CHAPTER 5

The Competitive Nature of

STRATEGIC Strategy
ACTIONS:
STRATEGY
FORMULATION
Strategic Management
Management of Strategy
Competitiveness and Globalization:
Concepts
Concepts and Cases and Cases Seventh edition
PowerPoint Presentation by Charlie Cook
The University of West Alabama
© 2007 Thomson/South-Western.
All rights reserved. Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
KNOWLEDGE OBJECTIVES

Studying this chapter should provide you with the strategic

management knowledge needed to:
1. Define competitors, competitive rivalry, competitive behavior, and
competitive dynamics.
2. Describe market commonality and resource similarity as the building
blocks of a competitor analysis.
3. Explain awareness, motivation, and ability as drivers of competitive
behavior.
4. Discuss factors affecting the likelihood a competitor will take
competitive actions.
5. Discuss factors affecting the likelihood a competitor will respond to
actions taken against it.
6. Explain competitive dynamics in slow-cycle, fast-cycle, and standard-
cycle markets.

© 2007 Thomson/South-Western. All rights reserved. 5–2

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 firm’s
ability to gain and sustain competitive advantages.

© 2007 Thomson/South-Western. All rights reserved. 5–3

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.
• Multimarket Competition
 Firms competing against each other in several
product or geographic markets.
• Competitive Dynamics
 The total set of actions and responses taken by all
firms competing within a market.

© 2007 Thomson/South-Western. All rights reserved. 5–4

From Competitors to Competitive Dynamics

Competitors Why? • To gain an advantageous

market position
Engage
in Competitive
Rivalry
• Competitive Behavior
•Competitive actions
How? •Competitive responses
What
Results? What Results?

Competitive Dynamics
Competitive actions and responses taken
by all firms competing in a market

© 2007 Thomson/South-Western. All rights reserved. 5–5

 Figure 5.1 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: 100–134.
© 2007 Thomson/South-Western. All rights reserved. 5–6
Competitive Rivalry’s Effect on Strategy
• Success of a strategy is determined by:
 The firm’s 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 firm’s business-
level strategy or strategies.

© 2007 Thomson/South-Western. All rights reserved. 5–7

A Model of Competitive Rivalry
• Firms are mutually interdependent
 A firm’s competitive actions have noticeable effects
on its competitors.
 A firm’s competitive actions elicit competitive
responses from its competitors.
 Competitors feel each other’s actions and responses.
• Marketplace success is a function of both
individual strategies and the consequences of
their use.

© 2007 Thomson/South-Western. All rights reserved. 5–8

A Model of Competitive Rivalry

Competitive Analysis Drivers of Competitive

• Market commonality Behavior
• Resource similarity • Awareness
• Motivation
• Ability

Feedback
Interfirm Rivalry
• Likelihood of Attack
Outcomes • First-mover incentives
• Organizational size
• Market position
• Quality
• Financial
• Likelihood of Response
performance • Type of competitive action
• Reputation
• Market dependence

© 2007 Thomson/South-Western. All rights reserved. 5–9

 FIGURE 5.2 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: 100–134.
© 2007 Thomson/South-Western. All rights reserved. 5–10
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.

© 2007 Thomson/South-Western. All rights reserved. 5–11

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 more respond
aggressively when attacked.

© 2007 Thomson/South-Western. All rights reserved. 5–12

Resource Similarity
• Resource Similarity
 How comparable the firm’s tangible and intangible
resources are to a competitor’s 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.

© 2007 Thomson/South-Western. All rights reserved. 5–13

 FIGURE 5.3 A Framework of Competitor Analysis

Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry:
Toward a theoretical integration, Academy of Management Review, 21: 100–134.
© 2007 Thomson/South-Western. All rights reserved. 5–14
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

© 2007 Thomson/South-Western. All rights reserved. 5–15

Drivers of Competitive Behavior (cont’d)

Awareness • Motivation concerns

 the firm’s incentive to take
action
Motivation  or to respond to a
competitor’s attack
 and relates to perceived
gains and losses

© 2007 Thomson/South-Western. All rights reserved. 5–16

Drivers of Competitive Behavior (cont’d)

Awareness • Ability relates to

 each firm’s resources
 the flexibility these
Motivation resources provide
• Without available
Ability resources the firm lacks
the ability to
 attack a competitor
 respond to the competitor’s
actions

© 2007 Thomson/South-Western. All rights reserved. 5–17

Drivers of Competitive Behavior (cont’d)

Awareness • A firm is more likely to attack

the rival with whom it has low
market commonality than the
Motivation one with whom it competes in
multiple markets.
• Given the strong competition
Ability under market commonality, it is
likely that the attacked firm will
Market respond to its competitor’s
Commonality action in an effort to protect its
position in one or more
markets.

© 2007 Thomson/South-Western. All rights reserved. 5–18

Drivers of Competitive Behavior (cont’d)

Awareness
• The greater the resource imbalance
between the acting firm and
Motivation competitors or potential responders,
the greater will be the delay in
response by the firm with a
Ability resource disadvantage.
• When facing competitors with
Market greater resources or more attractive
Commonality market positions, firms should
eventually respond, no matter how
Resource challenging the response.
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 competitor’s competitive action.

© 2007 Thomson/South-Western. All rights reserved. 5–20

Strategic and Tactical Actions
• Strategic Action (or Response)
 A market-based move that involves a significant
commitment of organizational resources and is
difficult to implement and reverse.

• Tactical Action (or Response)

 A market-based move that is taken to fine-tune a
strategy:
• Usually involves fewer resources.
• Is relatively easy to implement and reverse.

© 2007 Thomson/South-Western. All rights reserved. 5–21

Factors Affecting Likelihood of Attack
First-Mover • First movers allocate funds for:
Incentives  Product innovation and
development
 Aggressive advertising
First Mover
A firm that takes an  Advanced research and
initial competitive action development
in order to build or • First movers can gain:
defend its competitive
advantages or to  The loyalty of customers who may
improve its market become committed to the firm’s
position. goods or services.
 Market share that can be difficult
for competitors to take during future
competitive rivalry.

© 2007 Thomson/South-Western. All rights reserved. 5–22

Factors Affecting Likelihood of Attack (cont’d)

First Mover • Second mover responds to the first

mover’s competitive action, typically
through imitation:
Second Mover
 Studies customers’ reactions to
Incentives
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.

© 2007 Thomson/South-Western. All rights reserved. 5–23

Factors Affecting Likelihood of Attack (cont’d)

First Mover • Late mover responds to a

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
Late Mover movers.
• Late mover’s competitive action
allows it to earn only average
returns and delays its
understanding of how to create
value for customers.

© 2007 Thomson/South-Western. All rights reserved. 5–24

Factors Affecting Likelihood of Attack (cont’d)

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 and flexible competitors
Late Mover  Relying on speed and surprise to
defend competitive advantages or
develop new ones while engaged in
Organizational competitive rivalry.
Size- Small  Having the flexibility needed to
launch a greater variety of
competitive actions.

© 2007 Thomson/South-Western. All rights reserved. 5–25

Factors Affecting Likelihood of Attack (cont’d)

First Mover • Large firms are likely to initiate more

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

© 2007 Thomson/South-Western. All rights reserved. 5–26

Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Quality exists when the firm’s
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

© 2007 Thomson/South-Western. All rights reserved. 5–27

Table 5.1 Quality Dimensions of Goods and Services

Product Quality Dimensions

1. Performance—Operating characteristics
2. Features—Important special characteristics
3. Flexibility—Meeting operating specifications over some
period of time
4. Durability—Amount of use before performance deteriorates
5. Conformance—Match with preestablished standards
6. Serviceability—Ease and speed of repair
7. Aesthetics—How a product looks and feels
8. Perceived quality—Subjective 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.
© 2007 Thomson/South-Western. All rights reserved. 5–28
Factors Affecting Likelihood of Attack (cont’d)

First Mover

Second Mover • Service quality dimensions

include:
Late Mover  Timeliness
 Courtesy
Organizational  Consistency
Size  Convenience
 Completeness
Quality
(Service)  Accuracy

© 2007 Thomson/South-Western. All rights reserved. 5–29

Table 5.1 Quality Dimensions of Goods and Services (cont’d)

Service Quality Dimensions

1. Timeliness—Performed in the promised period of time
2. Courtesy—Performed cheerfully
3. Consistency—Giving all customers similar experiences each time
4. Convenience—Accessibility to customers
5. Completeness—Fully serviced, as required
6. Accuracy—Performed 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.
© 2007 Thomson/South-Western. All rights reserved. 5–30
Likelihood of Response
• Responses to a competitor’s action are taken
when the action:
 Leads to better use of the competitor’s capabilities to
gain or produce stronger competitive advantages or
an improvement in its market position.
 Damages the firm’s ability to use its capabilities to
create or maintain an advantage.
 Makes the firm’s market position becomes less
defensible.

© 2007 Thomson/South-Western. All rights reserved. 5–31

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

© 2007 Thomson/South-Western. All rights reserved. 5–32

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
competitor’s responses.
• Tactical responses are taken to
counter the effects of tactical actions
 A competitor likely will respond quickly
to a tactical actions

© 2007 Thomson/South-Western. All rights reserved. 5–33

Factors Affecting Strategic Response (cont’d)
Type of • An actor is the firm taking an action
Competitive or response
Action
• Reputation is the positive or
negative attribute ascribed by one
Actor’s 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.

© 2007 Thomson/South-Western. All rights reserved. 5–34

Factors Affecting Strategic Response (cont’d)
Type of • Market dependence is the
Competitive extent to which a firm’s
Action
revenues or profits are derived
from a particular market.
Actor’s
Reputation • In general, firms can predict that
competitors with high market
dependence are likely to
Dependence respond strongly to attacks
on the market threatening their market
position.

© 2007 Thomson/South-Western. All rights reserved. 5–35

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

© 2007 Thomson/South-Western. All rights reserved. 5–36

Competitive Dynamics versus Rivalry (cont’d)
• Competitive Rivalry • Competitive Dynamics
(Individual firms) (All firms)
 Market commonality  Market speed (slow-
and resource similarity cycle, fast-cycle, and
standard-cycle
 Awareness, motivation
and ability  Effects of market
speed on actions and
 First mover incentives,
responses of all
size and quality
competitors in the
market

© 2007 Thomson/South-Western. All rights reserved. 5–37

Competitive Dynamics

Slow-Cycle • Competitive advantages are

Markets shielded from imitation for long
periods of 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.

© 2007 Thomson/South-Western. All rights reserved. 5–38

 FIGURE 5.4 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): 111–118.
© 2007 Thomson/South-Western. All rights reserved. 5–39
Competitive Dynamics (cont’d)
• The firm’s competitive advantages
Slow-Cycle
Markets aren’t shielded from imitation.
• Imitation happens quickly and
somewhat expensively
Fast-Cycle
Markets • Competitive advantages aren’t
sustainable.
 Competitors use reverse engineering
to quickly imitate or improve on the
firm’s products
• Non-proprietary technology is
diffused rapidly

© 2007 Thomson/South-Western. All rights reserved. 5–40

 FIGURE 5.5 Developing 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): 111–118.
© 2007 Thomson/South-Western. All rights reserved. 5–41
Competitive Dynamics (cont’d)

Slow-Cycle • Moderate cost of imitation may

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

© 2007 Thomson/South-Western. All rights reserved. 5–42