Ch05 Hitt SM8e [Street 09].Pptx

8/2/2019 Ch05 Hitt SM8e [Street 09].Pptx

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Strategic Management:

Concepts and Cases

Part II: Strategic Actions: Strategy Formulation

Chapter 5: Competitive Rivalry and

Competitive Dynamics


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Competition Between HP and Dell:

The Battle Rages On

Dell lost position as global top-seller of PCsEnd 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 consumerThis single business model lowered costs and hence prices

of products, no longer created value to the degree it had

historically .

Why? Competitive actions/reactionsHP: 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

Dell decides to venture into retail sales a reaction to HP!


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Introduction and Definitions

Competitors

Firms operating in the same market, offering similar

products and targeting similar customers

Competitive RivalryOngoing set of competitive actions and competitive

responses occurring between competitors as they

contend with each other for an advantageous market

positionCompetitive Behavior

Set of competitive actions and competitive responses

the firm takes to build or defend its competitive

advantages and to improve its market position


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Introduction and Definitions (Contd)

Multimarket Competition

Firms competing against one another in several product

or geographic markets

Competitive DynamicsTotal set of actions and responses of all firms competing

within a market


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From Competitors to Competitive

Dynamics

Competitors

To gain an advantageous

market position

Competitive Behavior

Competitive actions

Competitive responses

Competitive Dynamics

Competitive actions and responses taken by

all firms competing in a market

Engage

in

Why?

How?

What Results?

What Results?

Competitive

Rivalry


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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 complexFoundation for successfully building and using

capabilities and core competencies to gain an

advantageous market position

Sequence of events (Figure 5.2) are the components ofthis chapter


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A Model of Competitive Rivalry

Competitive Analysis Market commonality

Resource similarity

Drivers of Competitive

Behavior

Awareness Motivation

Ability

Interfirm Rivalry

Likelihood of Attack First-mover incentives Organizational size

Quality Likelihood of Response

Type of competitive action Reputation Market dependence

Outcomes

Market position Financial

performance

Feedback


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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 AnalysisTo what extent are firms competitors?

Market Commonality

Each industry composed of various markets whichcan 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 andfocus on cost reduction

Combination ofmarket commonality& resource

similarityindicate a firms direct competitors


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Competitor Analysis

Examples from text (p. 132)

Industry Market Market

SegmentProductSegment

GeographicMarket

Financial Insurance Commercial,Consumer

Health, life East, west

Brokeragesvcs

Banks

Transportation CommercialGround


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A Framework of Competitor Analysis


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Drivers of Competitive Actions/Responses

Market commonality& resource similarityinfluence

three drivers (awareness, motivation and ability) of

competitive behavior

AwarenessPrerequisite to any competitive action

Extent competitors recognize degree of mutual interdependence

that results from market commonality and resource similarity

Motivation

Firm's incentive to take action, or to respond to a competitor's

attack, as it relates to perceived gains and losses

Ability

Firm's resources that allow competitive action and flexibility

responsiveness


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Drivers of Competitive Actions/Responses

Other influences include resourcedissimilarity

The greater the resource imbalance betweenacting firm and competitors or potentialresponders, the greater will be the delay inresponse

I.e., Wal-Mart initially used cost leadership strategy tocompete only in small communitiesCreated a logistics systems and extremely efficient

purchasing practices as competitive advantages


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Competitive Rivalry

Important to understand competitors awareness,motivation and ability in order to predict thelikelihood of an attack study likelihood of attackfactors

What are the strategicand tacticalactions?Strategic actions/responses: market-based movesthat signify a significant commitment of organizationalresources to pursue a specific strategy

Difficult to implement and reverse

Tactical actions/responses: market-based moves thatinvolve fewer resources to fine-tune a strategy that isalready in place

Easy to implement and reverse


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Competitive Rivalry

What are the strategicand tacticalactions? (Contd)

Competitive Action

Strategic or tactical action firm takes to build or defend its

competitive advantages or improve its market position

Competitive ResponseStrategic or tactical action the firm takes to counter effects of a

competitor's action

Tactical Action (or Response)

Market-based move the firm takes in order to fine-tune astrategy


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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(Contd)

Three possible likelihood of response actions (Contd)

1. First Mover Incentives

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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1. First Mover Incentives (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 quicklyallocated to support actions

Benefits can be substantial, but remember the learning

curve!


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1. First Mover Incentives: Responses to

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 potentialreturns

Late Mover

Responds to market opportunities only after considerable time has

elapsed since first and second movers have taken action

Has substantially reduced risks and returns


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Three possible likelihood of response actions(Contd)

2. Organizational Size

Small firms

Act as nimble and flexible competitorsRely 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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3. Quality

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 willcompetitively 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 ofcompetitive rivalry)

Reputation: positive or negative attribute ascribed by one rival toanother based on past competitive behavior

3. Dependence on the MarketExtent to which a firm's revenues or profits are derived from aparticular market

Finally, if the action significantly strengthens or weakensthe firm's competitive position


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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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FIGURE5.4 Gradual Erosion of a Sustained Competitive Advantage

SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics

by taking strategic initiative,Academy of Management Executive, 11(2): 111118.


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Competitive Dynamics: 3 Market Cycles (Contd)

2. Fast-Cycle Markets

Markets in which the firm's capabilities that contribute tocompetitive advantages are not shielded from imitationand where imitation is often rapid and inexpensive

Focus: learning how to rapidly and continuously developnew competitive advantages that are superior to thosethey replace (creating innovation)

Avoid loyalty to any one product, possibly cannibalizing

their own current products to launch new ones beforecompetitors learn how to do so through successfulimitation

Continually try to move on to another temporarycompetitive advantage before competitors can respond

to the first one


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FIGURE5.5 Developing Temporary Advantages to Create Sustained

Advantage

Source: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by

taking strategic initiative,Academy of Management Executive, 11(2): 111118.


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Competitive Dynamics: 3 Market Cycles (Contd)

3. Standard-Cycle MarketsMarkets where firms competitive advantagesare moderately shielded from imitation and

where imitation is moderately costlyCompetitive advantages partially sustained asquality is continuously upgraded

Seek to serve many customers and gain a large

market shareGain brand loyalty through brand names

Careful operational control / manage aconsistent experience for the customer

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