms are more likely to respond to tactical actions Limited resources may lead to alternatives such as Strategic Alliances 46

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 47

Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Firm size can have opposing effects on competitive dynamics Relative Size Speed Innovation Quality 48

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 Relative Size However, smaller competitors may be more nimble and innovative Speed Innovation “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.” -- Herb Kelleher, CEO, Southwest Airlines Quality 50

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 52

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 53

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 54

Quality Dimensions of Goods & Services Product Quality Dimensions: Perceived quality Subjective assessment of characteristics (product image) 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 54

Quality Dimensions of Goods & Services Service Quality Dimensions: 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 54

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 55

Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Slow cycle markets are frequently shielded by monopoly power or very strong brand loyalties This market outcome and lack of interfirm rivalry may lead to sustained competitive advantage Sustained Competitive Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Advantage Temporary Advantage 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 56

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 Evolutionary Actions Growth-Oriented Actions Market-Power Actions Sustained competitive advantage is a possible outcome in this instance 58

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 59

Gradual Erosion of a Sustained Competitive Advantage Returns from a Sustained Competitive Advantage Exploitation Counterattack Launch Time (years) 10 60

Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative 1 Disrupting the Status Quo Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety 2 Creating Temporary Advantage Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers 3 Seizing the Initiative 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 65

Obtaining Temporary Advantages to Create Sustained Advantage Returns from a Sustained Competitive Advantage Exploitation Counterattack Launch 5 10 15 Time (years) 66

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) 67

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) 68

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 69

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Outcomes Ability for Action and Response Interfirm Rivalry: Attack & Response Competitive Awareness Market Types Motivation Slow, Standard Capability Likelihood of Attack Relative Size or Fast Cycle First Mover Incentives Speed Competitive Innovation Outcomes Likelihood of Response Quality Sustained Type of Competitive Competitive Competitor Analysis Action Advantage Actor’s Reputation Temporary Dependence on the Advantage Market Commonality Market Evolutionary Resource Availability Outcomes Resource Similarity Entrepreneurial Growth-Oriented Feedback or Market-Power Actions 70

An Action-Based Model of the Industry Life Cycle Key Task Exploiting Open Niches (Blind Spots) and Competitive Uncertainty Entrepreneurial Actions Key Task Growth-Oriented Actions Exploiting Factors of Production Key Task Market-Power Actions Exploiting Market Position Firm Resource & Market Strength Emerging Stage Growth Stage Mature Stage Time 75