CHAPTER 5

COMPETITIVE DYNAMICS

DR. SATIRENJIT K JOHL

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KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
 Define competitors, competitive rivalry, competitive behavior, and
competitive dynamics.
 Describe market commonality and resource similarity as the building
blocks of a competitor analysis.
 Explain awareness, motivation, and ability as drivers of competitive
behavior.
 Discuss factors affecting the likelihood a competitor will take
competitive actions.

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KNOWLEDGE OBJECTIVES (CONT’D)
Studying this chapter should provide you with the
strategic management knowledge needed to:
 Discuss factors affecting the likelihood a competitor will
respond to actions taken against it.

 Explain competitive dynamics in slow-cycle, fast-cycle, and

standard-cycle markets.

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 THE
STRATEGIC
MANAGEMENT
PROCESS

Figure 1.1
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DEFINITIONS

Competitors
 Firms operating in the same market, offering similar
products and targeting similar customers
Competitive rivalry
 The ongoing set of competitive actions and responses
occurring between competitors
 Competitive rivalry influences an individual firm’s
ability to gain and sustain competitive advantages

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DEFINITIONS

Competitive behavior
 The set of competitive actions and competitive responses the firm
takes to build or defend its competitive advantages and to improve its
market position
Competitive dynamics
 The total set of actions and responses taken by all firms competing
within a market
Multimarket competition
 Firms competing against each other in several product or geographic
markets

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 FROM COMPETITORS TO COMPETITIVE DYNAMICS

SOURCE: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry:
Toward a theoretical integration, Academy of Management Review, 21: 100–134. Figure 5.1
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 COMPETITIVE RIVALRY’S EFFECT ON STRATEGY

Success of a strategy is determined by:

 The firm’s initial competitive actions
 How well it anticipates competitors’ responses to them
 How well the firm anticipates and responds to its competitors’ initial
actions
Competitive rivalry:
 Affects all types of strategies
 Has the strongest influence on the firm’s business-level strategy or
strategies

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 A MODEL OF COMPETITIVE RIVALRY

Firms are mutually interdependent

 A firm’s competitive actions have noticeable effects on its
competitors
 A firm’s competitive actions elicit competitive responses from
its competitors
 Competitors feel each other’s actions and responses
Marketplace success is a function of both individual
strategies and the consequences of their use

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 A MODEL OF COMPETITIVE RIVALRY

SOURCE: Adapted from M.-J. Chen, 1996, Competitor

analysis and interfirm rivalry:Toward a theoretical integration,
Academy of Management Review, 21: 100–134. Figure 5.2
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COMPETITOR ANALYSIS
• Competitor analysis is used to help a firm
understand its competitors
• The firm studies competitors’ future objectives,
current strategies, assumptions, and capabilities
• With the analysis, a firm is better able to predict
competitors’ behaviors when forming its
competitive actions and responses

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 MARKET COMMONALITY
Market commonality is concerned with:
 The number of markets with which a firm and a competitor
are jointly involved
 The degree of importance of the individual markets to each
competitor
Firms competing against one another in several or many
markets engage in multimarket competition
 A firm with greater multimarket contact is less likely to
initiate an attack, but more likely to respond aggressively
when attacked

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 RESOURCE SIMILARITY
Resource Similarity
 How comparable the firm’s tangible and intangible resources are to
a competitor’s in terms of both types and amounts
Firms with similar types and amounts of resources are likely to:
 Have similar strengths and weaknesses
 Use similar strategies

Assessing resource similarity can be difficult if critical

resources are intangible rather than tangible

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A FRAMEWORK OF COMPETITOR ANALYSIS

Figure 5.3
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DRIVERS OF COMPETITIVE BEHAVIOR

Awareness Awareness is
 the extent to which competitors
recognize the degree of their
mutual interdependence that
results from:
 Market commonality
 Resource similarity

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DRIVERS OF COMPETITIVE BEHAVIOR (CONT’D)

Awareness Motivation concerns

 the firm’s incentive to take
action
Motivation
 or to respond to a
competitor’s attack
 and relates to perceived
gains and losses

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DRIVERS OF COMPETITIVE BEHAVIOR (CONT’D)

Awareness Ability relates to

 each firm’s resources
 the flexibility these resources
Motivation
provide
Without available resources
Ability the firm lacks the ability
to
 attack a competitor
 respond to the competitor’s
actions

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DRIVERS OF COMPETITIVE BEHAVIOR (CONT’D)

• A firm is more likely to attack the rival

Awareness with whom it has low market commonality
than the one with whom it competes in
multiple markets
Motivation • The primary reason is that there are high
stakes involved in trying to gain a more
advantageous position over a rival with
whom the firm shares many markets. Also,
Ability because of the high stakes of competition
under market commonality, there is a high
probability that the attacked firm will
Market respond to its competitor’s action in an
Commonality effort to protect its position in one or more
markets

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DRIVERS OF COMPETITIVE BEHAVIOR (CONT’D)

• The greater the resource imbalance

Awareness between the acting firm and
competitors or potential responders,
the greater will be the delay in
Motivation response by the firm with a resource
disadvantage
• When facing competitors with
Ability greater resources or more attractive
market positions, firms should
eventually respond, no matter how
Market challenging the response. Choosing
Commonality not to respond ultimately result in
failure.
Resource
Dissimilarity
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 COMPETITIVE RIVALRY

Competitive action
A strategic or tactical action the firm takes to build or
defend its competitive advantages or improve its
market position
Competitive response
A strategic or tactical action the firm takes to counter
the effects of a competitor’s competitive action

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COMPETITIVE RIVARLY: STRATEGIC AND TACTICAL
ACTIONS
Firms use both strategic & tactical actions in forming their
competitive actions & competitive response in course of
engaging in competitive rivalry.
Strategic action or a strategic response
 A market-based move that involves a significant commitment of
organizational resources and is difficult to implement and
reverse
Tactical action or a tactical response
 A market-based move that is taken to fine-tune a strategy:
 Usually involves fewer resources
 Is relatively easy to implement and reverse

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COMPETITIVE RIVARLY: STRATEGIC AND TACTICAL
ACTIONS
Exp: Hyundai Motor expenditure on R&D & plant expansion to support
firm’s desire to be the largest car maker by 2020 & sell one million units
annually in U.S are strategic actions. Tactical actions are easily reversed:
exp pricing decisions

Exp: Pepsi & Coca-cola compete in bottled water mrkt – create awareness
of one another as they compete in bottled mrkt. Also, compete in milk
based products. Their strategic focus to expand beyond soda into healthier
beverages. Coco Cola introduced Swerve in July 2003. Also Pepsi offer
chocolate dairy drink (Love Bus Brew). The degree of their mrkt
commonality & resource similarity & are engage in multimrkt
competition. Both will continue to monitor each other’s competitive action
& responses in multiple product as part of their competitive rivalry.

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FACTORS AFFECTING LIKELIHOOD OF ATTACK

First movers allocate funds for:

First Mover  Product innovation and development
 Aggressive advertising
 Advanced research and development
First movers can gain:
 The loyalty of customers who may become
committed to the firm’s goods or services
 Market share that can be difficult for competitors
to take during future competitive rivalry
General evidences find it has greater survival rate
compared to the later mrkt entrants.

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

First Mover Second mover responds to the first

mover’s competitive action,
typically through imitation:
Second Mover  Studies customers’ reactions to product
innovations
 Tries to find any mistakes the first mover
made, and avoid them
 Can avoid both the mistakes and the huge
spending of the first-movers
 May develop more efficient processes and
technologies

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

• Late mover responds to a competitive

First Mover action only after considerable time
has elapsed
Second Mover • Any success achieved will be slow in
coming and much less than that
achieved by first and second movers
Late Mover • Late mover’s competitive action
allows it to earn only average returns
and delays its understanding of how
to create value for customers

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

First Mover Small firms are more likely:

 To launch competitive actions
 To be quicker in doing so
Second Mover Small firms are perceived as:
 Nimble(quick) and flexible competitors
 Relying on speed and surprise to defend
Late Mover competitive advantages or develop new
ones while engaged in competitive rivalry
Organizational  Having the flexibility needed to launch a
greater variety of competitive actions
Size

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

Large firms are likely to initiate more

First Mover competitive actions as well as strategic
actions during a given time period
Second Mover Large organizations commonly have the
slack resources required to launch a
larger number of total competitive
Late Mover actions
“Think and act big and we’ll get smaller.
Think and act small and we’ll get
Organizational
bigger.”
Size
Herb Kelleher
Former CEO, Southwest Airlines

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

First Mover
Quality exists when the firm’s
goods or services meet or
Second Mover exceed customers’
expectations
Late Mover Product quality dimensions
include:
Organizational • Performance • Conformance
Size • Features • Serviceability
• Flexibility • Aesthetics
Quality
(Product) • Durability • Perceived
quality
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 QUALITY DIMENSIONS OF GOODS
Product Quality Dimensions
1. Performance—Operating characteristics
2. Features—Important special characteristics
3. Flexibility—Meeting operating specifications over some
period of time
4. Durability—Amount of use before performance deteriorates
5. Conformance—Match with pre-established standards
6. Serviceability—Ease and speed of repair
7. Aesthetics—How a product looks and feels
8. Perceived quality—Subjective assessment of characteristics
(product image)

SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society,
St. Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The
Free Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
Table 5.1a
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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONT’D)

First Mover
Service quality dimensions
include:
Second Mover
 Timeliness
 Courtesy
Late Mover  Consistency
 Convenience
Organizational  Completeness
Size
 Accuracy
Quality
(Product)

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 QUALITY DIMENSIONS OF SERVICES

Service Quality Dimensions

1. Timeliness—Performed in the promised period of time
2. Courtesy—Performed cheerfully
3. Consistency—Giving all customers similar experiences each time
4. Convenience—Accessibility to customers
5. Completeness—Fully serviced, as required
6. Accuracy—Performed correctly each time

SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society,
St. Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The
Free Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
Table 5.1b
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FACTORS AFFECTING LIKELIHOOD OF RESPONSE

Firms study three other factors to predict how a

competitor is likely to respond to competitive
actions:
Type of competitive action
Reputation
Market dependence

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FACTORS AFFECTING STRATEGIC RESPONSE

Type of Strategic actions receive strategic

Competitive responses
Action  Strategic actions elicit fewer total competitive
responses
 The time needed to implement and assess a
strategic action delays competitor’s responses
Tactical responses are taken to counter
the effects of tactical actions
 Competitor likely will respond quickly to a
tactical actions

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FACTORS AFFECTING STRATEGIC RESPONSE (CONT’D)

Type of • An actor is the firm taking an action

Competitive or response
Action • Reputation is the positive or negative
attribute ascribed by one rival to
Actor’s another based on past competitive
Reputation behavior
• The firm studies responses that a
competitor has taken previously
when attacked to predict likely
responses

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FACTORS AFFECTING STRATEGIC RESPONSE (CONT’D)

Type of • Market dependence is the extent

Competitive to which a firm’s revenues or
Action profits are derived from a
particular market
Actor’s • In general, firms can predict that
Reputation competitors with high market
dependence are likely to respond
Dependence strongly to attacks threatening
on the market their market position

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COMPETITIVE DYNAMICS VERSUS RIVALRY

Competitive Competitive
Dynamics Rivalry
 Ongoing actions and  Ongoing actions and
responses taking place responses taking place
between all firms between an individual
competing within a firm and its
market for competitors for an
advantageous positions advantageous market
position

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COMPETITIVE DYNAMICS VERSUS RIVALRY
(CONT’D)

Competitive Dynamics (All Competitive Rivalry

firms) (Individual firms)
 Market speed (slow-cycle, fast-  Market commonality and
cycle, and standard-cycle) resource similarity
 Effects of market speed on actions  Awareness, motivation and
and responses of all competitors in ability
the market
 First mover incentives, size and
quality

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COMPETITIVE DYNAMICS
• Competitive advantages are shielded
Slow-Cycle from imitation for long periods of
Markets time and imitation is costly
• Competitive advantages are
sustainable in slow-cycle markets
• All firms concentrate on competitive
actions and responses to protect,
maintain and extend proprietary
competitive advantage

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 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): 111–118. Figure 5.4
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COMPETITIVE DYNAMICS (CONT’D)

Slow-Cycle • The firm’s competitive

Markets advantages aren’t shielded from
imitation
• Imitation happens quickly and
Fast-Cycle
Markets somewhat inexpensively
• Competitive advantages aren’t
sustainable
 Competitors use reverse engineering to
quickly imitate or improve on the firm’s
products

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OBTAINING 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): 111–118. Figure 5.5
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COMPETITIVE DYNAMICS (CONT’D)

Moderate cost of imitation may

Slow-Cycle
Markets shield competitive advantages.
Competitive advantages are partially
sustainable if their quality is
Fast-Cycle continuously upgraded
Markets
Firms
 Seek large market shares
Standard-Cycle
 Gain customer loyalty through brand names
Markets
 Carefully control operations

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