Chapter 5: Competitive Rivalry and Competitive Dynamics

Chapter 5
Competitive Rivalry and Competitive Dynamics
KNOWLEDGE OBJECTIVES
1.
2.
3.
4.
5.
6.

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.
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.

CHAPTER OUTLINE
Opening Case Competition Between Hewlett-Packard and Dell: The Battle Rages On
A MODEL OF COMPETITIVE RIVALRY
COMPETITOR ANALYSIS
Market Commonality
Resource Similarity
DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES
Strategic Focus Who Will Win the Competitive Battles Between Netflix and Blockbuster?
COMPETITIVE RIVALRY
Strategic and Tactical Actions
Strategic Focus Using Aggressive Pricing as a Tactical Action at Wal-Mart
LIKELIHOOD OF ATTACK
First-Mover Incentives
Organizational Size
Quality
LIKELIHOOD OF RESPONSE
Type of Competitive Action
Actors Reputation
Dependence on the Market
Popped the Top?
COMPETITIVE DYNAMICS
Slow-Cycle Markets
Fast-Cycle Markets
Standard-Cycle Markets
SUMMARY
REVIEW QUESTIONS
EXPERIENTIAL EXERCISES
NOTES

5-1

Chapter 5: Competitive Rivalry and Competitive Dynamics

LECTURE NOTES
Chapter Introduction: The competitive landscape of the twenty-first century will be
characterized by increasing globalization, advanced technological development, and other
factors that will lead to an environment that is more dynamic and charged with rivalry. Firms
will act and react in a dance of sorts, but one involving very high stakeseven survival. This
chapter introduces terms and concepts relevant to the conversation about competitive
behavior in a variety of markets. Figure 5.2 is central to the discussion of most of the chapter.
OPENING CASE
Competition Between Hewlett-Packard and Dell: The Battle Rages On
At the end of 2006, Hewlett-Packard had caught and passed Dell for the lead in worldwide PC market
share. Dells share of the PC market fell to 14.7 percent while HPs share grew to 18 percent. This
deterioration of market share contributed to a 32 percent total decline in Dells stock price, while the
increase in market share resulted in an increase of 100 percent in HPs stock price for the same period.
An innovative business model that was deemed a stroke of genius in 1984 became ineffectual with time.
The reason(s) for this change are based in competitive dynamics. Dell expanded usage of its onceinnovative business model to attempt to continuously lower product costs, ultimately allowing it to lower
its prices. The uniqueness of Dells model became less valuable to PC customers. Concentrating on a
single business model can lead to quick growth when demand for a firms products continues to expand.
Over a longer period, however, innovation and reinvention are the foundation for ongoing success.
Hewlett-Packards recent overtaking of Dell was not a result of challenging Dell at its own game. Over the
past several years, HP found ways to innovate and reinvent itself. After examining its business model, Todd
Bradely, the HP executive who now heads PC operations, concluded that HP was fighting on the wrong
battlefield. HP was concentrating its resources to fight Dell where Dell was strong, in direct sales over the
Internet and phone. Instead (Bradely) decided, HP should focus on its strength, retail stores, where Dell had
no presence at all. To successfully change its focus, HP developed close relationships with retailers, even
trying to personalize PCs. For example, HP worked with Best Buy to design and produce a white-andsilver notebook computer. Aimed at attracting female customers, this machine, priced at $1,100, was one of
Best Buys top-selling notebooks during the 2006 holiday season.
Dells decision to venture into retail selling is a competitive reaction to HPs actions. Dell is now partnering
with a Japanese retailer (Bic Camera Inc.) to sell notebooks and desktops throughout Japan. Additionally,
Dell is experimenting with its own retail stores, opening its first one in Dallas, Texas, in July 2007. (Other
Dell retail outlets are in the planning stages.) Dell is also committing additional monies to research and
development (to find product innovations) and is restructuring some of its advertising campaigns to
remind consumers of the benefits of customizing computers.
Students must recognize that success is often the result of changing the game or the rules of the
game, rather than beating a competitor at its game. Hewlett-Packard has been able to dislodge
Dells dominant position in the PC market by focusing on retailers as a critical path to new
customers, rather than attempting to bolster its internet presence and challenge Dell head-on.
Dell has now been forced into playing HPs game of establishing a physical brick-and-mortar
retail presence, a new strategy for Dell.

Define competitors, competitive rivalry, competitive behavior

and competitive dynamics.

5-2

Chapter 5: Competitive Rivalry and Competitive Dynamics

A strategys success is determined not only by the firms 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).
Some important definitions:
Firms operating in the same market with similar products targeting similar customers are competitors.
Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between
rivals as they compete against each other for an advantageous market position.
Competitive behavior is the set of competitive actions and competitive responses the firm takes to build or
defend its competitive advantages and to improve its market position.
Firms competing against each other in several product/geographic markets are in multimarket competition.
All competitive behaviorthat is, the total set of actions and responses taken by all firms competing within
a marketis called competitive dynamics.
Teaching Note: Firms must learn to compete differently if they are to achieve strategic
competitiveness in the twenty-first century competitive landscape. To provide an idea of what
this means, new ways of competing may include the following:
bringing new goods and services to market more quickly
the use of new technologies (e.g., Amazon.com)
diversifying the product line (e.g., Barnes and Noble into music as a catalyst for growth)
shifting product emphasis (e.g., U-hauls focus on accessory sales)
consolidation (e.g., the merger of Hewlett Packard and Compaq)
combining online selling with physical stores (e.g., Searss acquisition of Lands End)
The focus of this chapter is on competitive dynamics, the series of competitive actions and competitive
responses among firms competing within a particular industry. The implication that should be strongly stated is
that the strategic management process (as described in Chapter 1 and Figure 1.1) is dynamic, not static.

FIGURE 5.1
From Competitors to Competitive Dynamics
This figure features the key concepts involved in competitive dynamics, which refers to the total set of actions
and responses taken by all of the firms competing in a given market.

Expanding geographic scope contributes to the increasing intensity in competitive rivalry among firms. That is,
firms trying to predict competitive rivalry should anticipate that they will meet a larger number of increasingly
diverse competitors in the future; thus, competitive rivalry will affect their strategies more than in the past.
Teaching Note: Figure 5.2 provides a model of competitive dynamics and rivalry, but it also
serves as an outline for this chapters discussion. You might briefly summarize the model at
this point and comment that students can refer to it throughout your discussion.
A MODEL OF COMPETITIVE RIVALRY

5-3

Chapter 5: Competitive Rivalry and Competitive Dynamics

Competitive rivalry exists when firms jockey with one another to pursue an advantageous market position.
When one or more firms competing in an industry feels pressure to act or perceives an opportunity to improve
their competitive position, competitive rivalry occurs as various firms initiate a series of actions and responses.
Research findings showing that intensified rivalry within an industry results in decreased average profitability
for firms competing in it supports the importance of understanding these effects.

FIGURE 5.2
A Model of Competitive Rivalry
Viewing the model leads to a number of observations:
Interfirm rivalry or competitive dynamics begin with an assessment of competitors awareness and
motivation to attack and/or respond to competitive moves.
Market commonality and resource similarity are affected by a firms awareness, and motivation affects the
likelihood of attack or response.
The likelihood of attack and response result in competitive outcomes, with outcomes moderated by a firms
ability to take strategic actions or responses.
Feedback from competitive outcomes will affect future competitive dynamics by affecting the nature of a
firms awareness, motivation, and ability for action/response.

Teaching Note: Competitive rivalry exists because of competitive asymmetry, which

describes the fact that firms differ from one another in terms of their resources, capabilities,
core competencies, and the opportunities and threats in their competitive environments and
industries. It is important that firms see that competition results in mutual interdependence
among firms in the industry as each firm tries to establish a sustainable competitive
advantage.
As firms strive to achieve strategic competitiveness and above-average returns, they must
recognize that strategies are not deployed in isolation from rivals actions and responses.
The strategic management process represents firms taking a series of actions, fending off
counter-actions or responses and developing responses of their own.

Describe market commonality and resource similarity as the

building blocks of a competitor analysis.

COMPETITOR ANALYSIS
A competitor analysis is the first step in predicting the extent and nature of rivalry with each competitor.
Appropriate features of this kind of analysis are described below.
Market Commonality
Market commonality is represented by the extent to which firms compete in the same markets. And market
commonality is increasing as more and more firms compete internationally.
Teaching Note: If firms overlap in a number of marketswhich is sometimes referred to as
multipoint competitionthis results in a situation where firms compete against each other
simultaneously in multiple geographic or product markets. This can have a significant impact

5-4

Chapter 5: Competitive Rivalry and Competitive Dynamics

on competitive dynamics (e.g., expanding into a new market that the competitor has entered
to ensure that the rival does not tap a market opportunity that could then be used to support
competition in core markets).
In a number of industries (e.g., airlines, chemicals, pharmaceuticals, and consumer foods) the largest domestic
firms compete in many of the same markets. Thus there is high market commonality. This means that each has
awareness and motivation to respond to competitive interaction.
Interestingly, high levels of commonality reduce the likelihood of competitive interaction. For firms that are in
many common markets, there generally is competitive peace. However, when one of these firms makes a
competitive move, the others are compelled to respond rapidly and aggressively.
Resource Similarity
Resource similarity is the extent to which a firms tangible and intangible resources are comparable to a
competitors in terms of both type and amount. Firms with similar types and amounts of resources are likely to
have similar strengths and weaknesses and to use similar strategies.
Teaching Note: In contrast to market commonality, assessing resource similarity can be
difficult, particularly when critical resources are intangible (e.g., brand name, knowledge,
trust, capacity to innovate) rather than tangible (e.g., access to raw materials, ability to borrow
capital).
In most cases, dissimilar resources may increase the likelihood of an attack while firms with similar resources
(overlap between their resource portfolios) will be less likely to attack because resource similarity increases the
likelihood of retaliation.
Teaching Note: Coca-Cola and Pepsis decision to target the fast-growing market for bottled
water provides an example of how resource dissimilarity may cause potential competitors to
be overlooked, especially by an industrys dominant firms. This means that competitive
responses of firms such as Perrier Group to protect its key bottled water brands may be
delayed due to resource dissimilarity.

FIGURE 5.3
A Framework of Competitor Analysis
The results of the firms competitor analyses can be mapped for visual comparisons. Figure 5.3 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 to which it has compared
itself are competitors. For example, the firm and its competitor displayed in quadrant I of Figure 5.3 have
similar types and amounts of resources and use them 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. In contrast, the firm and its competitor shown in quadrant III share few
markets and have little similarity in their resources, indicating that they arent direct and mutually
acknowledged competitors. The firms 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, those with whom the firm is a
direct competitor change across time.

5-5

Chapter 5: Competitive Rivalry and Competitive Dynamics

Explain awareness, motivation, and ability as drivers of

competitive behavior.

DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES

Awareness refers to whether or not the attacking or responding firm is aware of the competitive market
characteristics such as the market commonality and the resource similarity of a potential attacker or respondent.
When managers are not aware of these factors or assess them inaccurately, industry overcapacity or excessive
competition may result. For example, this may be a partial explanation for the recent decline in Levi Strauss
core market as the firm appeared to be unaware of changes in teenagers interests as competition for their
business intensified.
Market commonality affects the firms perceptions and resulting motivation. For example, all else being equal,
the firm is more likely to attack the rival with whom it has low market commonality than the one with whom it
competes in multiple markets. 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.
Motivation is represented by the incentives that a firm has to either initiate an attack or to respond when
attacked.
Resource dissimilarity also influences competitive actions and responses between firms, in that the greater the
resource imbalance between the acting firm and competitors or potential responders, the greater will be the
delay in response by the firm with a resource disadvantage.
Ability relates to each firms resources and the flexibility they provide. Without 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.

STRATEGIC FOCUS
Who Will Win the Competitive Battles Between Netflix and Blockbuster?
Netflix pioneered the online movie rental business and prospered during its first eight years as new
subscribers were added to the firms customer base. Since adding subscribers was a critical path to
Netflixs ongoing success, prices of Netflixs various plans were reduced in late 2004. This pricing strategy
worked. And because profit margins had remained very adequate at 2004 price levels, prices had remained
unchanged up through early 2007. Netflixs profits grew from $6.5 million in 2003 to $49 million in 2006.
Blockbuster, Netflixs chief rival, is aware of every competitive move made by Netflix. Blockbuster has
retaliated by lowering its pricing to its subscribers. Analysts feel that the situation between Netflix and
Blockbuster has become ugly. Some are predicting that the two competitors are locking into a mutually
destructive competitive situation.
Evidence suggests that Netflixs momentum tapped out somewhat dramatically when Blockbuster launched
a new option in its online rental service in 2006. Called Total Access, subscribers pay an additional $1
per month for the ability to return and check out rentals in Blockbusters physical stores as well as handle
these transactions online. How will Netflix counter? It has no brick-and-mortar infrastructure to support a
similar option to its customers, relying on the mail for distribution. In 2007, Netflix countered by lowering
its already-low 2004 prices. Of course, Netflixs profits will suffer. In addition to lowering prices, Netflix
initiated its Watch Now movie downloading service. This service uses high-speed Internet connections to
allow customers to download movies and watch them on their television sets or PCs. Students might
wonder how Blockbuster will react to Netflixs Watch Now service. It seems that Blockbuster could
easily imitate this service, hoping that it will be difficult for Netflix to gain a competitive advantage

5-6

Chapter 5: Competitive Rivalry and Competitive Dynamics

through using it. And both firms will have to decide how long they are willing to engage in competitive
battles that are severely damaging their ability to earn profits. The window for this level of destructive
competition may soon close. In mid-2007, Blockbuster stated in a Securities and Exchange Commission
filing that the firm would modify its online service to strike the appropriate balance between continued
subscriber growth and enhanced profitability.
Imitation is the best form of flattery.or is it? This case is analogous to two buck deer that have
literally locked horns in a scrap and will each pay the ultimate price. Remind students that pricing
decisions affect the bottom line dollar for dollar, i.e., if prices are reduced by a dollar, profit will be
reduced by a dollar because costs do not change. Ask students to identify options that each firm
has. Should Netflix and Blockbuster merge? And is there a greater threat to the survivability of
each firm?
COMPETITIVE RIVALRY
Competitive rivalry is the ongoing set of competitive actions and responses occurring between competing firms
for an advantageous market position. Because the ongoing competitive action/response sequence between a firm
and a competitor affects the performance of both firms, it is important for companies to carefully study
competitive rivalry to successfully use their strategies.
Strategic and Tactical Actions
Firms use both strategic and tactical actions when forming their competitive actions and competitive responses
in the course of engaging in competitive rivalry.
A competitive action is a strategic or tactical action the firm takes to build or defend its competitive
advantages or improve its market position.
A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitors
competitive action.
A strategic action or a strategic response is a market-based move that involves a significant commitment of
organizational resources and is difficult to implement and reverse.
A tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it
involves fewer resources and is relatively easy to implement and reverse.
Hyundai Motor Co.s expenditures on research and development and plant expansion to support the firms
desire to be one of the worlds largest carmakers by 2010 are strategic actions.
Tactical actions are easily reversed pricing decisions are often taken by these firms to increase demand in
certain markets during certain periods.

STRATEGIC FOCUS
Using Aggressive Pricing as a Tactical Action at Wal-Mart
In mid-2007, Wal-Mart had 6,775 stores and was projected to generate revenues in excess of $350 billion.
Approximately 40 percent of this revenue is being generated outside of the United States as Wal-Mart
continues to expand internationally. Analysts believe that Wal-Marts business model will prove successful
in some emerging markets even though the firm struggles with adequate profitability in some developed
markets such as Germany and Japan.
Europes Carrefour, Costco Wholesale, and Target are Wal-Marts major competitors, although a number of
other companies (including Kohls, J.C. Penney, and BJs Wholesale Club) also compete against the
retailing giant. As a tactical action, Wal-Mart prices some products to increase overall sales revenue and to
attract customers to its stores in hopes that they will purchase other items as well. Aggressive pricing
works (for Wal-Mart and others such as Costco Wholesale using the practice) when reduced prices generate

5-7

Chapter 5: Competitive Rivalry and Competitive Dynamics

sales revenues in excess of those generated without the price cuts, and when customers buy other highermargin items while shopping. Both Wal-Mart and Costco now offer gasoline filling stations to attract
customers to their stores. The same pricing tactics are utilized as an enticement to draw customers into
their stores to hopefully purchase other items.
As a tactical action, aggressive pricing is used with virtually all products that Wal-Mart sells. Toys and
electronics (i.e., flat panel televisions, PCs, and telephones) are priced aggressively during holiday seasons.
More recently, Wal-Mart aggressively priced appliances in order to compete against Best Buy, Home
Depot, and Lowes in this product category. For the back-to-school season, Wal-Mart often cuts prices
anywhere from 10 percent to 50 percent on as many as 16,000 school-related items.
Firms must carefully evaluate the effectiveness of all of their competitive actions and competitive
responses. Some feel that Wal-Marts emphasis on low prices is preventing the firm from allocating
sufficient resources to remodel aging stores and to upgrade the quality of its merchandising mix.
Competitors Kohls and Costco appear to be attracting some of Wal-Marts customers by offering more
appealing mixes of merchandise and a marginally more pleasant shopping experience that modernized
facilities provide. Thus, Wal-Mart must carefully assess the degree to which its tactical action of aggressive
pricing is allowing it to successfully engage competitors in marketplace competitions.
Students should be reminded that the cost of utilizing a pricing tactic may be more extensive than
the profit forgone. The real cost in this case is not having funding available to maintain, improve,
and expand current infrastructure and product mix in order to retain current customer levels. WalMart has established itself as a target at which competition is aiming. No single firm can
challenge Wal-Mart head-on, but each accepts Wal-Mart as the price leader in its respective
market, and will employ tactics to protect its respective turf.

Discuss factors affecting the likelihood a competitor will take

competitive actions.

LIKELIHOOD OF ATTACK
In addition to market commonality, resource similarity, and the drivers of awareness, motivation, and ability,
other factors affect the likelihood a competitor will use strategic actions and tactical actions to attack its
competitors. Three of these factorsfirst-mover incentives, organizational size, and qualityare described
below.
First-Mover Incentives
First movers are the firms that take an initial competitive action, either strategic or tactical. First movers are
firms that have the resources, capabilities, and core competencies that enable them to gain a competitive
advantage through innovative and entrepreneurial competitive actions.
By being early, the first mover hopes to:
earn above-average returns until competitors respond effectively
gain customer loyalty, thus creating a barrier to entry by competitors
gain market share that can be difficult for competitors to take in the future
Teaching Note: Consider the success of Harley-Davidson in large motorcycles (cruisers). In
the 1980s Harley-Davidson set the standard for low, heavyweight motorcycles and has

5-8

Chapter 5: Competitive Rivalry and Competitive Dynamics

successfully defended its position by emphasizing its reputation and brand name.
The firm trying to predict its rivals competitive actions might conclude that they will take aggressive strategic
actions to gain first movers benefits. However, while a firms competitors might be motivated to be first
movers, they may lack the ability to do so. First movers tend to be aggressive and willing to experiment with
innovation and take higher, yet reasonable, levels of risk. To be a first mover, the firm must have readily
available the resources to significantly invest in R&D as well as to rapidly and successfully produce and market
a stream of innovative products.
Organizational slack is what 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 arent currently
in use. Thus, slack is liquid resources that the firm can quickly allocate to support the actions (e.g., R&D
investments and aggressive marketing campaigns) that lead to first mover benefits.
There also are dangers or disadvantages to being a first mover.
It is difficult to accurately estimate the returns that will be earned from introducing product innovations.
The first movers cost to develop a product innovation can be substantial, reducing the slack available to
support further innovation.
Lack of product acceptance over the course of the competitors innovations may indicate less willingness in
the future to accept the risks of being a first mover.
Second movers are firms that respond to a first movers competitive action, typically through imitation. Doing
so allows the second mover to
avoid both the mistakes and the huge spending of the pioneers (first movers)
have time to develop processes and technologies that are more efficient than those used by the first mover
respond quickly to first movers successful, innovation-based market entries
rapidly and meaningfully interpret market feedback to respond quickly, yet successfully to the first
movers successful innovations
Teaching Note: An example of industry dynamicsand how a second mover can succeed
is provided by looking at the competitive dynamics of the athletic shoe industry.
New Balance is a second mover in the athletic shoe industry.
It effectively competes against industry leaders Nike and Reebok by focusing on the needs
of a well-defined market segment.
New Balance products are not particularly innovative compared to industry leader, Nike.
New Balance is able to succeed by doing a better job of satisfying the needs of baby
boomers, whose ages are significantly higher than those of Nikes and Reeboks core
customer groups, 42, compared to 25 and 33, respectively.
New Balance offers a new model every 17 weeks, compared to six weeks for most rivals.
New Balances success seems to come not from rapid introductions of innovative new
products, but by offering high-quality products at moderate prices and by making them
available in multiple widths (ranging from AA to EEEE), recognizing that many people do
not have average feet.
Late movers are firms that respond to a competitive action, but only after considerable time has elapsed after
the first movers action and the second movers response.
Typically, a late response is better than no response at all, although any success achieved from the late
competitive response tends to be slow in coming and considerably less than that achieved by first and second
movers.

5-9

Chapter 5: Competitive Rivalry and Competitive Dynamics

As late movers are the last to respond to the first and second movers actions, late movers tend to be poor
performers and often are weak competitors. For example, Avon was a late mover in e-commerce and Dell was a
late mover in providing Internet access.
Organizational Size
An organizations size affects the likelihood that it will take competitive actions as well as the types of actions it
will take and their timing. Small firms are more likely to, and quicker to, launch competitive actions.
Large firms are likely to initiate more competitive actions as well as strategic actions during a given time
period. Thus, the competitive actions a firm will likely encounter from larger competitors will be different than
the competitive actions it will encounter from smaller competitors.
Large organizations often have slack resources to launch a larger number of total competitive actions, and thus
do. However, smaller firms have the flexibility needed to launch a greater variety of competitive actions.
Wal-Mart appears to be an example of a large firm that has the flexibility required to take many types of
competitive actions. Analysts believe that Wal-Marts tactical actions are critical to its success and show a great
deal of flexibility (such as a quick advertising change for 2007 back-to-school sales, after disappointing spring,
2007 sales). In other words, Wal-Marts competitive actions will be a combination of the tendencies shown by
small and large companies.
Quality
Product quality shapes the competitive dynamics in many industries. In fact, product quality is no longer a
competitive issue but a necessary or mandatory product attribute if firms expect to successfully implement any
of the generic business strategies discussed in Chapter 3low cost, differentiation, focus, or integrated cost
leadership/differentiation. Quality involves meeting or exceeding customer expectations in the products and/or
services offered.
Teaching Note: The following observations may prove useful in presenting this section:
The necessity of quality is illustrated by competition in the automobile industry and the
uphill battle of U.S. automakers to produce cars with a quality level comparable to those
produced by the Japanese.
While U.S. automakers appear to have reached quality parity, they should expect that
Japanese automakers will initiate strategic responses to their competitive actions. In fact,
many observers expect the Japanese to use their core competencies to develop a source
of competitive advantage other than quality. In turn, this will stimulate U.S. (and
European) automakers to develop and implement competitive responses.
In the long run, it costs less to make quality products or to offer quality services than it
does to make or offer defective ones (because of the costs related to repairing defects or
correcting service errors).
While quality is necessary, it is not a sufficient product attribute for firms to achieve strategic competitiveness.
An acceptable level of quality merely provides firms with the opportunity to compete. Products and services
must continue to meet customer preferences.
Quality is as important in the services sector as it is in manufacturing. For the importance of quality to
permeate the entire organization (and affect all of its processes and value-creating activities), a dedication to
quality must come from the organizations top-level executives.

5-10

Chapter 5: Competitive Rivalry and Competitive Dynamics

Teaching Note: This is what has happened at Dell Computer as top management, especially
Michael Dell, is obsessed with maintaining high levels of product quality and continuous
quality improvements. At Dell, a total quality management process is found throughout the
firms activities and processes.
Quality affects competitive rivalry.
The firm studying a competitor with poor quality products can predict that the competitors costs are high
and that its sales revenue will likely decline until the quality issues are resolved.
The firm can predict that the competitor is unlikely to be aggressive in terms of taking competitive actions,
given that its quality problems must be corrected in order to gain credibility with customers.
Once corrected, the competitor will likely act by emphasizing additional dimensions of competition.
Teaching Note: To improve quality or to maintain a focus on it, firms often become involved
with total quality management, which is a managerial innovation that emphasizes an
organizations total commitment to the customer and to continuous improvement of every
process through the use of data-driven, problem-solving approaches based on empowerment
of employee groups and teams. Through TQM, firms seek to (1) increase customer
satisfaction, (2) cut costs, and (3) reduce the amount of time required to introduce innovative
products to the marketplace.

TQM: A Mini-Lecture
TQM combines W. Edward Demings and Joseph Jurans teachings on statistical process
control (SPC is a technique used to continually upgrade the quality of goods or services that a
firm produces) with group problem-solving processes and Japanese values related to quality
and continuous improvement.
A key attribute of SPC is the early detection and elimination of variations in the processes
used to manufacture a good or service (compared to waiting until a product is completed).
It is interestingand, at the same time, discouragingto note that Japanese firms adapted
and implemented Demings and Jurans quality management techniques long before they were
recognized as important by U.S. firms. This lag by U.S. firms explains how Japanese firms
were able to achieve a competitive advantage based on product quality that forced U.S. firms
to play catch up.
The principal goals of TQM are increasing customer satisfaction with the firms goods and/or
services, compressing product introduction time (time-to-market) and reducing costs.
Critical to successfully implementing Demings framework is recognizing that the firm (and all
of its employees) must continuously strive to improve the quality of the firms processes as
well as that of its goods and services.
Newer methods of TQM use benchmarking and emphasize organizational learning for firms
attempting to gain competitive advantage. Benchmarking facilitates TQM by developing
information on best practices that can guide the firms own TQM efforts.

Table Note: Quality-related dimensions of goods and services are shown in Table 5.1.

5-11

Chapter 5: Competitive Rivalry and Competitive Dynamics

TABLE 5.1
Quality Dimensions of Goods and Services
Indicated in Table 5.1, the quality dimensions of products and services differ slightly from each other. As
presented, the quality dimensions of products are more objective or measurable, relating to:
how the product performs and how it conforms with pre-established standards
what features it has
its flexibility, durability, conformance, and serviceability
how it looks or feels and an overall perception of quality
In contrast, the quality dimensions of services are more subjective, dealing with:
timeliness, courtesy, and convenience
accuracy, completeness, and consistency

Discuss factors affecting the likelihood a competitor will

respond to actions taken against it.

LIKELIHOOD OF RESPONSE
Once a competitive action has been taken, its success generally is determined by the likelihood and nature of the
competitive response.
In general, a firm is likely to respond to a competitors action when
1. the action leads to better use of the competitors capabilities to gain or produce stronger competitive
advantages or an improvement in its market position,
2. the action damages the firms ability to use its capabilities to create or maintain an advantage, or
3. the firms market position becomes less defensible.
To predict how a competitor is likely to respond to competitive actions, firms should consider (see Figure 5.2):
market commonality and resource similarity
awareness, motivation, and ability
type of competitive action, reputation and market dependence
Type of Competitive Action
Teaching Note: Remember, competitive actions are significant competitive moves taken by a
firm that are designed to gain a competitive advantage in a market, with the type of
competitive action taken being based on the firms strategy (described in Chapter 4).
Competitive actions can be classified based on the scope or breadth and significance of the
action.
The likelihood of a competitive response to an action depends on the type of action takenstrategic or tactical
and the potential effect on competitors.
Because strategic actions require the use or dedication of specific organizational resources, are more difficult to
implement successfully, are more time consuming, and are difficult (and often costly) to reverse, it is more
likely that tactical actions will be implemented and responded to more often.

5-12

Chapter 5: Competitive Rivalry and Competitive Dynamics

Because tactical actions require fewer organizational resources and are relatively easy to implement and reverse,
their effects on the competitive situation are more immediately felt.
Some examples of strategic actions include:
Wal-Marts entry into the European market
Continentals decision to initiate flights into Lima, Peru
Bank Ones implementation of an Internet banking company
Teaching Note: Tactical actions are taken to fine-tune a strategy. They involve fewer and
more general organizational resources and are relatively easy to implement and reverse, if
necessary. Fare increases (decreases) in the airline industry represent tactical actions. They
require few organizational resources (other than communicating new prices), are relatively
easy to implement, and can be reversed. Tactical actions also are generally more quickly
responded to by competitors than are strategic actions.
Teaching Note: It can be instructive to compare the rapid response by airlines to
competitors tactical actions (such as fare reductions) to American Airlines acquisition of
another airline company and its $1 billion purchase of gates at JFK airport to respond to
Continentals efforts to gain market share (strategic actions).
Actors Reputation
To predict the likelihood of a competitors response to a current or planned action, the firm studies the responses
that that competitor has taken previously when attacked, in that past behavior is assumed to be a reasonable
predictor of future behavior.
Competitors are more likely to respond to either strategic or tactical actions that are taken by a market leader.
For example, competitive actions taken by Home Depot are almost certain to incite a response from Lowes.
Teaching Note: Some likely effects of reputation are the following:
Actions initiated by firms with a previous history of success also will be more likely to result
in quick reactions and imitation.
Actions taken by firms with reputations for risk-taking and for initiating complex and
unpredictable actions are less likely to be responded to.
Actions taken by price predators (firms who cut prices to capture market share and then
raise prices) are seen as having a negative effect on competitors and their actions receive
only minimal response and imitation.
Dependence on the Market
Market dependence denotes the extent to which a firms revenues/profits are derived from a particular market.
Firms that are highly concentrated inor dependent onan industry (or market) in which a competitive action
has been taken are more likely to respond than are firms who do business in multiple industries and markets.

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

standard-cycle markets.

COMPETITIVE DYNAMICS

5-13

Chapter 5: Competitive Rivalry and Competitive Dynamics

Teaching Note: Recall that Figure 5.1 illustrates the potential outcomes of interfirm rivalry.
Whereas competitive rivalry concerns the ongoing actions and responses between a firm and its competitors for
an advantageous market position, competitive dynamics concerns the ongoing actions and responses taking
place among all firms competing within a market for advantageous positions.
To explain competitive dynamics, it is important to understand the effects of varying rates of competitive speed
in different markets (called slow-cycle, fast-cycle, and standard-cycle markets, defined below) on the behavior
(actions and responses) of all competitors within a given market. Competitive behaviors as well as the reasons
or logic for taking them are similar within each market type, but differ across market type. Thus, competitive
dynamics differ in slow-cycle, fast-cycle, and standard-cycle markets. The sustainability of the firms
competitive advantages differs across the three market types.
Slow-Cycle Markets
Slow-cycle markets are those in which the firms competitive advantages are shielded from imitation, often for
long periods of time and where imitation is costly. Thus, competitive advantages are sustainable in slow-cycle
markets.
Building a unique competitive advantage that is proprietary leads to competitive success in a slow-cycle market.
This type of advantage is difficult for competitors to understand. Copyrights, geography, patents, and ownership
of an information resource are examples of what leads to unique advantages.
Teaching Note: Noted in Chapter 3, a difficult-to-understand and costly-to-imitate advantage
can be the result of unique historical conditions, causal ambiguity, and/or social complexity.
Once a proprietary advantage is developed, the firms competitive behavior in a slow-cycle market is oriented to
protecting, maintaining, and extending that advantage.
Teaching Note: Providing some examples may help students understand what has been
involved in establishing and defending a one-of-a-kind competitive advantage. The following
are some possibilities:
IBMs historical dominance of the mainframe computer industry
Boeings dominant position in larger, commercial jet aircraft (at least until the Airbus superjumbo jet hits the market)
Microsofts dominant position in the market for PC operating system software (though
diminished somewhat by a recent swell of new competitors)
Wal-Marts use of local market monopolies as it established its dominant position in
discount retailing by setting up stores in small, rural communities
Figure Note: The sustainability of competitive actions in slow-cycle markets is illustrated in
Figure 5.4.
FIGURE 5.4
Gradual Erosion of a Sustained Competitive Advantage

5-14

Chapter 5: Competitive Rivalry and Competitive Dynamics

As indicated by Figure 5.4, a firm operating in a slow-cycle market may be able to retain its competitive
advantage over time.
Returns from the competitive action increase during the early, launch years of the strategy.
When returns level out, the firm exploits its position.
Competitors counterattack or launch strategies that cause the first firms bases for competitive advantage to
erode. As a result, returns are competed away.

Fast-Cycle Markets
Fast-cycle markets are markets in which the firms competitive advantages arent shielded from imitation and
where imitation happens quickly and somewhat inexpensively through reverse engineering and technology
diffusion. Competitive advantages arent sustainable in fast-cycle markets.
The technology often used by fast-cycle competitors isnt proprietary, nor is it protected by patents as is the
technology used by firms competing in slow-cycle markets. For example, only a few hundred parts readily
available on the open market are required to build a PC. Patents protect only a few of these parts, such as
microprocessor chips.
Fast-cycle markets are more volatile than slow-cycle and standard-cycle markets. Prices fall quickly in these
markets, so companies need to profit quickly from their product innovations (e.g., rapid declines in the prices of
microprocessor chips produced by Intel and Advanced Micro Devices continuously reduces their prices to end
users).
Imitation of many fast-cycle products is relatively easy, as demonstrated by Dell and Gateway, along with a host
of local PC vendors. All of these firms have partly or largely imitated IBMs initial PC design to create their
products.
Teaching Note: The focus of fast-cycle competition is competitive disruption, an approach
where competition is based on one set of resources and then shifted to anotherin other
words, using price as a first step toward sustaining a competitive advantage, then shifting to
quality, then speed, then innovation, and so on. The principle is that the primary basis of the
competitive advantage is shifted as the firm disrupts, and changes, the rules of the game.
Firms in fast-cycle markets avoid loyalty to any of their products, preferring to cannibalize their own before
competitors learn how to do so through successful imitation. This emphasis creates competitive dynamics that
differ substantially from what is witnessed in slow-cycle markets. Instead of concentrating on protecting,
maintaining, and extending competitive advantages, these companies focus on learning how to rapidly and
continuously develop superior advantages.
Figure Note: Figure 5.5 can be used to discuss how competitive advantage would unfold in
a fast-cycle market.
FIGURE 5.5
Obtaining Temporary Advantages to Create Sustained Advantage
As illustrated, one way in which firms might sustain a competitive advantage is to move continuously from
advantage to advantage. This is accomplished by moving from one source of advantage to another, never
allowing competitors to catch up.

5-15

Chapter 5: Competitive Rivalry and Competitive Dynamics

Examples of firms that have successfully followed the incremental approach to sustain competitive advantage
are Vodaphone in telecommunications services and Cisco Systems in telecommunications systems.

Teaching Note: The following has been prescribed as the incremental or step-by-step
approach to managing competitive advantages in fast-cycle markets.
1. Disrupt the status quo a firm should identify new opportunities to meet customer needs,
thereby shifting or changing the basis of competition.
2. Create a temporary advantage the temporary advantage should be based on improved
knowledge of customers needs, innovative application of technology, and an attempt to
define the future basis of customer satisfaction.
3. Seize the initiative move aggressively and rapidly, forcing competitors to play catch up;
taking a proactive approach while leaving competitors to be reactive.
4. Sustain the momentum continue to develop new sources of advantage; dont wait for
competitors to catch up; stay one step ahead.
Teaching Note: As discussed earlier, the new competitive landscape requires that firms (1)
introduce more new products, (2) develop broader product lines, and (3) provide more rapid
product upgrades.
Standard-Cycle Markets
Standard-cycle markets are those in which the firms competitive advantages are moderately shielded from
imitation and where imitation is moderately costly. Competitive advantages are partially sustainable in standardcycle markets, but only when the firm is able to continuously upgrade the quality of its competitive advantages.
The competitive actions and responses that form a standard-cycle markets competitive dynamics find firms
seeking large market shares, trying to gain customer loyalty through brand names, and carefully controlling
their operations to consistently provide the same usage experience for customers without surprises.
Because of large volumes, the size of mass markets, and the need to develop scale economies, the competition
for market share is intense in standard-cycle markets. P&G and Unilever are direct competitorsthey share
multiple markets, have similar types and amounts of resources, and follow similar strategies. For example, they
both compete aggressively for market share in laundry detergents, where tiny fractions make a huge difference
at the bottom line.
Innovation has a substantial influence on competitive dynamics as it affects the actions and responses of all
companies competing within a slow-cycle, fast-cycle, or standard-cycle market.

ANSWERS TO REVIEW QUESTIONS

Who are competitors? How are competitive rivalry, competitive behavior, and competitive dynamics
defined in the chapter? (pp. 128-129)
1.

Competitors are firms competing in the same market, offering similar products, and targeting similar customers.
Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between
competitors as they compete against each other for an advantageous market position. The outcomes of
competitive rivalry influence the firms ability to sustain its competitive advantages as well as the level
(average, below-average, or above-average) of its financial returns. For the individual firm, the set of

5-16

Chapter 5: Competitive Rivalry and Competitive Dynamics

competitive actions and responses it takes while engaged in competitive rivalry is called competitive behavior.
Competitive dynamics is the set of actions taken by all firms that are competitors within a particular market.
What is market commonality? What is resource similarity? What does it mean to say that these
concepts are the building blocks for a competitor analysis? (pp. 131-133)
2.

Market commonality refers to the number of markets with which competitors are jointly involved and their
importance to each. Resource similarity refers to how comparable competitors resources are in terms of type
and amount. These are the building blocks of a competitor analysis (which is the first step the firm takes to be
able to predict its competitors actions and responses) because they are foundational to this understanding.
Chapter 2 discussed what firms must do to understand competitors. The discussion is extended further in the
current chapter as the authors describe what the firm does to predict competitors market-based actions. Thus,
understanding precedes prediction. And in general, the greater the market commonality and resource similarity,
the more firms acknowledge that they are direct competitors.
3.

How do awareness, motivation, and ability affect the firms competitive behavior? (pp. 133-135)

As shown in Figure 5.2, market commonality and resource similarity influence the drivers (awareness,
motivation, and ability) of competitive behavior. In turn, the drivers influence the firms competitive behavior,
as shown by the actions and responses it takes while engaged in competitive rivalry.
Awareness, which is a prerequisite to any competitive action or response being taken by the firm or its
competitor, refers to the extent to which competitors recognize the degree of their mutual interdependence that
results from market commonality and resource similarity. 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.
Motivation, which concerns the firms incentive to take action or to respond to a competitors attack, relates to
perceived gains and 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 as a result of doing so or that its market
position wont be damaged if it doesnt respond.
In some instances, the firm may be aware of the large number of markets it shares with a competitor and may be
motivated to respond to an attack by that competitor, but it lacks the ability to do so. Ability relates to each
firms resources and the flexibility they provide. Without 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.
4.

What factors affect the likelihood that a firm will take a competitive action? (pp. 136-141)

In addition to market commonality and resource similarity and awareness, motivation, and ability, three more
specific factors affect the likelihood a competitor will take competitive actions. The first of these concerns is
first mover incentives. First movers, those taking an initial competitive action, often earn above-average returns
until competitors can successfully respond to their action and gain loyal customers. Not all firms can be first
movers in that they may lack the awareness, motivation, or ability required to engage in this type of competitive
behavior. Moreover, some firms prefer to be a second mover (the firm responding to the first movers action).
One reason for this is that second movers, especially those acting quickly, can successfully compete against the
first mover. By studying the first movers product, customers reactions to it, and the responses of other
competitors to the first mover, the second mover can avoid the early entrants mistakes and find ways to
improve upon the value created for customers by the first movers good or service. Late movers (those that
respond a long time after the original action was taken) often are lower performers and much less competitive.

5-17

Chapter 5: Competitive Rivalry and Competitive Dynamics

Organizational size, the second factor, tends to reduce the number of different types of competitive actions that
large firms launch while it results in smaller competitors using a wide variety of actions. Ideally, the firm
would like to initiate a large number of diverse actions when engaged in competitive rivalry. The third factor,
quality, dampens firms abilities to take competitive actions, in that product quality is a base denominator to
successful competition in the global economy.
5. What factors affect the likelihood a firm will initiate a competitive response to the action taken by a
competitor? (pp. 141-143)
The type of competitive action (strategic or tactical) the firm took, the competitors reputation for the nature of
its competitor behavior, and its dependence on the market in which the action was taken are studied to predict a
competitors response to the firms action. In general, the number of tactical responses taken exceeds the
number of strategic responses. Competitors respond more frequently to the actions taken by the firm with a
reputation for predictable and understandable competitive behavior, especially if that firm is a market leader. In
most cases, the firm can anticipate that when its competitor is highly dependent for its revenue and profitability
in the market in which the firm took a competitive action, that competitor is likely to launch a strong response.
However, firms that are more diversified across markets are less likely to respond to a particular action that
affects only one of the markets in which they compete.
6. What competitive dynamics can be expected among firms operating in slow-cycle markets? In fastcycle markets? In standard-cycle markets? (pp. 143-147)
Competitive dynamics concerns the ongoing competitive behavior occurring among all firms competing in a
market for advantageous positions. Market characteristics affect the set of actions and responses firms take
while competing in a given market as well as the sustainability of firms competitive advantages. In slow-cycle
markets, where competitive advantages can be maintained, competitive dynamics finds firms taking actions and
responses that are intended to protect, maintain, and extend their proprietary advantages. In fast-cycle markets,
competition is almost frenzied as firms concentrate on developing a series of temporary competitive advantages.
This emphasis is necessary because firms advantages in fast-cycle markets arent proprietary and as such, are
subject to rapid and relatively inexpensive imitation. Standard-cycle markets are between slow-cycle and fastcycle markets, in that firms are moderately shielded from competition in these markets as they use competitive
advantages that are moderately sustainable. Competitors in standard-cycle markets serve mass markets and try
to develop economies of scale to enhance their profitability. Innovation is vital to competitive success in each of
the three types of markets. Firms should recognize that the set of competitive actions and responses taken by all
firms differs by type of market.

EXPERIENTIAL EXERCISES
Exercise 1: Win-win, win-lose, or lose-lose?
A key aspect of company strategy concerns the interactions between two or more firms. When a new
market segment emerges, should a firm strive for a first-mover advantage, or wait to see how the market
takes shape? Diversified firms compete against one another in multiple market segments and must often
consider how actions in one market might be subject to retaliation by a competitor in another segment.
Similarly, when a competitor initiates a price war, a firm must decide whether it should respond in kind or
not.
Game theory is helpful for understanding the strategic interaction between firms. Game theory uses
assumptions about the behavior of rivals to help a company choose a specific strategy that maximizes its
return. In this exercise, you will use game theory to help analyze business decisions.
Individual

5-18

Chapter 5: Competitive Rivalry and Competitive Dynamics

One of the classic illustrations of game theory can be found in the prisoners dilemma. Two criminals have
been apprehended by the police for suspicion of a robbery. The police separate the thieves and offer them
the same deal: inform on your peer and receive a lesser sentence. Let your peer inform on you, and receive
a harsher sentence. What should you tell the police?
Visit www.gametheory.net where you can play the prisoners dilemma against a computer. Play the
dilemma using different parameters, and make notes of your experience.
Groups
There are many examples of game theory in popular culture, from the reality show Survivor to episodes of
The Simpsons. Revisit www.gametheory.net and select either a TV or movie illustration. Discuss the
applications of game theory with your team.
As a group, prepare a one page summary of how game theory can be applied to competitive interactions
between firms.
Exercise 2: Strategy as warfare
It is common to see military analogies and phrasing used to describe strategy topics, particularly in regard
to competitive dynamics and inter-firm rivalry. For example, executives often speak about guerilla
marketing, launching pre-emptive strikes on rivals, or battles for market share. Al Dunlap, a former CEO
of Sunbeam, was once known as Rambo in pinstripes and even posed for a business magazine photo
shoot wearing machine guns.
Military texts are often used to help understand how firms should act in relation to their competitors. Von
Clauswitzs book On War draws on his experience in the Napoleonic Wars. Sun Tzus Art of War is a much
earlier circa 500 BC and more influential text, however. Sun Tzu was a Chinese general who,
according to legend, was hired by the king after a demonstration of training using the kings concubines.
Part One
Break into teams of four to six persons. Each member should select a different chapter of Art of War (there
are thirteen chapters in total). There are numerous sources on the Internet for free downloads of the book,
including an audio book version at Project Gutenberg. (www.gutenberg.org). After reading your chapter,
prepare a bullet-point summary for your team members on the chapters relevance to corporate strategy.
Part Two
Have the team meet and ask each member to explain her/his summary of what was read. Then, answer the
following questions:
Which of Sun Tzus ideas offered the most insightful analogies for inter-firm rivalry?
Which of Sun Tzus ideas seemed to be the least relevant for understanding competitive dynamics
among firms?
What ideas from Art of War can you apply to an example used earlier in this chapter?

INSTRUCTOR'S NOTES FOR

EXPERIENTIAL EXERCISES

5-19

Chapter 5: Competitive Rivalry and Competitive Dynamics

Exercise 1: Win-win, win-lose, or lose-lose?

The purpose of this exercise is to illustrate basic concepts of game theory, so they can be more readily
related to competitive dynamics. The exercise has both individual and group components.
In the first half of the exercise, students are asked to play the prisoners dilemma, using the computer
version of the exercise at www.gametheory.net. The prisoner's dilemma is based on the following
elements:

Two criminals are arrested as suspects in a bank robbery.

Before they have a chance to coordinate their alibis, the criminals are moved to separate cells.

Each criminal is given a choice: stay silent or betray their partner. If they betray their partner,
and the partner remains silent, they will go free while the partner will serve 10 years in prison.
If they each betray their partner, they will each serve 2 years. If they stay silent, the will be
jailed on a lesser charge, and each serve six months.

What should each criminal do?

Note: the exact terms of the sentences vary across different versions of this exercise.
There are four possible outcomes that are possible, depending on whether each criminal stays silent or
betrays his partner:

A stays silent

A betrays

B stays silent

Betrays

A serves 6 months

A serves 10 years

B serves 6 months

B goes free

A goes free

A serves 2 years

B serves 10 years

B serves 2 years

The best solution is for neither criminal to confess: total time served is one year, compared to four or ten
years in other scenarios. But, individual utility is maximized by betraying the partner, with the opportunity
for freedom. Recognizing that the partner may come to the same conclusion, each criminal decides to
betray the other, and both serve two year sentences.
When discussing this exercise in class, it may be useful to supplement a discussion of the dilemma with a
discussion of the tragedy of the commons. Garrett Hardin published the article Tragedy of the commons

5-20

Chapter 5: Competitive Rivalry and Competitive Dynamics

in Science magazine in 1968. Science has a .pdf reprint of the article available online, as well as an
extensive set of subsequent articles, available at http://www.sciencemag.org/sciext/sotp/commons.dtl.
Hardins discussion starts with the following scenario:
Imagine a common grazing area in a rural community:

Ten families each have one cow that grazes on the commons

The land can optimally support ten cows

Each cows sells for $100 at the end of the season

Family revenue is $100

Community revenue is $1,000

The scenario extends with the question, "What happens if one farmer adds a second cow?"

Because of overgrazing, each cow feeds less, and sells for only $85 at the end of the season

The community is now earning only $935 overall

Most farmers are earning $15 less

The farmer with two cows earns $170

Then, another farmer adds a second cow.

With more overgrazing, each cow sells for $70 at the end of the season

The community is now earning only $840 overall

Most farmers are earning $30 less

The farmers with two cows earn $140

The rational decision at the macro level is to only graze one cow per family on the common. However, the
rational decision at the individual level is to add an extra cow. Eventually, everyone follows suit, and all
members of the community earn far less than they did previously.
To make a connection between game theory and strategy, ask students how the prisoner's dilemma and the
tragedy of the commons relate to competitor interactions. Topics that can be addressed here include:

Head-to-head market share battles

Multipoint competition and mutual forbearance

Additional resources include:

For a good example of a market share battle, see the article on TAC and Orange competing in the Thai
phone market, in Pre-emptive strike in Far Eastern Economic Review, April 26, 2001, p.50.

5-21

Chapter 5: Competitive Rivalry and Competitive Dynamics

For a more general article on the economics of price competition, see the paper The deadly dynamics of
price competition in Marketing Research, Winter 2004, 14(4) by Dozoretz and Matanovich.
Exercise 2: Strategy as warfare
The purpose of this exercise is for students to examine the overlap between military strategy and business
strategy. Working in small teams, each member is assigned one of the thirteen chapters in Sun Tzus Art of
War, and to prepare a chapter summary. There are numerous sources on the Internet for free downloads of
the book, including an audiobook version at Project Gutenberg. (www.gutenberg.org). Next, the entire
team meets to discuss the following questions:
Which of Sun Tzus ideas offered the most insightful analogies for inter-firm rivalry?
Which of Sun Tzus ideas seemed to be the least relevant for understanding competitive dynamics
among firms?
What ideas from Art of War can you apply to an example used earlier in this chapter?

The Art of War is organized into the following chapters:

Chapter I. LAYING PLANS
Chapter II. WAGING WAR
Chapter III. ATTACK BY STRATAGEM
Chapter IV. TACTICAL DISPOSITIONS
Chapter V. ENERGY
Chapter VI. WEAK POINTS AND STRONG
Chapter VII. MANEUVERING
Chapter VIII. VARIATION IN TACTICS
Chapter IX. THE ARMY ON THE MARCH
Chapter X. TERRAIN
Chapter XI. THE NINE SITUATIONS
Chapter XII. THE ATTACK BY FIRE
Chapter XIII. THE USE OF SPIES
A useful resource for structuring the debrief is the book Sun Tzu and the Art of Business (2000), by Mark
McNeely, Oxford Press. McNeely integrates the Art of War chapters into six business principles:

Gaining market share without destroying value

Avoiding direct confrontation with competitors

Utilizing market information

5-22

Chapter 5: Competitive Rivalry and Competitive Dynamics

Speed

Shaping your opponent

Leadership

Mark McNeely maintains a Website on Sun Tzu and business applications at:

http://www.suntzu1.com/
Exercise 2: Corporate Juggling
The corporate juggling exercise is very different from prior activities used in the textbook. The main
differences are (a) that it is physical, and (b) it will require that the instructor invest in a set of props to
conduct the exercise. However, this exercise is often welcomed by students, as it gets them out for their
seats for part of the class period. The exercise also offers a highly visual metaphor that makes the concepts
of diversification and complexity far more tangible.
To run the exercise, you will divide the class into two types of groups: Small teams (5-7 persons) and large
teams (10-14 persons). You will need to assemble one bag of resources for each team. For example, with
a class enrollment of 40, you might have two large teams, and three to four small teams.
Part One
Each team gets a bag of items to be juggled. The items should be lightweight enough so that no one is hurt.
Each bag should contain just one type of object, and the items should vary from team to team. Sample
objects can include ping pong balls, tennis balls, used film canisters (ask at photo processing shops), balled
socks, and even crumpled pieces of butcher pad paper. You should have at least as many objects in the bag
as there are team members.
Give the bags to the team facilitators, and allow them to practice for ten minutes. Then, ask the following
questions:
How did group size affect your process and outcomes?
How did the nature of the objects being tossed affect your process and outcomes?
Part Two
After the discussion of these two questions, trade objects so that each team has a mix of different items.
For example, a small team might have a couple of ping pong balls, one tennis ball, a sock, and a paper ball.
Have the team repeat the juggling process using this diverse set of resources. The, ask:
How did the variability in inputs affect your process and outcomes?
So far, the discussion has focused on team processes versus diversification. To sharpen the focus on the
chapter, ask students How are elements of the exercise similar to topics in Chapter 6? Mentioning some
of the following may help in stimulating further conversation:
How easy or hard was it to process multiple objects? How does a CEO manage many different
business segments concurrently?
How important was the dissimilarity between objects in your teams effectiveness? How does that
relate to a firms ability in managing dissimilar business units?

5-23

Chapter 5: Competitive Rivalry and Competitive Dynamics

What strategies did the team use to create value (i.e., keep more objects in the air at one time)?
Teams may use very different approaches to maximize their output: e.g., switching facilitators,
creating rules for adding more objects into play, building structures and processes to handling
more capacity.

ADDITIONAL QUESTIONS AND EXERCISES

The following questions and exercises can be presented for in-class discussion or assigned as homework.
Application Discussion Questions
1. Have the students read the popular business press (e.g., Business Week, Fortune, Fast Company), and
identify a strategic action and a tactical action taken by firms approximately two years ago. Next, they
should use the Internet to search the popular business press to see if, and how, competitors responded to
those actions. They should be able to explain the actions and the responses, linking their findings to the
discussion in this chapter.
2. Why would a firm regularly choose to be a second mover? Likewise, why would a firm purposefully be a
late mover?
3. How did Wal-Marts strategic actions affect its primary European competitors? How has Wal-Marts ecommerce strategy affected competitors?
4. Have the students choose a large firm and examine the popular business press to identify how its size, speed
of actions, level of innovation, and quality of goods or services have affected its competitive position in its
industry. Ask them to explain their findings.
5. Identify a firm in a fast-cycle market. What strategic actions account for its success or failure over the last
several years? How has the Internet affected the firm?
Ethics Questions
1. Are there some industries in which ethical practices are more important than in other industries? If so, name
the industries that are ethical, and explain how the competitive actions and competitive responses might
differ for these industries compared with a typical industry?
2. When engaging in competitive rivalry, firms jockey for a market position that is advantageous, relative to
competitors. In this jockeying, what types of competitor intelligence-gathering approaches are ethical? How
has the Internet affected competitive intelligence activities?
3. A second mover is a firm that responds to a first movers competitive actions, often through imitation. Is
there anything unethical about how a second mover engages in competition? Why or why not?
4. Standards for competitive rivalry differ in countries throughout the world. What should firms do to cope
with these differences? How do the differences relate to ethical practices?
5. Could total quality management practices result in firms operating more ethically than before such practices
were implemented? If so, what might account for an increase in the ethical behavior of a firm using TQM
principles?
6. What ethical issues are involved in fast-cycle markets?
Internet Exercise
Cisco Systems ranks as one of the greatest success stories of the last decade. The firm used acquisitions to gain
access to R&D, with a pace that accelerated from four companies in 1995 to twenty-three companies in 2000.
This strategy allowed Cisco to adopt and integrate innovations faster than its competitors. But when the
Internet bubble burst in early 2000, venture funding for the kinds of startups upon which Cisco had been
feasting (i.e., those spawning networking innovations) evaporated. The firm faced two immediate problems: (1)
dealing with the complexity of managing the integration of a fast growing stable of new technology products
and (2) learning again how to innovate without acquisition. Look up Cisco Systems (http://www.cisco.com) on
the Web and try to discern what the firm is doing to adjust to its new industry circumstances.

5-24

Chapter 5: Competitive Rivalry and Competitive Dynamics

*e-project: Discuss how the Internet has become a vital component in increasing the speed, ease, and frequency
of todays large mergers and acquisitions.

5-25