Chapter 5

Competitive Dynamics
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

2000 South-Western College Publishing

Ch5-1

Strategic Inputs

Chapter 2 External Environment Strategic Intent Chapter 3 Internal Environment Strategic Mission

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance
Chapter 12 Strategic Leadership Chapter 11 Structure & Control Chapter 13
Entrepreneurship

Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies

Strategic Actions

Chapter 7 Acquisitions & Restructuring

& Innovation

Outcomes

Strategic

Feedback

Strategic Competitiveness Above Average Returns

Ch5-2

Factors Leading to More Complex Rivalry

Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)
Ch5-3

Competitive Dynamics
Results from a series of competitive actions and competitive responses among firms competing within a particular industry

Competitive Rivalry
Exists when two or more firms jockey with one another in the pursuit of better market position
Ch5-4

A firms strategic conduct is dynamic in nature

Actions taken by one firm elicit responses from competitors

Competitive Dynamics
Actions and responses shape the competitive positions of each firms business level strategy

Competitive responses lead to additional actions from the firm that acted originally

Ch5-5

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-6

Competitor Analysis
Market Commonality Resource Similarity

Feedback

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior

Awareness
Motivation

Do managers understand the key characteristics of competitors?

Capability

Ch5-7

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Does the firm have appropriate incentives to attack or respond?

Capability

Ch5-8

Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation

Capability

Does the firm have the necessary resources to attack or respond?

Ch5-9

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-10

Competitor Analysis
Market Commonality Resource Similarity

Feedback

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity

Do firms compete with each other in multiple markets?

Ch5-11

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity
Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs
For example, airlines price flights similarly but respond quickly when competitors introduce promotional prices
Ch5-12

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity

Do competitors possess similar types or amounts of resources?

Ch5-13

Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity
Firms are less inclined to attack a firm that is likely to retaliate Firms with similar resources are more likely to be aware of each others competitive moves

Firms with dissimilar resources are more likely to attack

Ch5-14

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-15

Competitor Analysis
Market Commonality Resource Similarity

Feedback

Model of Interfirm Rivalry: Likelihood of Attack and Response

Interfirm Rivalry:
Attack & Response Likelihood of Attack First Mover advantage First Mover Incentives can be substantial Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ch5-16

First Mover
Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies

Can earn above average profits until competitors respond

Gain customer loyalty, helping to create a barrier to entry by competitors Advantage depends upon difficulty of imitation
Ch5-17

Second Mover
Firms that respond to a First Movers actions Second Movers frequently imitate First Movers Speed of response often dictates success

Should evaluate customers response before moving Fast Second Movers can capture some of initial customers and develop some brand loyalty Avoid some of the risks associated with First Move

Must possess necessary capabilities to imitate

Ch5-18

Model of Interfirm Rivalry: Likelihood of Attack and Response

Interfirm Rivalry:
Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability Whether a competitor is likely to respond depends on several key factors
Ch5-19

Types of Competitive Actions

Strategic Actions
Example

Significant commitments of specific and distinctive organizational resources Difficult to implement Difficult to reverse

Major Acquisition
Undertaken to fine tune strategy Relatively easy to implement Relatively easy to reverse

Tactical Actions
Example

Price cut

Ch5-20

Gauging the Likelihood of Response

Type of Competitive Action -Tactical or Strategic Easier to respond to Require fewer resources to mount a response

Actors Reputation
Market leaders are more likely to be copied Risk taking firms are less likely to be copied Price Predators are less likely to be copied
Ch5-21

Gauging the Likelihood of Response

Market Dependence
Firms that are more dependent on a single industry are more likely to respond than are diversified firms

Industry dependent firms will likely respond to either strategic or tactical actions

Competitor Resources
Smaller firms are more likely to respond to tactical actions
Limited resources may lead to alternatives such as Strategic Alliances
Ch5-22

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-23

Competitor Analysis
Market Commonality Resource Similarity

Feedback

Model of Interfirm Rivalry: Likelihood of Attack and Response

Ability for Action and Response

Relative Size Speed Innovation Quality
Ch5-24

Firm size can have opposing effects on competitive dynamics

Model of Interfirm Rivalry: Likelihood of Attack and Response

Ability for Action and Response

Relative Size Speed Innovation Quality

Large firms may exert market power over rivals and erect barriers to entry against smaller competitors However, smaller competitors may be more nimble and innovative Think and act big and well get
smaller. Think and act small and well get bigger. -- Herb Kelleher,
CEO, Southwest Airlines
Ch5-25

Model of Interfirm Rivalry: Likelihood of Attack and Response

Ability for Action and Response

Relative Size Speed Innovation Quality
Ch5-26

Quick response is crucial to both the first mover and the fast second mover

Model of Interfirm Rivalry: Likelihood of Attack and Response

Ability for Action and Response

Relative Size Speed Innovation Quality Consistent innovation is required for market leadership in many dynamic industries
Ch5-27

Model of Interfirm Rivalry: Likelihood of Attack and Response

Ability for Action and Response

Relative Size Speed Innovation Quality Exceeding customer expectations is a necessity to compete in the 21st century
Ch5-28

Quality Dimensions of Goods & Services

Product Quality Dimensions:
Performance Features Flexibility Durability Conformance Serviceability Aesthetics Operating characteristics Important special characteristics Meeting operating specifications over time Amount of use before performance deteriorates Match with pre-established standards Ease and speed of repair or normal service How a product looks and feels

Perceived quality Subjective assessment of characteristics (product image)

Ch5-29

Quality Dimensions of Goods & Services

Service Quality Dimensions:
Timeliness Courtesy Performed in promised period of time Performed cheerfully

Consistency
Convenience Completeness Accuracy

Giving all customers similar experiences

Accessibility to customers Fully serviced, as required Performed correctly each time

Ch5-30

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-31

Competitor Analysis
Market Commonality Resource Similarity

Feedback

Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes

Competitive Market Types Slow cycle markets are

Slow, Standard or Fast Cycle

Competitive Outcomes
Sustained Competitive Advantage Temporary Advantage

frequently shielded by monopoly power or very strong brand loyalties

This market outcome and lack of interfirm rivalry may lead to sustained competitive advantage

Evolutionary Outcomes
Evolutionary Actions Growth-Oriented Actions Market-Power Actions

Ch5-32

Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes

Standard cycle markets Competitive Market Types often lead to highly Slow, Standard or Fast Cycle competitive pressures Competitive Outcomes despite world class products Sustained Competitive Advantage Firms with multimarket Temporary Advantage competition may dampen rivalry somewhat Evolutionary Outcomes Evolutionary Actions Growth-Oriented Actions Market-Power Actions Sustained competitive advantage is a possible outcome in this instance Ch5-33

Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes

Fast cycle markets are Competitive Market Types intensely dynamic and a Slow, Standard or Fast Cycle first mover advantage is Competitive Outcomes often unsustainable Sustained Competitive Advantage Temporary Advantage Firms may cannibalize older generation products while introducing new innovative premium products Sustainable competitive advantage is unilkely Ch5-34

Evolutionary Outcomes
Evolutionary Actions Growth-Oriented Actions Market-Power Actions

Gradual Erosion of a Sustained Competitive Advantage

Returns from a Sustained Competitive Advantage

Exploitation Counterattack Launch

Time (years)

10

Ch5-35

Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative 1 Disrupting the Status Quo
Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety

2 Creating Temporary Advantage

Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers Move aggressively into new areas of competition to create new advantage and undermine a competitors old advantage Take several actions in a row in order to seize the initiative and create momentum to develop new advantages

3 Seizing the Initiative

4 Sustaining the Momentum

Ch5-36

Obtaining Temporary Advantages to Create Sustained Advantage

Returns from a Sustained Competitive Advantage

Exploitation Launch

Counterattack

Time (years) 10

15

Ch5-37

Obtaining Temporary Advantages to Create Sustained Advantage

Returns from a Sustained Competitive Advantage

Firm has already moved on to Advantage No. 2

Exploitation Launch

Counterattack

Time (years) 10

15

Ch5-38

Obtaining Temporary Advantages to Create Sustained Advantage

Returns from a Sustained Competitive Advantage

Firm continues to move on to the next Advantage

Exploitation Launch

Counterattack

Time (years) 10

15

Ch5-39

Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes

Strategies may be deterCompetitive Market Types mined by the life cycle of Slow, Standard or Fast Cycle the industry

Competitive Outcomes
Sustained Competitive Advantage Temporary Advantage

Younger firms and emerging industries are generally characterized by entrepreneurial actions Growth-oriented and Market-power strategies dominate established or mature industries Ch5-40

Evolutionary Outcomes
Evolutionary Actions Growth-Oriented Actions Market-Power Actions

Model of Interfirm Rivalry: Likelihood of Attack and Response

Drivers of Competitive Behavior
Awareness Motivation Capability

Interfirm Rivalry:
Attack & Response
Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actors Reputation Dependence on the Market Resource Availability

Ability for Action and Response

Relative Size Speed Innovation Quality

Outcomes
Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions Ch5-41

Competitor Analysis
Market Commonality Resource Similarity

Feedback

An Action-Based Model of the Industry Life Cycle

Key Task Key Task Key Task

Firm Resource & Market Strength

Exploiting Open Niches (Blind Spots) and Competitive Uncertainty

Exploiting Factors of Production

Exploiting Market Position

Market-Power Actions
Growth-Oriented Actions Entrepreneurial Actions

Emerging Stage

Growth Stage

Mature Stage
Ch5-42

Time