4-Strategic Actions: Strategy

Formulation
Competitive Rivalry
and Competitive Dynamics

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The process by which a strategy is created is
referred to as a strategy formulation process

• Overview: Six content areas

– Competitors, competitive rivalry, competitive
behavior and competitive dynamics
– Market commonality and resource similarity: Building
blocks of competitor analysis
– Competitive actions: Awareness, motivation and ability
– Factors driving competitor’s competitive actions
– Competitor’s response to actions taken against it
– Competitive dynamics in slow, fast and standard-cycle
markets

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Introduction and Definitions

• Competitors
– Firms operating in the same market, offering similar
products and targeting similar customers
• Competitive Rivalry
– Ongoing set of competitive actions and competitive
responses occurring between competitors as they
contend with each other for an advantageous market
position
• Competitive Behavior
– Set of competitive actions and competitive responses
the firm takes to build or defend its competitive
advantages and to improve its market position

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Introduction and Definitions (Cont’d)

• Multimarket Competition
– Firms competing against one another in several product
or geographic markets
• Competitive Dynamics
– Total set of actions and responses of all firms competing
within a market

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From Competitors to Competitive Dynamics

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Model of Competitive Rivalry

• Model of Competitive Rivalry

– Over time firms take competitive actions/reactions
– Pattern shows firms are mutually interdependent
– Firm level rivalry is usually dynamic and complex
– Foundation for successfully building and using
capabilities and core competencies to gain an
advantageous market position
– Sequence of events (next slide) are the components of
this chapter

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A Model of Competitive Rivalry

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Competitor Analysis

• Competitor Analysis
– 2 components to assess: Market Commonality and
Resource Similarity
– The question: ‘To what extent are firms competitors’?
• Number of markets in which firms compete against each other
• Competitor: High market commonality & resource similarity
• I.e., Dell and HP are direct competitors
– Direct competition does not always imply intense rivalry

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Competitor Analysis

• Market Commonality
– Each industry composed of various markets which can
be subdivided into (segments)
– I.e., Financial industry
• Resource Similarity
– Extent to which firm’s tangible/intangible resources are
comparable to competitor’s in type and amount
• I.e., FedEx and UPS – both have efficient operations and focus
on cost reduction
• Combination of market commonality & resource
similarity indicate a firm’s direct competitors

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A Framework of Competitor Analysis

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Drivers of Competitive Actions/Responses

• Market commonality & resource similarity

influence three drivers (awareness, motivation and
ability) of competitive behavior
– Awareness
• Prerequisite to any competitive action
• Extent competitors recognize degree of mutual
interdependence that results from market commonality and
resource similarity
– Motivation
• Firm's incentive to take action, or to respond to a competitor's
attack, as it relates to perceived gains and losses
– Ability
• Firm's resources that allow competitive action and flexibility in
responsiveness

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Drivers of Competitive Actions/Responses

• Other influences include resource dissimilarity

– The greater the resource imbalance between acting
firm and competitors or potential responders, the
greater will be the delay in response
• i.e., Wal-Mart initially used cost leadership strategy to
compete only in small communities
• Created a logistics systems and extremely efficient purchasing
practices as competitive advantages

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Competitive Rivalry

• Important to understand competitor’s awareness,

motivation and ability in order to predict the
likelihood of an attack – study ‘likelihood of attack’
factors
• What are the strategic and tactical actions?
– Strategic actions/responses: market-based moves that
signify a significant commitment of organizational
resources to pursue a specific strategy
• Difficult to implement and reverse
– Tactical actions/responses: market-based moves that
involve fewer resources to fine-tune a strategy that is
already in place
• Easy to implement and reverse

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Competitive Rivalry

• What are the strategic and tactical actions?

– Competitive Action
• Strategic or tactical action firm takes to build or defend its
competitive advantages or improve its market position
– Competitive Response
• Strategic or tactical action the firm takes to counter effects of
a competitor's action
– Tactical Action (or Response)
• Market-based move the firm takes in order to fine-tune a
strategy

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Interfirm Rivalry: Likelihood of Attack

• Three possible ‘likelihood of response’ actions

– 1. First Mover Incentives
– 2. Organizational Size
– 3. Quality

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Interfirm Rivalry: Likelihood of Attack (Cont’d)

• Three possible ‘likelihood of response’ actions

– 1. First Mover Incentives
• Firm that takes an initial competitive action to build or to
defend its competitive advantages or to improve its market
position
• Must have readily available resources
– Slack – buffer or cushion provided by actual or obtainable resources not
currently used by an organization, resources in excess of the minimum
needed to produce a given level of output

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Interfirm Rivalry: Likelihood of Attack (Cont’d)

• Three possible ‘likelihood of response’ actions (Cont’d)

– 1. First Mover Incentives

• Often builds upon a strategic foundation of superior research
and development skills
• Tends to be aggressive and willing to experiment with
innovation
• Tends to take higher, yet reasonable, risks
• Needs to have liquid resources (slack) that can be quickly
allocated to support actions
• Benefits can be substantial, but remember the learning curve!

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Interfirm Rivalry: Likelihood of Attack (Cont’d)

• Three possible ‘likelihood of response’ actions (Cont’d)

– 1. First Mover Incentives: Responses to

• Second Mover
– Responds to first mover, typically through imitation
– Is more cautious than first movers
– Tends to study customer reactions to product innovations
– Tends to learn from the mistakes of first movers, reducing its risks
– Takes advantage of time to develop processes and technologies that are
more efficient than first movers, reducing its costs
– Will not benefit from first mover advantages, lowering potential returns
• Late Mover
– Responds to market opportunities only after considerable time has
elapsed since first and second movers have taken action
– Has substantially reduced risks and returns

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Interfirm Rivalry: Likelihood of Attack (Cont’d)

• Three possible ‘likelihood of response’ actions (Cont’d)

– 2. Organizational Size
• Small firms
– Act as nimble(agile) and flexible competitors
– Rely on speed and surprise to defend their competitive advantage
– Have greater variety of competitive behavior options available
• Large firms
– Often have greater slack
– Have greater likelihood to initiate competitive and strategic actions
over time
– Tend to rely on a limited variety of competitive actions, which can
ultimately reduce their competitive success

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Interfirm Rivalry: Likelihood of Attack (Cont’d)

• Three possible ‘likelihood of response’ actions (Cont’d)

– 3. Quality
• Customer perception that the firm's goods or services perform
in ways that are important to customers, meeting or exceeding
their expectations

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Interfirm Rivalry: Likelihood of Response

• Additional factors affect the likelihood a firm will

competitively respond to a competitor’s actions:
– 1. Types and effectiveness of the competitive action
– 2. Actor’s Reputation
• Actor: Firm taking an action or response (in the context of
competitive rivalry)
• Reputation: positive or negative attribute ascribed by one rival
to another based on past competitive behavior
– 3. Dependence on the Market
• Extent to which a firm's revenues or profits are derived from a
particular market
• Finally, if the action significantly strengthens or
weakens the firm's competitive position

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Competitive Dynamics: 3 Market Cycles

• 1. Slow-Cycle Markets
– Markets in which the firm's competitive advantages are
shielded from imitation for long periods of time, and in
which imitation is costly
– Build a one-of-a-kind competitive advantage which
creates sustainability (I.e., proprietary and difficult for
competitors to understand)
– Once a proprietary advantage is developed, competitive
behavior should be oriented to protecting,
maintaining, and extending that advantage
– Organizational structure should be used to
effectively support strategic efforts

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 Gradual Erosion of a Sustained Competitive
Advantage

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Competitive Dynamics: 3 Market Cycles
(Cont’d)

• 2. Fast-Cycle Markets
– Markets in which the firm's capabilities that
contribute to competitive advantages are not
shielded from imitation and where imitation is
often rapid and inexpensive
– Focus: learning how to rapidly and continuously
develop new competitive advantages that are
superior to those they replace (creating innovation)
– Avoid loyalty to any one product, possibly cannibalizing
their own current products to launch new ones
before competitors learn how to do so through successful
imitation
– Continually try to move on to another temporary
competitive advantage before competitors can respond to
the first one

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 Developing Temporary Advantages to Create
Sustained Advantage

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Competitive Dynamics: 3 Market Cycles
(Cont’d)

• 3. Standard-Cycle Markets
– Markets where firm’s competitive advantages are
moderately shielded from imitation and where
imitation is moderately costly
– Competitive advantages partially sustained as
quality is continuously upgraded
– Seek to serve many customers and gain a large market
share
– Gain brand loyalty through brand names
– Careful operational control / manage a consistent
experience for the customer

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