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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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Interfirm Rivalry: Likelihood of Attack(Contd)
Three possible likelihood of response actions (Contd)
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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Interfirm Rivalry: Likelihood of Attack(Contd)
Three possible likelihood of response actions (Contd)
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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Interfirm Rivalry: Likelihood of Attack(Contd)
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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Interfirm Rivalry: Likelihood of Attack(Contd)
Three possible likelihood of response actions (Contd)
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