Chapter 5

Competitive Dynamics
 Factors Leading to More Complex Rivalry
Pratidanditā

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) European Economic Community
General Agreement on Tariffs and Trade North American Free Trade Agreement
 set of actions and responses taken by all firms
that are competitors within a particular market.

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

Competitive Rivalry a measure of the extent of competition

among existing firms

Exists when two or more firms jockey with one another in

the pursuit of better market position
When a firm takes a strategic firm's strategies are not static but
action, such as introducing a
new product or lowering A firm’s constantly evolve in response to
the actions of its competitors.
prices, its competitors may strategic conduct is
respond in various ways, dynamic in nature
such as launching their own
products or matching the
price reduction.

Competitive
Actions taken by one Competitive responses lead to
firm elicit responses additional actions
from competitors Dynamics from the firm that
acted originally

The initial firm may then

need to adjust its
Over time, the ongoing Actions and responses strategy in response to
interaction between firms shape the competitive its competitors' actions,
shapes their competitive positions of each firm’s leading to a cycle of
positions and determines business level strategy actions and responses.
their success or failure.
 Model of Interfirm Rivalry:
Likelihood of Attack and Response

Drivers of
Competitive Outcomes
Behavior Ability for
Interfirm Rivalry: Action and
Attack & Response Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Quality Sustained
Type of Competitive Competitive
Competitor Action
Analysis Advantage
Actor’s Reputation
Temporary
Dependence on Advantage
Market theMarket
Commonality Resource Availability Evolutionary
Outcomes
Resource
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
 Drivers of
Competitive
Behavior
Do managers understand the
Awareness
Awareness key characteristics of
competitors?
Motivation

Capability Awareness is about how well companies understand

their relationship with competitors because they
share markets and resources. It helps them think
about the impact of their actions on both themselves
and their rivals. If a company isn't aware of this, it
might compete too hard, which can hurt everyone
involved.
 Motivation refers to a company’s willingness to take action or respond to a
competitor based on whether it sees potential gains or losses. Even if a company
knows about its competitors, it may not bother to compete if it thinks there’s no
benefit or if its position won’t be harmed by not reacting.

If a company decides not to compete, it saves its resources for other purposes,
like focusing on different rivals.

Drivers of Market commonality, or how much companies share the same markets,

Competitive
influences motivation. Companies are more likely to challenge a competitor with
whom they share fewer markets, because there’s less risk. When companies
compete in many shared markets, the stakes are higher. If one attacks, the other

Behavior will likely respond to defend its position, even in a different market. This back-and-
forth can cause both companies to lose focus and use resources they could have
used elsewhere. Because of the high risks when sharing many markets, a
company is almost certain to respond when attacked to protect its position.

Awareness
Does the firm have
Motivation appropriate incentives to
attack or respond?
Capability
 Ability refers to whether a company has the resources and
flexibility to respond to or attack a competitor. Even if a
company knows it shares markets with a competitor and wants
to respond, it might not be able to if it doesn’t have enough
resources, like money or skilled people.
Drivers of For example, smaller or newer companies may have great ideas
Competitive but lack the resources to take on larger competitors. Similarly,
foreign companies may struggle against local firms because
Behavior local firms have stronger connections with customers, suppliers,
and the government.

However, if two companies have similar resources, they also

Awareness have similar abilities to attack or defend. This means that before
making any move, one company should carefully consider the
response it might get from a similarly resourced competitor.
Motivation
Does the firm have the
Capability necessary resources to
attack or respond?
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for Action
Behavior Interfirm Rivalry: and Response
Attack & Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitor Competitive
Action Advantage
Analysis Actor’s Reputation
Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
Competitor
Analysis

Market Do firms compete with each other

Commonality in multiple markets?

Resource Market commonality means how much a company and its competitor are

Similarity
active in the same markets. If both companies are competing in a lot of
the same areas (like selling similar products in the same regions), they
have high market commonality. The more important these shared
markets are to both companies, the higher the competition.
 Multipoint competition is when companies compete in
many areas at the same time. Because of this, they are
less likely to fight hard in any one area, to avoid bigger
conflicts.
Competitor However, if one company makes a move, like an airline
Analysis lowering ticket prices, others will quickly respond by
doing the same to keep up.

Market Multipoint competition tends to

Commonality reduce competitive interactions, but
increases the likelihood of response
where interaction occurs
Resource
Similarity For example, airlines price flights
similarly but respond quickly when
competitors introduce promotional
prices
 Competitor
Analysis

Market
Commonality

Resource Do competitors possess similar types

Similarity or amounts of resources?

Resource similarity refers to how similar a company's resources (both physical and
non-physical) are to those of its competitor. If two companies have similar types and
amounts of resources (like equipment, technology, or skills), they will likely have
similar strengths and weaknesses. As a result, they may use similar strategies to
take advantage of opportunities in the market.
 Companies are less likely to attack a competitor if they think
that competitor will fight back.

When companies have similar resources, they are more

aware of each other's actions and competitive moves.
Competitor
On the other hand, if companies have very different
Analysis resources, they might be more willing to attack each other
because they believe they won't face a strong response.

Market
Commonality Firms are less inclined to attack a
firm that is likely to retaliate
Resource
Similarity
Firms with similar resources are
more likely to be aware of each
other’s competitive moves

Firms with dissimilar resources

are more likely to attack
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Behavior Ability for Action
Interfirm Rivalry: and Response
Attack & Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitor Competitive
Action Advantage
Analysis Actor’s Reputation
Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
Interfirm rivalry refers to the competition between different companies within the same industry. This rivalry can influence various aspects of business, including pricing, marketing strategies, product
development, and overall market dynamics. Here are some key points about interfirm rivalry:

1. **Competition for Market Share**: Companies compete for customers and market share, leading to strategies like price cuts, promotions, or new product launches.

2. **Response to Actions**: Firms closely monitor each other's actions. If one company lowers prices or introduces a new product, competitors may quickly respond to maintain their market position.

3. **Similar vs. Dissimilar Resources**: Companies with similar resources (like size or technology) tend to be more aware of each other's strategies and may avoid aggressive competition. In contrast,
companies with different resources might take more risks in attacking one another.

4. **Impact on Industry**: Intense rivalry can lead to innovation and improvements in

Interfirm Rivalry: quality, but it can also result in reduced profits for all companies involved if competition
becomes too aggressive.

5. **Factors Influencing Rivalry**: Elements like the number of competitors, market

growth, and barriers to entry can affect the level of rivalry in an industry.

Attack & Response Overall, interfirm rivalry shapes the competitive landscape and can significantly impact
business success.

Likelihood of
Likelihood ofAttack
Attack First Mover advantage can
be substantial
FirstMover
First Mover Incentives
Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
 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
 Second Mover

Firms that respond to a First Mover’s 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

 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 Whether a competitor is
Action likely to respond depends
Actor’s Reputation on several key factors
Dependence on the
Market
Resource Availability
 Types of Competitive Actions
Significant commitments of specific and
Strategic distinctive organizational resources
Actions
Difficult to implement
**Strategic Actions**: These are big
Difficult to reverse moves that require a lot of resources
and are hard to change once
implemented. For example, launching a
new product line or entering a new
Example Major Acquisition market.

Tactical Undertaken to “fine tune” strategy

Actions
Relatively easy to implement
Relatively easy to reverse
- **Tactical Actions**: These are smaller, more

Price cut
flexible moves that are easier to adjust. For
Example example, changing prices or running a promotion.
 Gauging the Likelihood of Response
Type of Competitive Action -Tactical or Strategic

Easier to respond to

Require fewer resources to mount a response

Actor’s 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

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
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Behavior Ability for Action
Interfirm Rivalry: and Response
Attack & Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitor Competitive
Action Advantage
Analysis Actor’s Reputation
Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
Ability for Action
and Response

Firm size can have opposing

effects on competitive dynamics
Relative Size

Speed

Innovation

Quality
Ability for
Large firms may exert market power
Action and over rivals and erect barriers to entry
Response against smaller competitors

Relative Size However, smaller competitors may

be more nimble and innovative
Speed
Innovation “Think and act big and we’ll get
smaller. Think and act small and
we’ll get bigger.”
Quality -- Herb Kelleher,
CEO, Southwest Airlines
Ability for Action
and Response

Relative Size Quick response is crucial

to both the first mover
Speed and the fast second
mover
Innovation

Quality
Ability for Action
and Response

Relative Size

Speed Consistent innovation is

required for market
Innovation leadership in many
dynamic industries
Quality
Ability for Action
and Response

Relative Size

Speed

Innovation
Exceeding customer
expectations is a necessity to
Quality compete in the 21st century
 Quality Dimensions of Goods & Services

Product Quality Dimensions:

Performance Operating characteristics

Features Important special characteristics
Flexibility Meeting operating specifications over time
Durability Amount of use before performance
deteriorates
Conformance Match with pre-established standards
Serviceability Ease and speed of repair or normal service
Aesthetics How a product looks and feels
Perceived quality Subjective assessment of characteristics
(product image)
Service Quality Dimensions:

Timeliness Performed in promised period of time

Courtesy Performed cheerfully

Consistency Giving all customers similar experiences

Convenience Accessibility to customers

Completeness Fully serviced, as required

Accuracy Performed correctly each time

 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Behavior Ability for Action
Interfirm Rivalry: and Response
Attack & Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitor Competitive
Action Advantage
Analysis Actor’s Reputation
Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
 Outcomes

Competitive Market Types Slow cycle markets are

frequently shielded by
Slow, Standard or Fast Cycle monopoly power or very strong
brand loyalties
Competitive Outcomes
Sustained Competitive
Advantage This market outcome and
Temporary Advantage lack of interfirm rivalry may
lead to sustained
Evolutionary Outcomes competitive advantage
Evolutionary Actions
Growth-Oriented Actions
Market-Power Actions
 Outcomes
Standard cycle markets
Competitive Market Types often lead to highly
Slow, Standard or Fast Cycle competitive pressures
despite world class
Competitive Outcomes products
Sustained Competitive
Advantage Firms with multimarket
Temporary Advantage competition may dampen
rivalry somewhat
Evolutionary Outcomes
Evolutionary Actions Sustained competitive
Growth-Oriented Actions advantage is a possible
Market-Power Actions outcome in this instance
Outcomes
Fast cycle markets are
Competitive Market Types
intensely dynamic, and a first
Slow, Standard or Fast Cycle mover advantage is often
unsustainable
Competitive Outcomes
Sustained Competitive Firms may cannibalize older
Advantage generation products while
Temporary Advantage introducing new innovative
premium products
Evolutionary Outcomes

Evolutionary Actions Sustainable competitive

Growth-Oriented Actions advantage is unilkely
Market-Power Actions
 Gradual Erosion of a Sustained Competitive
Advantage
Returns from
a Sustained
Competitive
Advantage
Exploitation
Counterattack

Launch

Time (years)
10
Some Firms Maintain Competitive Advantage
in Fast-Cycle Markets by Seizing the Initiative

Disrupting the Status Quo

Identify new opportuntites to serve the customer by shifting the rules
of competition through speed and variety

Creating Temporary Advantage

Use superior knowledge of the customer, technology and the future to
enhance customer orientation and empower workers

Seizing the Initiative

Move aggressively into new areas of competition to create new
advantage and undermine a competitor’s old advantage

Sustaining the Momentum

Take several actions in a row in order to seize the initiative and create
momentum to develop new advantages
 Obtaining Temporary Advantages
to Create Sustained Advantage

Returns from
a Sustained
Competitive
Advantage

Exploitation Counterattack
Launch

5 Time (years) 10 15
Returns from
a Sustained
Competitive
Advantage Firm has already moved
on to Advantage No. 2

Exploitation
Counterattack
Launch

5 Time (years) 10 15
Returns from
a Sustained
Competitive
Advantage Firm continues to move
on to the next
Advantage

Exploitation Counterattack
Launch

5 Time (years) 10 15
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Outcomes

Competitive Market Types Strategies may be deter-mined

by the life cycle of the industry
Slow, Standard or Fast Cycle

Competitive Outcomes
Younger firms and emerging
Sustained Competitive industries are generally
Advantage characterized by entrepreneurial
Temporary Advantage actions

Evolutionary Outcomes
Growth-oriented and Market-
Evolutionary Actions power strategies dominate
Growth-Oriented Actions Market- established or mature
Power Actions industries
 Drivers of
Competitive Outcomes
Behavior Ability for Action
Interfirm Rivalry: and Response
Attack & Response Competitive
Awareness Market Types
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitor Competitive
Action Advantage
Analysis Actor’s Reputation
Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Actions
 Action-Based Model of the Industry Life Cycle

Key Task Key Task Key Task

Exploiting Open Exploiting Factors Exploiting Market

Niches (Blind Spots) of Production Position
Firm Resource and Competitive
& Uncertainty
Market Strength Market-Power
Actions

Growth-Oriented
Actions
Entrepreneurial
Actions

Emerging Stage Growth Stage Mature Stage

Time