Organization & Strategy
Tools & Concepts III
March 2003
Contents
1
Competitive Dynamics: a framework for
competitor analysis
2
Anticipate Competitive Dynamics
Organization & Strategy
1
Competitive Dynamics
Objectives
The objective of a competitor analysis is to develop:
• a profile of the nature and the success of the likely strategy changes each competitor
might make
• each competitor’s probable response to the range of feasible strategic moves other firms
could initiate
• each competitor’s probable reaction to the array of industry changes and broader
environmental shifts that might occur
Questions ?
Who should we pick a fight with in the industry, and with what sequence of moves?
What is the meaning of that competitor’s strategic move and how seriously should we take
it?
What areas should we avoid because the competitor’s response will be emotional or
desperate?
Organization & Strategy
2
Competitive Dynamics
Diagnostic
Four diagnostic components to a competitor analysis:
• Future goals
• Current strategy
• Assumptions
• Capabilities
Organization & Strategy
3
Competitive Dynamics
Diagnostic: Which competitor to examine ?
Existing competitors
Potential competitors
• firms not in the industry but who could overcome entry barriers particularly cheaply
• firms for whom there is obvious synergy from being in the industry
• firms for whom competing in the industry is an obvious extension of the corporate
strategy
• customers or suppliers who may integrate backward or forward
Organization & Strategy
4
Competitive Dynamics
Diagnostic: Future Goals
1. What are the stated and unstated financial goals of the competitor?
2. What is the competitor’s attitude toward risks?
3. Does the competitor have economic or noneconomic organizational values or beliefs
which importantly affect its goals?
4. What is the organizational structure of the competitor?
5. What control and incentive systems are in place?
6. What accounting system and conventions are in place?
Organization & Strategy
5
Competitive Dynamics
Diagnostic: Future Goals
7. What kinds of managers comprise the leadership of the competitor?
8. How much apparent unanimity is there among management about future direction?
9. What is the composition of the board?
10. What contractual commitments may limit alternatives?
11. Are there any regulatory, antitrust, or other governmental or social constraints on
the behavior of the firm that will affect such things as its reaction to moves of a smaller
competitor or the probability that it will try to gain a larger market share?
Organization & Strategy
6
Competitive Dynamics
Diagnostic: Assumptions
1. What does the competitor appear to believe about its relative position - in cost,
product quality, technological sophistication, and other key aspects of its business - based
on its public statements, claims of management and sales force, and other indications?
2. Does the competitor have strong historical or emotional identification with particular
products or with particular functional policies, such as an approach to product design,
desire for product quality, manufacturing location, selling approach, and so on, which will
be strongly held?
3. Are there cultural, regional, or national differences that will affect the way in which
competitors perceive and assign significance to events?
4. Are there organizational values or canons which have been strongly institutionalized
and will affect the way events are viewed?
Organization & Strategy
7
Competitive Dynamics
Diagnostic: Assumptions
5. What does the competitor appear to believe about future demand for the product and
about the significance of industry trends?
6. What does the competitor appear to believe about the goals and capabilities of its
competitors?
7. Does the competitor seem to believe in industry conventional wisdom or historic
rules of thumb and common industry approaches that do not reflect new market
conditions?
8. A competitor’s assumptions may well be subtly influenced by, as well as reflected in, its
current strategy. It may see new industry events through filters defined by its past and
present circumstances, and this may not lead to objectivity.
Organization & Strategy
8
Competitive Dynamics
Diagnostic: Current Strategy
Develop statements of the current strategy of each competitor
• Use the Value Chain to define key activities in each functional area of the business and
how it seeks to interrelate the functions
• Define relative cost position
• Define relative willingness to pay
• Define type of competitive advantage and competitive scope
Organization & Strategy
9
Competitive Dynamics
Diagnostic: Capabilities
Core Capabilities
1. What are the competitor’s capabilities in each of the functional areas?
2. How does the competitor measure up to the test of consistency of its strategy?
3. Are there any probable changes in those capabilities as the competitor matures? Will
they increase or diminish over time?
Ability to grow
1. Will the competitor’s capabilities increase or diminish if it grows? In which areas?
2. What is the competitor’s capacity for growth in terms of people; skills, plant
capacity?
3. What is the competitor’s sustainable growth in financial terms?
Organization & Strategy
10
Competitive Dynamics
Diagnostic: Capabilities
Quick response capability
What is the competitor’s capacity to respond quickly to moves by others, or to mount
an immediate offensive? This will be determined by factors such as the following:
• uncommitted cash reserves
• reserve borrowing power
• excess capacity plant
• unintroduced but on-the-shelf new products
Organization & Strategy
11
Competitive Dynamics
Diagnostic: Capabilities
Ability to adapt to change
1. What are the competitor’s fixed versus variable costs? Its cost of unused capacity?
These will influence its probable responses to change.
2. What is the competitor’s ability to adapt and respond to changed conditions in each
functional area? For example, can the competitor adapt to
• competing on cost?
• managing more complex product lines?
• adding new products?
• competing on service?
• escalation in marketing activity?
Organization & Strategy
12
Competitive Dynamics
Diagnostic: Capabilities
Ability to adapt to change
3. Can the competitor respond to possible exogenous events such as
• a sustained high rate of inflation?
• technological changes which make obsolete existing plant?
• a recession?
• increases in wage rates?
• the most probable forms of government regulation that will affect the business?
4. Does the competitor have exit barriers which will tend to keep it from scaling down or
divesting its operations in the business?
5. Does the competitor share manufacturing facilities, a sales force, or personnel with
other units of its corporate parent? These may provide constraints to adaptation.
Organization & Strategy
13
Competitive Dynamics
Diagnostic: Capabilities
Staying Power
What is the ability of the competitor to sustain a protracted battle, which may put
pressure on earnings or cash flow? This will be a function of considerations such as the
following:
• cash reserves
• unanimity among management
• long time horizon in its financial goals
• lack of stock market pressure
Organization & Strategy
14
Competitive Dynamics
Putting the Four Components together
Future Goals
Current Strategy
Competitor’s response profile
Is the competitor satisfied with its current position?
What likely moves or strategy shifts will the competitor make?
Where is the competitor vulnerable?
What will provoke the greatest and most effective retaliation by the
competitor?
Assumptions
Capabilities
Organization & Strategy
15
Contents
1
Competitive Dynamics: a framework for
competitor analysis
2
Anticipate Competitive Dynamics
Organization & Strategy
16
Anticipate Competitive Dynamics
Imitation
Imitation is the diffusion of successful business models, defined in terms of resources
deployed and activities performed, across the population of firms.
Imitation diminishes the extent to which the originator of a successful business model
would be missed if it simply disappeared.
• Increase of capacity triggers additions by competitors
• Build one’s customer base tend to prompt competitors to defend or develop their own
• Product differentiation based on R&D is vulnerable
Organization & Strategy
17
Anticipate Competitive Dynamics
Barriers: economies of scale and scope
The most obvious barrier is that supplied by scale economies.
Committing itself to being so large that would-be imitators are held back by the fear that if
they matched its scale, supply might exceed demand by enough to make them rue the
effort
Scope economies are a second familiar form of size economies. They derive from the
advantages of being large in interrelated markets or segments.
• Share resources or activities across markets or segments
• bundling complementary goods or services
Organization & Strategy
18
Anticipate Competitive Dynamics
Barriers: learning/private information
Learning, if interpreted in terms of experience curve, is a third form of size economies.
To the extent that superior information can be kept private, imitation will be inhibited.
• Leakage through suppliers, customers, spinoffs, reverse-engineering and patent
documents
• Privacy is most achievable when information is tacit rather than specifiable, and
when it is collectively held by the organization, rather than consisting of something
that one or two parties can carry out the door.
Organization & Strategy
19
Anticipate Competitive Dynamics
Barriers: contracts, relationships and network externalities
It may be possible to enter into contracts with buyers or suppliers on better terms than
those available to late movers.
• Property rights and other formally contracts that are enforceable in court
• Control of physically unique resources
• Self-enforceability through reputation, switching costs, risk aversion or inertia
Network externalities exist when the attractions to buyers, suppliers, or complementors of
joining a network increase with its size. Very small advantages tend to snowball over
time, amplifying the advantage of the firm that control the largest network
Organization & Strategy
20
Anticipate Competitive Dynamics
Barriers: threats of retaliation
The certitude of retaliation may deter the imitation of a strategy even when its present
profitability is very high.
To be credible, it must be backed up by both the ability and the willingness to retaliate.
• maintenance of buffer stocks, liquidity position, excess capacity
• small positions in competitors’ other businesses that can be used to disrupt them,
• product upgrades that remain warehoused until competitors threaten to imitate existing
product offerings
The credibility can be enhanced by
• writing contracts that make retaliation more attractive than retreat
• binding oneself
• cultivating a reputation for retaliating against imitators
Organization & Strategy
21
Anticipate Competitive Dynamics
Barriers: time lags
Imitation usually requires a minimum time lag.
Attempts to use time ever more intensively may lead to diminishing returns.
Guesstimates of the average duration of time lags help underscore their importance.
• Marketing variables are the only one that can be changed significantly in less than
one year
• It takes two or three years to build the average manufacturing plant.
• Building a new distribution system or altering an existing one may take even longer.
• R&D tends to be on the order of four to six years
• Major changes in HR practices, building company reputations, and restructuring
corporate portfolio may stretch out over the better part of a decade
Organization & Strategy
22
Anticipate Competitive Dynamics
Barriers: strategic complexity and upgrading
The very complexity of a strategy may impede its imitation.
• Causal ambiguity
• Social complexity which may place certain resources beyond the ability of firms to
systematically manage and influence
• Complexity derives from the interconnectedness of the choices that firms make
Continuous upgrading of the organization’s own added value by driving a wider wedge
between customers’ willingness to pay and suppliers’ opportunity costs over time.
• Transform a business into a moving target
Organization & Strategy
23
Anticipate Competitive Dynamics
Substitution
Substitution is often seen as the threat that one product will displace another.
More broadly, it is the threat that a new business model will displace old ones.
It can pose an even deadlier threat to sustainability than imitation.
Triggers of substitution:
• drastic, cross-cutting technological change
• changes in input prices or availability or deregulation
• changes in customer preferences, previously unmet needs and changes in the customer
mix
Substitution starts out in small, initially unprofitable niches. The threats inspire mixed
motives on the part of the incumbents because they bring up the fears of selfcannibalization.
Organization & Strategy
24
Anticipate Competitive Dynamics
Responses: not responding - fighting - switching - recombining
The best response to substitution threats is sometimes no response at all.
Not all substitution threats are equally threatening or successful.
Fighting is a more commonly recognized response to substitution threats.
But, a subsitute at an early stage in its development may have more long-run improvement
potential than a mature business model.
Switching can be successful in fast-moving environments.
Recombining elements of one’s existing model with some of the new possibilities implicit
in substitution threats seems to represent a more successful response to substitution
threats than the wholesale switching of its business models. Recombination possibilities
expand the range of possible responses.
Organization & Strategy
25
Anticipate Competitive Dynamics
Responses: straddling - harvesting
Straddling involves continuing to operate traditional business models as well as adopting
new ones.
Straddling can be a valuable short-run expedient to preserve an organization’s options
even when it is not a viable long-run strategy.
Harvesting can be the correct response to a substitution threat when none of the other
strategies make sense.
Organization & Strategy
26
Anticipate Competitive Dynamics
Holdup
Holdup threatens to divert value to buyers, suppliers, complementors or other players in
the firm’s network
Holdup stems from cospecialization. As players cospecialize, their added values begin to
overlap, making it impossible for all participants to appropriate the full amount.
Organization & Strategy
27
Anticipate Competitive Dynamics
Responses: contracting - integrating - building bargaining power
Contracting relying on informal safeguards rather formal contracting can prevent holdup
problems from getting out of hand.
Totally comprehensive contracts enforceable at zero cost are generally impractical.
Integrating (vertical integration) may breed inflexibility, bureaucracy, incentive problems.
The decisions to integrate may need to be subject to a stiffer test than “ Can we do this
task internally more efficiently than via market mechanisms?”
Building bargaining power consists in creating competition on the other side of the divide
while retaining uniqueness (and added value) on one’s own side.
In addition, firms can seek to leverage that power by adopting a tough negotiating posture.
Organization & Strategy
28
Anticipate Competitive Dynamics
Responses: reducing asset-specificity - building relationships
Reducing asset-specificity is sometimes an independent lever that can be pulled to
reduce the extent of the holdup problem. It accompanies attempts to build up one’s
bargaining power.
In building relationships, both sides invest in expanding the total profit stream that would
be available to them only if they continued to work together. The broader conceptual point
is that if partners make substantial investments that are specific to each other and each are
accorded a large enough share of the joint gains from cooperation, such interorganizational
relationships may prove self-enforcing.
Organization & Strategy
29
Anticipate Competitive Dynamics
Responses: developing trust
The stability of cooperative relationships is enhanced when trust is high.
Trust depends in part on the cultural and historical context.
----> A range of options exist for dealing with holdup threats
Competition <------------------------------------------------------------------------ > Cooperation
Organization & Strategy
30
Anticipate Competitive Dynamics
Slack
Slack is an internal threat to appropriation of added value. Slack can be defined as the
extent to which the value appropriated by an organization falls short of the amount
potentially available to them.
It is a permanent suboptimization by an organization that dissipates appropriate added
value instead of passing it on to the owners, or even reduces its added value over time.
Organization & Strategy
31
Anticipate Competitive Dynamics
Responses: gathering information - monitoring behavior
Gathering information through benchmarking against other organizations, particularly
direct competitors, is useful in identifying slack.
Directly investigating the effects of changes in processes or behavior provides another way
to generate information about opportunities for improvement.
By monitoring behavior, the goal to catch inappropriate behavior before it occurs or to
decrease its attractiveness by increasing the probability of detection, backstopped by
penalties.
Organization & Strategy
32
Anticipate Competitive Dynamics
Responses: offering performance incentives - shaping norms
Even when monitoring behavior may be infeasible, it may be possible to reward good
behavior indirectly by rewarding good performance. Such an approach works best when
an individual’s behavior is tightly connected to the performance outcomes that are actually
observed.
A firm can also supplementing economic rewards and punishments with appeals to
norms, values, sense of mission. Underlying this approach is the humanistic idea that
people within organizations are sentient beings, motivated by more than just sticks or
carrots.
Organization & Strategy
33
Anticipate Competitive Dynamics
Responses: bonding resources - changing governance - mobilizing for
change
Managers are imperfectly policed by shareholders, have incentives to grow the resources
under their control, and are particularly able to take such steps when free cash flow is large
- leading to what shareholders regard as investments in negative-return activities or pure
waste.
Free cash flow is defined as the cash flow in excess of that required to fund all projects that
have a positive net present values when discounted at the relevant cost of capital.
Changing governance consists in creating small but well-informed and powerful boards of
directors, restricting the abilities of CEOs and other insiders to dominate those boards.
Forcing the change at the top may often be necessary to reverse slack-related problems,
but is rarely sufficient by itself. Successful organizational change involves the creation of
a strong sense of dissatisfaction with the status quo, and a process for change that often
involves changing people and organizational structure.
Organization & Strategy
34