CHAPTER 5

COMPETITIVE DYNAMICS

DR. SATIRENJIT K JOHL

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KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the
strategic management knowledge needed to:
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.

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KNOWLEDGE OBJECTIVES (CONTD)
Studying this chapter should provide you with the
strategic management knowledge needed to:
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.

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 THE
STRATEGIC
MANAGEMENT
PROCESS

Figure 1.1
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RESERVED. 54
DEFINITIONS

Competitors
Firms operating in the same market, offering
similar products and targeting similar customers
Competitive rivalry
The ongoing set of competitive actions and
responses occurring between competitors
Competitive rivalry influences an individual firms
ability to gain and sustain competitive advantages

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DEFINITIONS

Competitive behavior
The set of competitive actions and competitive
responses the firm takes to build or defend its
competitive advantages and to improve its market
position
Competitive dynamics
The total set of actions and responses taken by all firms
competing within a market
Multimarket competition
Firms competing against each other in several product
or geographic markets

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 FROM COMPETITORS TO COMPETITIVE DYNAMICS

SOURCE: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry:
Toward a theoretical integration, Academy of Management Review, 21: 100134. Figure 5.1
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 COMPETITIVE RIVALRYS EFFECT ON STRATEGY

Success of a strategy is determined by:

The firms initial competitive actions
How well it anticipates competitors responses to them
How well the firm anticipates and responds to its competitors
initial actions
Competitive rivalry:
Affects all types of strategies
Has the strongest influence on the firms business-level strategy or
strategies

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 A MODEL OF COMPETITIVE RIVALRY

Firms are mutually interdependent

A firms competitive actions have noticeable effects on its
competitors
A firms competitive actions elicit competitive responses
from its competitors
Competitors feel each others actions and responses
Marketplace success is a function of both individual
strategies and the consequences of their use

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 A MODEL OF COMPETITIVE RIVALRY

SOURCE: Adapted from M.-J. Chen, 1996, Competitor

analysis and interfirm rivalry:Toward a theoretical integration,
Academy of Management Review, 21: 100134. Figure 5.2
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COMPETITOR ANALYSIS

Competitor analysis is used to help a firm

understand its competitors
The firm studies competitors future
objectives, current strategies, assumptions,
and capabilities
With the analysis, a firm is better able to
predict competitors behaviors when forming
its competitive actions and responses

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 MARKET COMMONALITY
Market commonality is concerned with:
The number of markets with which a firm and a competitor
are jointly involved
The degree of importance of the individual markets to each
competitor
Firms competing against one another in several or many
markets engage in multimarket competition
A firm with greater multimarket contact is less likely to
initiate an attack, but more likely to respond aggressively
when attacked

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 RESOURCE SIMILARITY
Resource Similarity
How comparable the firms tangible and intangible resources
are to a competitors in terms of both types and amounts
Firms with similar types and amounts of resources are likely to:
Have similar strengths and weaknesses
Use similar strategies

Assessing resource similarity can be difficult if critical

resources are intangible rather than tangible

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A FRAMEWORK OF COMPETITOR ANALYSIS

Figure 5.3
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DRIVERS OF COMPETITIVE BEHAVIOR

Awareness Awareness is
the extent to which
competitors recognize the
degree of their mutual
interdependence that results
from:
Market commonality
Resource similarity

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DRIVERS OF COMPETITIVE BEHAVIOR (CONTD)

Awareness Motivation concerns

the firms incentive to take
action
Motivation
or to respond to a
competitors attack
and relates to perceived
gains and losses

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DRIVERS OF COMPETITIVE BEHAVIOR (CONTD)

Awareness Ability relates to

each firms resources
the flexibility these
Motivation
resources provide
Without available resources
Ability the firm lacks the ability to
attack a competitor
respond to the competitors
actions

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DRIVERS OF COMPETITIVE BEHAVIOR (CONTD)

A firm is more likely to attack the rival with

Awareness whom it has low market commonality than
the one with whom it competes in multiple
markets
Motivation 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. Also,
Ability because of the high stakes of competition
under market commonality, there is a high
probability that the attacked firm will
Market respond to its competitors action in an
Commonality effort to protect its position in one or more
markets

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DRIVERS OF COMPETITIVE BEHAVIOR (CONTD)

The greater the resource imbalance

Awareness between the acting firm and
competitors or potential responders,
the greater will be the delay in
Motivation response by the firm with a resource
disadvantage
When facing competitors with greater
Ability resources or more attractive market
positions, firms should eventually
respond, no matter how challenging
Market the response. Choosing not to
Commonality respond ultimately result in failure.

Resource
Dissimilarity
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 COMPETITIVE RIVALRY

Competitive action
A strategic or tactical action the firm takes to build
or defend its competitive advantages or improve its
market position
Competitive response
A strategic or tactical action the firm takes to
counter the effects of a competitors competitive
action

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COMPETITIVE RIVARLY: STRATEGIC AND TACTICAL
ACTIONS
Firms use both strategic & tactical actions in forming their
competitive actions & competitive response in course of
engaging in competitive rivalry.
Strategic action or a strategic response
A market-based move that involves a significant commitment
of organizational resources and is difficult to implement and
reverse
Tactical action or a tactical response
A market-based move that is taken to fine-tune a strategy:
Usually involves fewer resources
Is relatively easy to implement and reverse

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COMPETITIVE RIVARLY: STRATEGIC AND TACTICAL
ACTIONS
Exp: Hyundai Motor expenditure on R&D & plant expansion to
support firms desire to be the largest car maker by 2010 & sell
one million units annually in U.S are strategic actions. Tactical
actions are easily reversed: exp pricing decisions

Exp: Pepsi & Coca-cola compete in bottled water mrkt

create awareness of one another as they compete in bottled
mrkt. Also, compete in milk based products. Their strategic
focus to expand beyond soda into healthier beverages. Coco
Cola introduced Swerve in July 2003. Also Pepsi offer
chocolate dairy drink (Love Bus Brew). The degree of their
mrkt commonality & resource similarity & are engage in
multimrkt competition. Both will continue to monitor each
others competitive action & responses in multiple product
as part of their competitive rivalry.
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FACTORS AFFECTING LIKELIHOOD OF ATTACK

First movers allocate funds for:

First Mover Product innovation and development
Aggressive advertising
Advanced research and development
First movers can gain:
The loyalty of customers who may become
committed to the firms goods or services
Market share that can be difficult for
competitors to take during future competitive
rivalry
General evidences find it has greater survival
rates compared to the later mrkt entrants.

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

First Mover Second mover responds to the first

movers competitive action, typically
through imitation:
Second Mover Studies customers reactions to product
innovations
Tries to find any mistakes the first mover
made, and avoid them
Can avoid both the mistakes and the
huge spending of the first-movers
May develop more efficient processes
and technologies

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

Late mover responds to a

First Mover competitive action only after
considerable time has elapsed
Second Mover Any success achieved will be slow in
coming and much less than that
achieved by first and second movers
Late Mover Late movers competitive action
allows it to earn only average
returns and delays its
understanding of how to create
value for customers

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

First Mover Small firms are more likely:

To launch competitive actions
To be quicker in doing so
Second Mover Small firms are perceived as:
Nimble(quick) and flexible competitors
Relying on speed and surprise to defend
Late Mover competitive advantages or develop new
ones while engaged in competitive rivalry
Having the flexibility needed to launch a
Organizational greater variety of competitive actions
Size

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

Large firms are likely to initiate more

First Mover competitive actions as well as strategic
actions during a given time period
Second Mover Large organizations commonly have the
slack resources required to launch a
larger number of total competitive
Late Mover actions
Think and act big and well get smaller.
Think and act small and well get
Organizational
bigger.
Size
Herb Kelleher
Former CEO, Southwest Airlines

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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

First Mover
Quality exists when the firms
goods or services meet or
Second Mover exceed customers
expectations
Late Mover Product quality dimensions
include:
Organizational Performance Conformance
Size Features Serviceability
Flexibility Aesthetics
Quality
(Product) Durability Perceived
quality
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 QUALITY DIMENSIONS OF GOODS
Product Quality Dimensions
1. PerformanceOperating characteristics
2. FeaturesImportant special characteristics
3. FlexibilityMeeting operating specifications over some
period of time
4. DurabilityAmount of use before performance deteriorates
5. ConformanceMatch with pre-established standards
6. ServiceabilityEase and speed of repair
7. AestheticsHow a product looks and feels
8. Perceived qualitySubjective assessment of characteristics
(product image)

SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St.
Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The Free
Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
Table 5.1a
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FACTORS AFFECTING LIKELIHOOD OF ATTACK (CONTD)

First Mover
Service quality dimensions
include:
Second Mover
Timeliness
Courtesy
Late Mover Consistency
Convenience
Organizational Completeness
Size
Accuracy
Quality
(Product)

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 QUALITY DIMENSIONS OF SERVICES

Service Quality Dimensions

1. TimelinessPerformed in the promised period of time
2. CourtesyPerformed cheerfully
3. ConsistencyGiving all customers similar experiences each time
4. ConvenienceAccessibility to customers
5. CompletenessFully serviced, as required
6. AccuracyPerformed correctly each time

SOURCES: Adapted from J.W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St.
Paul, MN:West Publishing Company; H.V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York:The Free
Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York:The Free Press.
Table 5.1b
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FACTORS AFFECTING LIKELIHOOD OF RESPONSE

Firms study three other factors to predict how a

competitor is likely to respond to competitive
actions:
Type of competitive action
Reputation
Market dependence

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FACTORS AFFECTING STRATEGIC RESPONSE

Type of Strategic actions receive strategic

Competitive responses
Action Strategic actions elicit fewer total competitive
responses
The time needed to implement and assess a
strategic action delays competitors responses
Tactical responses are taken to counter
the effects of tactical actions
Competitor likely will respond quickly to a
tactical actions

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FACTORS AFFECTING STRATEGIC RESPONSE (CONTD)

Type of An actor is the firm taking an action

Competitive or response
Action Reputation is the positive or
negative attribute ascribed by one
Actors rival to another based on past
Reputation competitive behavior
The firm studies responses that a
competitor has taken previously
when attacked to predict likely
responses

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FACTORS AFFECTING STRATEGIC RESPONSE (CONTD)

Type of Market dependence is the

Competitive extent to which a firms
Action revenues or profits are derived
from a particular market
Actors In general, firms can predict that
Reputation competitors with high market
dependence are likely to
Dependence respond strongly to attacks
on the market threatening their market
position

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COMPETITIVE DYNAMICS VERSUS RIVALRY

Competitive Competitive
Dynamics Rivalry
Ongoing actions and Ongoing actions and
responses taking responses taking
place between all place between an
firms competing individual firm and its
within a market for competitors for an
advantageous advantageous market
positions position

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COMPETITIVE DYNAMICS VERSUS RIVALRY
(CONTD)
Competitive Dynamics (All
firms)
Market speed (slow-cycle, fast-
cycle, and standard-cycle)
Effects of market speed on
actions and responses of all
competitors in the market
Competitive Rivalry
(Individual firms)
Market commonality and
resource similarity
Awareness, motivation and
ability
First mover incentives, size
and quality
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COMPETITIVE DYNAMICS
Competitive advantages are shielded
Slow-Cycle from imitation for long periods of
Markets time and imitation is costly
Competitive advantages are
sustainable in slow-cycle markets
All firms concentrate on competitive
actions and responses to protect,
maintain and extend proprietary
competitive advantage

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 GRADUAL EROSION OF A SUSTAINED COMPETITIVE ADVANTAGE

SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics

by taking strategic initiative, Academy of Management Executive, 11(2): 111118. Figure 5.4
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COMPETITIVE DYNAMICS (CONTD)

Slow-Cycle The firms competitive advantages

Markets arent shielded from imitation
Imitation happens quickly and
somewhat inexpensively
Fast-Cycle
Markets Competitive advantages arent
sustainable
Competitors use reverse engineering to
quickly imitate or improve on the firms
products

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OBTAINING TEMPORARY ADVANTAGES TO CREATE
SUSTAINED ADVANTAGE

SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics

by taking strategic initiative, Academy of Management Executive, 11(2): 111118. Figure 5.5
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COMPETITIVE DYNAMICS (CONTD)

Moderate cost of imitation may shield

Slow-Cycle
Markets competitive advantages.
Competitive advantages are partially
sustainable if their quality is
Fast-Cycle continuously upgraded
Markets
Firms
Seek large market shares
Standard-Cycle Gain customer loyalty through brand names
Markets
Carefully control operations

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