Corporate Strategy
Fall 2008
Session 9
Rivalry and Multipoint Competition
Dr. Olivier Furrer
Office: TvA 1-1-11, Phone: 361 30 79
e-mail: o.furrer@fm.ru.nl
Office Hours: only by appointment
Session 9 © Furrer 2002-2008
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Example
In July 1969, Michelin announced plans to establish a plant in Canada
which would give a foothold in the North American market, attacking
market leader Goodyear. As a countermove, Goodyear entered the
European market. Michelin continued to increase its market share in North
America and attacked Goodyear in Brazil
(Karnani and Wernerfelt, 1985).
Session 9 © Furrer 2002-2008
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Definitions
Competitive Dynamics
Results from a series of competitive actions and
competitive responses among firms competing
within a particular industry
Competitive Rivalry
Exists when two or more firms jockey with one
another in the pursuit of better market position
Session 9 © Furrer 2002-2008
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Definitions (cont’d)
Multipoint Competition
A situation where firms compete against each other
simultaneously in several markets
Session 9 © Furrer 2002-2008
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Focus of this Session
• The process by which multimarket (or multibusiness)
affects interfirm rivalry
• The factors that moderate the impact of multimarket
(multipoint)) competition on interfirm rivalry
• The implications of multimarket (multipoint)
competition for corporate- and business-level
strategy
Session 9 © Furrer 2002-2008
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Factors Leading to More
Complex Rivalry
Declining emphasis on single, domestic markets and
increasing emphasis on global and multiple 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 (WTO, NAFTA, EU)
Session 9 © Furrer 2002-2008
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The Rivalry Matrix
Few
Many
Predictable
Game Theory
Warfare Models,
Multipoint
Competition
Uncertain
Nature of the Environment
Decision Variables
Scenarios,
Simulation, and
Systems Dynamics
Frameworks
Session 9 © Furrer 2002-2008
Reference.: Furrer, Olivier and Howard Thomas (2000), “The Rivalry
Matrix: Understanding Rivalry and Competitive Dynamics,” European
Management Journal, 18 (6), 619-637.
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Outcomes
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Resource
Similarity
Feedback
Session 9 © Furrer 2002-2008
Ref.: Chen, 1996
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
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Multimarket Competition and
Interfirm Rivalry:
The Mutual Forbearance Hypothesis
• Mutual forbearance is tacit collusion as a consequence of firms
competing in many markets and the resulting increase in their
interdependence.
• Tacit collusion, as opposed to direct collusion, which is illegal,
is a situation in which two firms understand each other’s
motives and strategies and implicitly coordinate to avoid
competing intensely.
• Extent theory suggests that two different processes may be
responsible for mutual forbearance as a result of higher degree
of multimarket contact: familiarity (Baum and Korn, 1999)
and deterrence (Bernstein and Whinston, 1990; Edwards,
1955; Porter, 1980).
Session 9 © Furrer 2002-2008
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Multimarket contact
Between focal firm and
rivals
Ability to hurt
Larger revenue exposure
to rivals’ actions
Larger number of
interactions with rivals
Better understanding of
interdependence and
overlapping market
fortunes with rivals
Greater attention to rivals
in market scanning and
competitor information
acquisition
Increased familiarity
Opportunity to hurt
Rivals’ opportunity to
retaliate in multiple markets
Lower expected payoff
from rivalry
Increased deterrence
MUTUAL FOREARANCE
Session 9 © Furrer 2002-2008
Lower intensity of
competition
Ref.: Jayachandran et al., 1999
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Outcomes
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Resource
Similarity
Feedback
Session 9 © Furrer 2002-2008
Ref.: Chen, 1996
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Session 9 © Furrer 2002-2008
Do managers understand the key
characteristics of competitors?
Does the firm have appropriate
incentives to attack or respond?
Does the firm have the necessary
resources to attack or respond?
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality
Do firms compete with each
other in multiple markets?
Multipoint competition tends to reduce
competitive interactions, but increases
the likelihood of response where
interaction occurs
For example, airlines price flights
similarly, but respond quickly when
competitors introduce promotional
prices
Session 9 © Furrer 2002-2008
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Resource
Similarity
Do competitors possess similar
types or amounts of resources?
Firms are less inclined to attack a firm
that is likely to retaliate
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
Session 9 © Furrer 2002-2008
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Market Commonality and
Resource Similarity
Session 9 © Furrer 2002-2008
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Multimarket Contact and Intensity of
Competition: A Contingency Model
Organizational
structure of
competing firms
Seller
concentration
Degree of
multimarket
contact
Intensity of
competition
Spheres of
influence
Session 9 © Furrer 2002-2008
Resource
similarity
Ref.: Jayachandran et al., 1999
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Firm Mover
advantage can be
substantial
Likelihood of Response
Type of Competitive Action
Actor’s Reputation
Dependence on the Market
Session 9 © Furrer 2002-2008
Resource Availability
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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
Session 9 © Furrer 2002-2008
Ref.: Lieberman and Montgomery, 1988
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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
Session 9 © Furrer 2002-2008
Ref.: Lieberman and Montgomery, 1988
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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 Action
Actor’s Reputation
Dependence on the Market
Session 9 © Furrer 2002-2008
Resource Availability
Whether a
competitor is
likely to respond
depends on several
key factors
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Types of Competitive Actions
Strategic
Actions
Significant commitments of specific &
distinctive organizational resources
Difficult to implement
Difficult to reverse
Example
Tactical
Actions
Major Acquisition
Undertaken to “fine tune” strategy
Relatively easy to implement
Relatively easy to reverse
Example
Session 9 © Furrer 2002-2008
Price cut
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Session 9 © Furrer 2002-2008
Ref.: Karnani and Wernerfelt, 1985
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Session 9 © Furrer 2002-2008
Ref.: Smith and Wilson, 1995
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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
Session 9 © Furrer 2002-2008
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Gauging the Likelihood of
Response
Market Dependence
Firms that are more dependent on a single industry are
more likely to respond than are multimarket 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
Session 9 © Furrer 2002-2008
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Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Firm size can have opposing
effects on competitive dynamics
Speed
Innovation
Quality
Session 9 © Furrer 2002-2008
Large firms may exert market power
over rivals and erect barriers to entry
against smaller competitors
However, smaller competitors may be
more nimble and innovative
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