MODULE 5
COMPETITIVE
RIVALRY AND
COMPETITIVE
DYNAMICS
.
COMPETITO
RS
• These are the firms
operating in the
same market,
offering the similar
products and
targeting similar
customers
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• Firms interact with their competitors as
Competitors part of the broad context within which
they operate while attempting to earn
above-average returns. The decisions
firms make about their interactions
with their competitors significantly
affect their ability to earn above-
average returns. Because 80 to 90
percent of new firms fail, learning how
to select the markets in which to
compete and how to best compete
within them is highly important.
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• Competitive rivalry is the ongoing set of
Competitive competitive actions and competitive
Rivalry responses that occur among firms as they
maneuver for an advantageous market
position. Especially in highly competitive
industries, firms constantly jockey for
advantage as they launch strategic actions
and respond or react to rivals’ moves. It is
important for those leading organizations to
understand competitive rivalry, in that “the
central, brute empirical fact in strategy is
that some firms outperform others,”
meaning that competitive rivalry influences
an individual firm’s ability to gain and sustain
competitive advantages.
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Competitive • Competitive behavior is the set of
competitive actions and competitive
Behavior responses the firm takes to build or
defend its competitive advantages and
to improve its market position. Through
competitive behavior, the firm tries to
successfully position itself relative to
the five forces of competition and to
defend current competitive advantages
while building advantages for the
future. Increasingly, competitors
engage in competitive actions and
responses in more than one market.
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Competitive Firms competing against each
Dynamics other in several product or
geographic markets are
engaged in multimarket
competition. All competitive
behavior—that is, the total set
of actions and responses taken
by all firms competing within a
market—is called competitive
dynamics.
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Competitors to Competitive Dynamics
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Competitive Rivalry
Another way of highlighting competitive rivalry’s effect on the firm’s strategies is to
say that a strategy’s success is determined not only by the firm’s initial competitive
actions but also by how well it anticipates competitors’ responses to them and by
how well the firm anticipates and responds to its competitors’ initial actions (also
called attacks). Although competitive rivalry affects all types of strategies (e.g.,
corporate-level, acquisition, and international), its most dominant influence is on
the firm’s business-level strategy or strategies. Indeed, firms’ actions and responses
to those of their rivals are the basic building block of business-level strategies.
In the global economy, competitive rivalry is intensifying, meaning that the
significance of its effect on firms’ business-level strategies is increasing. Rivalry is
intensifying in the flat panel television market, for example. One reason is the price
competition created by the price cuts of up to 40 percent below the leading
brands’ products by firms such as Westinghouse and Maxent. However, firms that
develop and use effective business-level strategies tend to outperform competitors
in individual product markets, even when experiencing intense competitive rivalry
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that price cuts bring about.
A Model Of Competitive Rivalry
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Over time, firms take many competitive actions and responses. As noted earlier, competitive rivalry
evolves from this pattern of actions and responses as one firm’s competitive actions have
noticeable effects on competitors, eliciting competitive responses from them. This pattern shows
that firms are mutually interdependent, that they feel each other’s actions and responses, and that
marketplace success is a function of both individual strategies and the consequences of their use.
Increasingly, too, executives recognize that competitive rivalry can have a major and direct effect on
the firm’s financial performance: Research shows that intensified rivalry within an industry results
in decreased average profitability for the competing firms.
Figure 5.2 presents a straightforward model of competitive rivalry at the firm level; this type of
rivalry is usually dynamic and complex. The competitive actions and responses the firm takes are
the foundation for successfully building and using its capabilities and core competencies to gain an
advantageous market position. The model in Figure 5.2 presents the sequence of activities
commonly involved in competition between a particular firm and each of its competitors.
Companies can use the model to understand how to be able to predict competitors’ behavior
(actions and responses) and reduce the uncertainty associated with competitors’ actions. Being
able to predict competitors’ actions and responses has a positive effect on the firm’s market
position and its subsequent financial performance. The sum of all the individual rivalries modeled
in Figure 5.2 that occur in a particular market reflects the competitive dynamics in that market.
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Competitor Analysis
Understanding its competitors, to be able to
predict competitors’ behavior in the form of
their competitive action and responses.
Market Commonality - Is concerned Resource Similarity - The extent to
with the number of markets with which which the firm’s tangible and intangible
the firm and a competitor are jointly resources are comparable to a
involved and the degree of importance competitor’s in terms of both type and
of the individual markets to each amount.
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Framework of Competitor Analysis
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In the above figure, it shows different hypothetical intersections between the firm
and individual competitors in terms of market commonality and resource similarity.
These intersections indicate the extent to which the firm and those with which it is
compared are competitors. For example, the firm and its competitor displayed in
quadrant I of Figure above have similar types and amounts of resources (i.e., the
two firms have a similar portfolio of resources). The firm and its competitor in
quadrant I would use their similar resource portfolios to compete against each
other in many markets that are important to each. These conditions lead to the
conclusion that the firms modeled in quadrant I are direct and mutually
acknowledged competitors (e.g., FedEx and UPS). In contrast, the firm and its
competitor shown in quadrant III share few markets and have little similarity in
their resources, indicating that they aren’t direct and mutually acknowledged
competitors. The firm’s mapping of its competitive relationship with rivals is fluid as
firms enter and exit markets and as companies’ resources change in type and
amount. Thus, the companies with which the firm is a direct competitor change
across time.
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Drivers Of Competitive Actions And Responses
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Awareness - which is a prerequisite to any
competitive action or response taken by a firm,
refers to the extent to which competitors
Awareness recognize the degree of their mutual
interdependence that results from market
commonality and resource similarity.48
Awareness tends to be greatest when firms
have highly similar resources (in terms of types
and amounts) to use while competing against
each other in multiple markets. Awareness
affects the extent to which the firm
understands the consequences of its
competitive actions and responses. A lack of
awareness can lead to excessive competition,
resulting in a negative effect on all competitors’
performance.
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• Motivation - which concerns the firm’s incentive to take action or
to respond to a competitor’s attack, relates to perceived gains and
Motivation losses. Thus, a firm may be aware of competitors but may not be
motivated to engage in rivalry with them if it perceives that its
position will not improve or that its market position won’t be
damaged if it doesn’t respond. The primary reason is the high
stakes involved in trying to gain a more advantageous position
over a rival with whom the firm shares many markets. As we
mentioned earlier, multimarket competition can find a competitor
responding to the firm’s action in a market different from the one
in which the initial action was taken. Actions and responses of this
type can cause both firms to lose focus on core markets and to
battle each other with resources that had been allocated for other
purposes. Because of the high stakes of competition under the
condition of market commonality, the probability is high that the
attacked firm will respond to its competitor’s action in an effort to
protect its position in one or more markets.
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Ability - relates to each firm’s resources
and the flexibility they provide. Without
Ability available resources (such as financial
capital and people), the firm lacks the
ability to attack a competitor or respond
to its actions. However, similar
resources suggest similar abilities to
attack and respond. When a firm faces a
competitor with similar resources,
careful study of a possible attack before
initiating it is essential because the
similarly resourced competitor is likely
to respond to that action.
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Strategic And Tactical Actions
Strategic Action or Response - Is a market-
based move that involves a significant
commitment of organizational resources and
is difficult to implement and reverse.
Tactical Action or Response - Is a market-
based move that is taken to finetune a
strategy. It involves fewer resources and is
relatively easy to implement and reverse.
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Factors That
Affects A. First-Mover Incentives – is a firm that takes an initial competitive action
in order to build or defend its competitive advantages or to improve its
market position.
Likelihood of • The benefits of being a successful first mover can be substantial.
Attack Especially in fast cycle markets (discussed later in the chapter), where
changes occur rapidly and where it is virtually impossible to sustain a
competitive advantage for any length of time, “a first mover may
experience five to ten times the valuation and revenue of a second
mover”. This evidence suggests that although first-mover benefits are
never absolute, they are often critical to a firm’s success in industries
experiencing rapid technological developments and relatively short
product life cycles.
• Organizational slack makes it possible for firms to have the ability (as
measured by available resources) to be first movers. Slack is the buffer or
cushion provided by actual or obtainable resources that aren’t currently
in use and are in excess of the minimum resources needed to produce a
given level of organizational output.
• Second mover is a firm that responds to the first mover’s competitive
action, typically through imitation.
• Late mover is a firm that responds to a competitive action a significant
amount of time after the first mover’s action and the second mover’s
response.
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Likelihood Of Attack: B. Organizational Size – An organization’s size affects the
likelihood it will take competitive actions as well as the types and
Factors That Affects timing of those actions.78 In general, small firms are more likely
Likelihood of Attack: than large companies to launch competitive actions and tend to
do it more quickly. Smaller firms are thus perceived as nimble and
flexible competitors who rely on speed and surprise to defend
their competitive advantages or develop new ones while engaged
in competitive rivalry, especially with large companies, to gain an
advantageous market position. Small firms’ flexibility and
nimbleness allow them to develop variety in their competitive
actions; large firms tend to limit the types of competitive actions
used.
C. Quality - exists when the firm’s goods or services meet or
exceed customers’ expectations. In the eyes of customers, quality
is about doing the right things relative to performance measures
that are important to them. Quality is possible only when top-
level managers support it and when its importance is
institutionalized throughout the entire organization.
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Quality Dimensions Of Goods And Services
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Likelihood Of Response: Type of Competitive Action – Competitive responses to
Factors That Affects strategic actions differ from responses to tactical actions.
These differences allow the firm to predict a competitor’s
Likelihood Of Response likely response to a competitive action that has been launched
against it. In general, strategic actions receive strategic
responses and tactical actions receive tactical responses.
Actor’s Reputation – is “the positive or
negative attribute ascribed by one rival to
another based on past competitive behavior.
Market Dependence – denotes the
extent to which a firm’s revenues or
profits are derived from a particular
market.
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Competitive
Speed In Slow-Cycle Markets – are those in which the firm’s
Different Markets competitive advantages are shielded from
imitation commonly for long periods of time and
where imitation is costly.
Fast-Cycle Markets – are markets in which the
firm’s capabilities that contribute to competitive
advantages aren’t shielded from imitation and
where imitation is often rapid and inexpensive.
Standard-Cycle Markets – are markets in which the
firm’s competitive advantages are moderately
shielded from imitation and where imitation is
moderately costly.
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