Chapter 5 Competitive Dynamics

Chapter 5Competitive DynamicsMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingChapter 3InternalEnvironmentChapter 2ExternalEnvironmentThe StrategicManagementProcessStrategic IntentStrategic MissionStrategicCompetitivenessAbove AverageReturnsFeedbackStrategy FormulationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringStrategy ImplementationChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsStrategicActionsStrategic OutcomesDeclining emphasis on single, domestic markets and increasing emphasis on global marketsAdvances in communication technology make coordination easier across multiple marketsAdvances in technology and innovation have increased competitiveness of small and medium sized firmsNational barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)Factors Leading to More Complex RivalryCompetitive DynamicsResults from a series of competitive actions and competitive responses among firms competing within a particular industryCompetitive RivalryExists when two or more firms jockey with one another in the pursuit of better market positionActions and responses shape the competitive positions of each firm’s business level strategyActions taken by one firm elicit responses from competitorsA firm’s strategic conduct is dynamic in natureCompetitive responses lead to additional actions from the firm that acted originallyCompetitive DynamicsRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseDrivers of Competitive BehaviorMotivationCapabilityAwarenessModel of Interfirm Rivalry:Likelihood of Attack and ResponseDo managers understand the key characteristics of competitors?AwarenessDoes the firm have appropriate incentives to attack or respond?Drivers of Competitive BehaviorMotivationCapabilityAwarenessModel of Interfirm Rivalry:Likelihood of Attack and ResponseDoes the firm have the necessary resources to attack or respond?Drivers of Competitive BehaviorMotivationCapabilityAwarenessModel of Interfirm Rivalry:Likelihood of Attack and ResponseRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseCompetitor AnalysisResource SimilarityMarket CommonalityModel of Interfirm Rivalry:Likelihood of Attack and ResponseDo firms compete with each other in multiple markets?Market CommonalityCompetitor AnalysisResource SimilarityMarket CommonalityMultipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occursFor example, airlines price flights similarly but respond quickly when competitors introduce promotional pricesModel of Interfirm Rivalry:Likelihood of Attack and ResponseCompetitor AnalysisResource SimilarityDo competitors possess similar types or amounts of resources?Market CommonalityModel of Interfirm Rivalry:Likelihood of Attack and ResponseCompetitor AnalysisResource SimilarityMarket CommonalityFirms are less inclined to attack a firm that is likely to retaliateFirms with dissimilar resources are more likely to attackFirms with similar resources are more likely to be aware of each other’s competitive movesModel of Interfirm Rivalry:Likelihood of Attack and ResponseRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationModel of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of AttackFirst Mover IncentivesFirst Mover advantage can be substantialFirst MoverFirms that take an initial competitive actionGenerally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologiesCan earn above average profits until competitors respondGain customer loyalty, helping to create a barrier to entry by competitorsAdvantage depends upon difficulty of imitationSecond MoverFirms that respond to a First Mover’s actionsSecond Movers frequently imitate First MoversSpeed of response often dictates successShould evaluate customers’ response before moving“Fast” Second Movers can capture some of initial customers and develop some brand loyaltyAvoid some of the risks associated with First MoveMust possess necessary capabilities to imitateInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationWhether a competitor is likely to respond depends on several key factorsModel of Interfirm Rivalry:Likelihood of Attack and ResponseTacticalActionsMajor AcquisitionExampleTypes of Competitive ActionsStrategic ActionsPrice cutExampleSignificant commitments of specific and distinctive organizational resourcesDifficult to implementDifficult to reverseRelatively easy to implementRelatively easy to reverseUndertaken to “fine tune” strategyGauging the Likelihood of ResponseActor’s ReputationMarket leaders are more likely to be copied“Risk taking” firms are less likely to be copied“Price Predators” are less likely to be copied Type of Competitive Action -Tactical or StrategicEasier to respond toRequire fewer resources to mount a responseMarket DependenceCompetitor ResourcesSmaller firms are more likely to respond to tactical actionsLimited resources may lead to alternatives such as Strategic AlliancesGauging the Likelihood of ResponseFirms that are more dependent on a single industry are more likely to respond than are diversified firmsIndustry dependent firms will likely respond to either strategic or tactical actionsRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseRelative SizeQualityInnovationSpeedAbility for Action and ResponseModel of Interfirm Rivalry:Likelihood of Attack and ResponseRelative SizeFirm size can have opposing effects on competitive dynamicsQualitySpeedLarge firms may exert market power over rivals and erect barriers to entry against smaller competitorsHowever, smaller competitors may be more nimble and innovativeAbility for Action and ResponseRelative SizeInnovationModel of Interfirm Rivalry:Likelihood of Attack and Response“Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”-- Herb Kelleher, CEO, Southwest AirlinesRelative SizeQualityInnovationSpeedQuick response is crucial to both the first mover and the fast second moverAbility for Action and ResponseModel of Interfirm Rivalry:Likelihood of Attack and ResponseConsistent innovation is required for market leadership in many dynamic industries Ability for Action and ResponseRelative SizeQualityInnovationSpeedModel of Interfirm Rivalry:Likelihood of Attack and ResponseExceeding customer expectations is a necessity to compete in the 21st centuryAbility for Action and ResponseRelative SizeQualityInnovationSpeedModel of Interfirm Rivalry:Likelihood of Attack and ResponseQuality Dimensions of Goods & ServicesProduct Quality Dimensions:Perceived quality Subjective assessment of characteristics (product image)Performance Operating characteristicsFeatures Important special characteristicsFlexibility Meeting operating specifications over timeDurability Amount of use before performance deterioratesConformance Match with pre-established standardsServiceability Ease and speed of repair or normal serviceAesthetics How a product looks and feelsQuality Dimensions of Goods & ServicesService Quality Dimensions:Timeliness Performed in promised period of timeCourtesy Performed cheerfullyConsistency Giving all customers similar experiencesConvenience Accessibility to customersCompleteness Fully serviced, as requiredAccuracy Performed correctly each timeRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseOutcomesEvolutionary ActionsGrowth-Oriented Actions Market-Power ActionsEvolutionary OutcomesSustained CompetitiveCompetitive Market TypesSlow, Standard or Fast CycleCompetitive OutcomesAdvantageTemporary AdvantageModel of Interfirm Rivalry:Likelihood of Attack and ResponseSlow cycle markets are frequently shielded by monopoly power or very strong brand loyaltiesThis market outcome and lack of interfirm rivalry may lead to sustained competitive advantageSustained CompetitiveCompetitive Market TypesSlow, Standard or Fast CycleCompetitive OutcomesAdvantageTemporary AdvantageOutcomesEvolutionary ActionsGrowth-Oriented Actions Market-Power ActionsEvolutionary OutcomesSustained competitive advantage is a possible outcome in this instanceStandard cycle markets often lead to highly competitive pressures despite world class productsFirms with multimarket competition may dampen rivalry somewhatSustained CompetitiveCompetitive Market TypesSlow, Standard or Fast CycleCompetitive OutcomesAdvantageTemporary AdvantageModel of Interfirm Rivalry:Likelihood of Attack and ResponseSustained CompetitiveOutcomesCompetitive Market TypesSlow, Standard or Fast CycleCompetitive OutcomesAdvantageTemporary AdvantageEvolutionary ActionsGrowth-Oriented Actions Market-Power ActionsFast cycle markets are intensely dynamic and a first mover advantage is often unsustainableEvolutionary OutcomesFirms may cannibalize older generation products while introducing new innovative premium productsSustainable competitive advantage is unilkelyModel of Interfirm Rivalry:Likelihood of Attack and ResponseTime (years)10LaunchExploitationCounterattackGradual Erosion of a Sustained Competitive Advantage Returns from a Sustained Competitive AdvantageSome Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the InitiativeDisrupting the Status QuoIdentify new opportuntites to serve the customer by shifting the rules of competition through speed and varietyCreating Temporary AdvantageUse superior knowledge of the customer, technology and the future to enhance customer orientation and empower workersSeizing the InitiativeMove aggressively into new areas of competition to create new advantage and undermine a competitor’s old advantage1234Sustaining the MomentumTake several actions in a row in order to seize the initiative and create momentum to develop new advantagesTime (years)10LaunchExploitationCounterattackReturns from a Sustained Competitive AdvantageObtaining Temporary Advantages to Create Sustained Advantage515Time (years)10LaunchExploitationCounterattackReturns from a Sustained Competitive Advantage515Firm has already moved on to Advantage No. 2Obtaining Temporary Advantages to Create Sustained AdvantageTime (years)10LaunchExploitationCounterattackReturns from a Sustained Competitive Advantage515Firm continues to move on to the next AdvantageObtaining Temporary Advantages to Create Sustained AdvantageStrategies may be deter-mined by the life cycle of the industryYounger firms and emerging industries are generally characterized by entrepreneurial actionsGrowth-oriented and Market-power strategies dominate established or mature industriesSustained CompetitiveOutcomesCompetitive Market TypesSlow, Standard or Fast CycleCompetitive OutcomesAdvantageTemporary AdvantageEvolutionary ActionsGrowth-Oriented Actions Market-Power ActionsEvolutionary OutcomesModel of Interfirm Rivalry:Likelihood of Attack and ResponseRelative SizeSpeedInnovationQualityAbility for Action and ResponseOutcomesDrivers of Competitive BehaviorAwarenessMotivationCapabilityCompetitor AnalysisMarketCommonalityResourceSimilarityInterfirm Rivalry:Attack & ResponseLikelihood of AttackFirst Mover IncentivesLikelihood of ResponseType of CompetitiveActionDependence on theMarketResource AvailabilityActor’s ReputationCompetitiveSlow, Standardor Fast CycleMarket TypesCompetitiveSustainedOutcomesCompetitiveAdvantageTemporaryAdvantageEvolutionaryOutcomesEntrepreneurialor Market-PowerGrowth-OrientedActionsFeedbackModel of Interfirm Rivalry:Likelihood of Attack and ResponseAn Action-Based Model of the Industry Life CycleKey TaskExploiting Open Niches (Blind Spots) and Competitive UncertaintyEntrepreneurial ActionsKey TaskGrowth-OrientedActionsExploiting Factors of ProductionKey TaskMarket-PowerActionsExploiting Market PositionFirm Resource & Market StrengthEmerging StageGrowth StageMature StageTime