A Primer on and Application of
Competitive Dynamics
Walter Ferrier, Ph.D.
Gatton College of Business & Economics
University of Kentucky
Presented at Helsinki School of Economics
March 2008
Competitive
Outcomes
Coke’s
Strategic
Actions
Organizational
Characteristics
Rivalry
Pepsi’s
Strategic
Actions
Industry
Characteristics
Page 2
Observable … Relative … Dynamic
Karjala
Lapin
Kulta
Lapin
Kulta
Page 3
Dethronement of the Shoe Leader
Market
Share
(U.S.)
Nike
Reebok
Adidas
1980
1990
2005
Page 4
Dethronement of the Retailing Leader
Market
Share
Wal-Mart
Sears
JC Penney
1950
1960
1970
1980
1990
2000
Page 5
Dethronement of the Aircraft Leader
Market
Share
Boeing
McDonnellDouglass
Airbus
1950
1960
1970
1980
1990
2000
Page 6
What is Competitive Dynamics?
• …a
• …a
• …a
• …a
• …a
• …a
• …a
paradigm
theory
pre-theory
view
reasoning
lens
method
– Research design element
– Observational mechanism
– Measurement technique
Page 8
Integrated/Contributing Theories
• Info processing
• Social networks
• Managerial cognition
• Multi-market competition
• Prospect/Threat rigidity
• First-mover
• Institutional theory
• Complexity
• Communication
• Knowledge
• Signaling
• Resource-based view
• Real option theory
• Game theory
• Strategic groups
• Structure-conduct-perform.
• Dynamic limit pricing
• Austrian economics
• Corporate entrepreneurship
• Dominant firm/Oligopoly
• Force field (from psychology)
• Population ecology
Page 9
Integrated/Contributing Theories
• What do they explain?
– Competitive behavior?
– …its antecedents, contexts?
– …processes?
• Does competitive dynamics “enable” other theories
explain, observe, conceptualize, measure:
– “behavior”
– “competition”
– “events”
– “dynamic interactive processes”
– “change”
– other things?
Page 10
A Pre-Theory of Competitive Inter-Action:
Some Boundary Conditions
• Actor relativity/interdependence
• The firm relative to:
– Itself (over time)
– Dyadic partners
– Groups
– Industry members
– Other non-rivals
• On factors/dimensions such as:
– Competitive actions
– Resources/capabilities
– Firm characteristics
– Outcomes
Page 11
Pre-Theory of Competitive Inter-Action
• Competitive “action” as fundamental element
• “…a visible, externally-directed competitive move carried
out to improve a firm’s relative competitive position”
• Dynamic
• Explicitly accounts for:
–
–
–
–
–
Time
Change
Evolution
Contingencies
Processes
Page 12
Pre-Theory of Competitive Inter-Action
• Has impact/consequences on:
• Performance
– Relative
– Absolute
• Behavior of other firms
• Supply chain members
– Customers
– Suppliers
• Regulators
• Investors
• Society
Page 13
Pre-Theory of Competitive Inter-Action
• Other
• Uncertainty, unknowability
• Imperfect information
• Thought, intent, purpose
• Not costless
Page 14
Theoretical Scaffolding/Fulcrum
• Awareness
• Alertness - attention
• Vision
• Scanning
• Filtering
• Motivation
• Intention
• Valence
• Emotion
• Desire
Theoretical Integration Required:
“Other theories” support
and explain logic when integrated
with this AMC theoretical
scaffolding – e.g.:
• Behavioral theory of the firm
• Institutional theory
• Social network theory
• RBV
• Capability
• Organizational enablers/constraints
• Contextual enablers/constraints
Page 15
An Emerging Theory of Competitive Dynamics
Organizational
Drivers
Industry
Structure
Drivers
Firm 1
Strategy
Awareness
Competitive
Inter-Action
Performance
Cognitive
Drivers
Institutional
Drivers
Firm 2
Strategy
SocioRelational
Drivers
Other?
Page 16
Levels of Analysis
Firm
Finnair
Page 17
Levels of Analysis
Firm
Finnair
Dyad
Finnair
SAS
Page 18
Levels of Analysis
Firm
Finnair
Triad
Dyad
Finnair
SAS
Finnair
SAS
Blue 1
Page 19
Levels of Analysis
Firm
Triad
Dyad
Finnair
Finnair
SAS
Finnair
SAS
Blue 1
Network
Lufthansa
Virgin
Finnair
US Airways
KLM
Page 20
Levels of Analysis
Firm
Triad
Dyad
Finnair
Finnair
SAS
Finnair
SAS
Blue 1
Network
Group
Lufthansa
Lufthansa
Virgin
Air France
KLM
eos
SAS
Finnair
US Airways
Brussels
Blue 1
Ryanair
KLM
Page 21
Levels of Analysis
Firm
Triad
Dyad
Finnair
Finnair
SAS
Finnair
SAS
Blue 1
Network
Group
Industry
(or Population)
Lufthansa
Lufthansa
Virgin
Air France
KLM
eos
SAS
Finnair
US Airways
KLM
Finnair
Lufthansa
Virgin
eos
Brussels
Blue 1
British Airways
US Airways
Ryanair
Alitalia
Ryanair
KLM
Page 22
Levels of Aggregation
Individual Action
(or response)
New
Product
Introduction
Page 23
Levels of Aggregation
Individual Action
(or response)
New
Product
Introduction
Action-Response
Dyad
Price
Cut
Ad
Campaign
Page 24
Levels of Aggregation
Individual Action
(or response)
New
Product
Introduction
Action-Response
Dyad
Price
Cut
Ad
Campaign
Competitive
Repertoire
6 x Price
1 x Product
4 x Ads
2 x Signaling
1 x Law Suit
Page 25
Levels of Aggregation
Individual Action
Action-Response
Dyad
(or response)
New
Product
Introduction
Price
Cut
Competitive
Repertoire
Ad
Campaign
6 x Price
1 x Product
4 x Ads
2 x Signaling
Competitive
Attack
1 x Law Suit
attack
Coke
Ad
Signal Product
Price
Legal
counter attack
Pepsi
Ad Ad
Product
Price Price
time
Page 26
Network Evolution, Competitive Actions and Performance
t2
t1
A
t3
A
A
B
B
Focal
Firm
C
B
Focal
Firm
C
Focal
Firm
E
D
Performance
time
Mkt
Prod
Price
Mkt
Mkt
Mkt Prod
Price
Price
Actions
Page 27
Network Evolution, Competitive Actions and Performance
t1
t3
t2
A
A
A
B
B
Focal
Firm
C
B
Focal
Firm
C
Focal
Firm
E
D
Performance
time
Mkt
Prod
Price
Mkt
Mkt
Mkt Prod
Price
Price
Actions
Page 28
Network Evolution, Competitive Actions and Performance
t1
t2
A
t3
A
A
B
B
Focal
Firm
C
B
Focal
Firm
C
Focal
Firm
E
D
Performance
time
Mkt
Prod
Price
Mkt
Mkt
Mkt Prod
Price
Price
Actions
Page 29
Globalization, Competitive Action and Performance
t1
t2
A
t3
A
A
B
B
Focal
Firm
C
B
Focal
Firm
C
Focal
Firm
E
Think of internationalization
and globalization in this way
D
Performance
time
Mkt
Prod
Price
Mkt
Mkt
Mkt Prod
Price
Price
Actions
Page 30
What is the next “big thing”?
• Phenomena
• Constructs
• Measures
• Levels of analysis or aggregation
• Data
• Unobservables
• Analytical techniques
• Theory
Page 31
Non-Organizational/Economic Theories
• Physics
• Physical
• Optical
• Quantum mechanics
• Biology
• Molecular/DNA
• Virology
• Music
• Perception/appreciation
• Composition theory
• Experimental aesthetics
• Perception
• Interpretation
• Subjective judgment
• Medicine
• Neurology
• Psychiatry
• Kinesiology
Page 32
What is Competitive Dynamics?
K
Phenomenon
A
Z
time
• Rivalry: Airbus vs. Boeing
• Negotiating a raise
• Writing an operatic duet
• Coaching a basketball game
• Training a hunting dog
• Conversation/argument between
husband & wife
Page 33
Competitive Dynamics:
Instrumentality, Application and Theory
An (any?) open-system process that:
• Is interactive
– Contains multiple actors
– Behavior and outcomes relative among actors
•
•
•
•
Contains distinct, observable elements, events, or happenings
Contains some perceptual and actual uncertainty or unknowability
Requires some thought, intent, purposefulness on behalf of actors
Is not costless
Page 34
Questions or Comments
Page 35
The Fast and the Furious:
The Assignment of Stock Risk Based on Investor Perceptions
of Competitive Maneuvering
and Who’s in the Drivers’ Seat
Dynamic Competitive Interaction
Focal
Firm
Actions
Focal Firm
Performance
Rivals’
Actions
Rivals’
Performance
TMT
Investment
Community
DynamicSubjective Interpretation
and Valuation of…
Traditional-Objective
Valuation Process
What’s happening?
Stock Risk
& Returns
Who’s making it happen?
Page 37
Empirical Model
Rivals’
Actions
Focal
Firm
Actions
X
beta
TMT
Heterogeneity
Focal Firm
Performance
Industry
Characteristics
Page 38
Subjective Valuation of the Top Management Team
Demographic diversity among TMT members serves as a
signal for:
–
–
–
–
Cognitive/experiential breadth
Decision quality/comprehensiveness
Environmental scanning
Legitimacy/reputation
…and for:
– Interpersonal conflict/dysfunction
– Slow decision speed
– Lack of agreement-seeking/consensus
Page 39
Subjective Valuation of Competitive Strategy
Interpretation and valuation related to perceptions of collative
structure in the pattern of competitive behaviors:
–
–
–
–
Simplicity… complexity
Predictability… unpredictability
Conformity … non-conforming
Long duration … single blip
Page 40
Perceptions of Gestalts in Sensory Information
Gestalt psych.
Exp. aesthetics
Comp. dynamics
•
•
•
•
•
•
•
•
•
•
•
•
•
Simplicity
Proximity
Similarity
Common direction
Simplicity
Familiarity
Predictability
Orderly
Stability
Simplicity
Conformity
Predictability
Duration
Outcomes
• Recognition of Gestalts or ‘wholes’
• Subjective judgment; hedonic value…”pleasingness”
• Subjective judgment of strategy-performance relationship
Page 41
Pattern Recognition, Interpretive Certitude
and Hedonic Value
“Sensory information”
• Computer screen pixels
• Paintbrush strokes
• Musical notes
• DNA nucleotides
• Pitch sequence
• etc.
organized into meaningful
wholes…Gestalts
Page 42
Hypotheses
Investors will assign higher levels of stock risk to firms with
heterogenous TMTs that carry out competitive attacks that
are perceived as being:
– Simple
– Predictable
– Conforming
– Significant duration
Page 43
Sensory Information: Competitive Actions
• Pricing
• Marketing
• New Product
• Service
• Capacity
• Overt Signals
a
b
c
d
e
Page 44
Competitive Action Sequences
• Ordered sample of “things”
‘Orderliness’ among elements (alphabet)
a
b
c
d
e
– Logically unified sequence
–
–
–
–
Succession of market-based decisions
Patterns in stream of behaviors
Coordinated series of actions
Actions in a sequential strategic thrust
• COMPETITIVE ATTACK: An uninterrupted
series/sequence of competitive actions
Page 45
Competitive
Outcomes
Coke’s
Actions
a
b
c
d
e
Organizational
Characteristics
Pepsi’s
Action
Rivalry
a
b
c
Industry
Characteristics
d
e
Action-Reaction Dyads
Action
Pair 1
Coca-Cola
Pepsi
b
Action
Pair 2
Action
Pair 3
b
c
b
a
c
Action
Pair 4
a
e
Prior Studies: Action “Repertoires”
b
b
b
Coca-Cola
Pepsi
b
c
Year-End
Tallies
a
b
c
e
time
b
Competitive Actions Over Time = Attack
Coke
a
a
Pepsi
a
b
b
c
d
a
b
b
c
c
c
d
d
e
e
d
c
e
e
a
a
b
Observed Sequence
a
b
c
d
e
c
b
Observed Sequence
Page 55
Competitive Attack Simplicity
Total
a
a
a
a
a
a
b
a
a
7
b
c
c
d
1
c
2
d
2
d
e
e
a
d
a
c
c
a
e
1
a
d
b
a
a
c
Observed Sequence of Competitive Actions
Page 57
Competitive Attack Complexity
Total
a
a
a
b
b
c
c
d
d
c
b
2
c
d
e
3
d
3
e
a
d
d
3
a
e
e
c
a
c
c
d
b
b
a
2
e
Observed Sequence of Competitive Actions
Page 58
Competitive Attack Predictability
Focal Firm in time1
a
a
Focal Firm in time2
a
b
a
b
c
b
c
c
d
c
d
d
e
e
a
d
a
b
c
Observed Sequence
e
a
d
b
c
c
e
b
e
e
Observed Sequence
Page 59
Competitive Attack Unpredictability
Focal Firm in time1
a
a
Focal Firm in time2
a
b
a
b
c
b
b
c
d
c
d
c
d
e
e
a
d
a
b
c
Observed Sequence
e
e
d
b
b
c
c
e
a
Observed Sequence
Page 60
Competitive Attack Conformity
Focal Firm
a
Industry Norm
a
b
a
a
b
c
c
d
b
b
c
d
d
e
c
e
e
a
b
d
e
c
Observed Sequence
a
a
b
c
d
e
c
b
Observed Sequence
Page 61
Competitive Attack Non-Conformity
Focal Firm
a
a
Industry Norm
a
b
b
c
d
a
b
b
c
c
c
d
d
e
e
d
c
e
e
a
a
b
Observed Sequence
a
b
c
d
e
c
b
Observed Sequence
Page 62
Competitive Attack [Long] Duration
a
a
a
a
b
b
c
c
d
c
d
d
e
e
e
time
a
d
e
c
a
c
d
b
a
e
Observed Sequence of Competitive Actions
Page 63
Competitive Attack [Short] Duration
a
a
b
c
c
c
d
d
e
time
c
a
c
d
Observed Sequence of Competitive Actions
Page 64
Hypotheses
Investors will assign higher levels of stock risk to firms with
heterogenous TMTs that carry out competitive attacks that
are perceived as being:
– Simple
– Predictable
– Conforming
– Significant duration
Page 69
Sample and Data Sources
All Fortune 500 Members who were:
• Top two in market share (1987-1993)
• Undiversified (i.e. single or dominant business)
– 35 different industries over 7 years
– 490 firm-years
Competitive Actions
• News, Press Releases from F&S Predicasts
TMT Demographics
• Dun & Bradstreet
Industry and Firm Financial Data
• Compustat
Page 70
Analysis
• Structural Equations Model
– Five-indicator model for TMT Heterogeneity
• Educational background
• Functional background
• Industry background
• Attendance at elite schools
• Military experience
–Median split -- Best SEM model fit for low TMT
Heterogeneity condition
Page 71
“Moderated-Effects” SEM Results:
Attack Characteristics in Low TMT Hetero Condition
beta
Simplicity
Duration
Conformity
Predictability
Weak
Collative
Properties
Strong
Collative
Properties
“Moderated-Effects” SEM Results:
Attack Characteristics in Low TMT Hetero Condition
beta
Simplicity
Opposite
Duration
Conformity
Predictability
Weak
Collative
Properties
Strong
Collative
Properties
Support
Conclusions
• Human capital (TMT) and behavioral capital (competitive
maneuvering) are important components of risk assessment
• Collative properties of competitive strategy:
• Simplicity
• Predictability
• Conformity
• Duration
… increase interpretability and valuation of competitive
strategy…
…but attenuated by perceptions of TMT processes and
capabilities
• Cognitive breadth
• Decision comprehensiveness
• Interpersonal conflict
• Slow decision-making
Page 74
Questions or Comments
Page 75
The Influence of Verbal Exchange among
TMT Members on Decision Quality and
Innovation
Extant Research
TMT
Members
Group
Cohesion
Group
Dysfunction
Agreementseeking
Debate
Constructive
Conflict
Decision
Comprehensiveness
Strategic
Consensus
Decision
Speed
Strategic
Change
Competitive
Dynamics
Performance
Innovation
Page 77
TMT
Members
Group
Cohesion
Group
Dysfunction
Agreementseeking
Debate
Constructive
Conflict
Decision
Comprehensiveness
Strategic
Consensus
Decision
Speed
Conversation
Analysis
Strategic
Change
Competitive
Dynamics
Innovation
Performance
Page 78
“The Decision Funnel”
Inputs and Processes Presumed by TMT Demographic Proxies
Raw
Decision
Inputs
Decision
Process
Decision
Outcomes
Field of
Vision
Page 79
Tunnel Vision:
Homogenous TMT – Industry Background
Raw
Decision
Inputs
Field of
Vision
Decision
Process
Decision
Outcomes
Page 80
Dysfunction:
Interpersonal Conflict – Poor Social Cohesion
Raw
Decision
Inputs
Decision
Process
Decision
Outcomes
Field of
Vision
Page 81
Constructive Conflict:
Cognitive/Experiential Breadth + DA/DI
Raw
Decision
Inputs
Decision
Process
Decision
Outcomes
Field of
Vision
Page 82
Decision Process in Real-Time
Raw
Decision
Inputs
Decision
Process
Decision
Outcomes
Field of
Vision
Page 83
Decision Process in Real-Time
Conversational, verbal statements uttered
in group decision-making sessions
Page 84
Pilot Study
• MBA New Product Development Simulation
• Student Teams
(3 for now)
– 5-7 members each
– Experiential & functional diversity
• Strategic, Multifunctional Task – Build “New Car”
– 3 hours
–
–
–
–
Strategic position vs. other teams
Product features
Marketing
Assemble and test prototype
• Audio Transcript of Decision Session
– Coded into different verbal statements
Page 85
Preliminary Categories of Verbal Statements
• NEW - New Idea/Concept Statement
“Based on the marketing reports, I think we should offer a really big luggage
compartment.”
• EXT - Idea/Concept Advocacy/Extension
“Oh, yea. We can cut manufacturing costs even more by outsourcing almost
all our parts [production].”
• INQ - Idea/Concept Inquiry
“What do you mean by customer-driven design?”
• CHAL - Idea/Concept Challenge
“I just don’t get it. Why would customers care about dealer margin?”
• DEF - Idea/Concept Defense
“Well, if you think the other companies are going to do the same thing, then
we should stick with being different.”
Page 86
• ACQ - Idea/Concept Acquiescence
“I guess. Maybe we can’t really get the car to do all that in a 5-minute
demonstration.”
• VAL - Idea/Challenge Validation Statement
“I don’t know about you, but I think we should go ahead with a big luggage
rack.”
• TRAN - Transitional Statement
“Can we talk about how to get this done before 3:00 p.m.?”
• AGR - Agreement-seeking Statement
“Anybody else wanna go for this?”
Page 87
• REA – Task/Process Reassurance Statement
“We’ll get the numbers when you need them.”
“I think we’re on the right track.”
• CRIT – Task/Process Criticism/Doubt
“There’s no way the audience will see these all little parts.”
“If we can’t decide by 2:45, then let’s bag it.”
• HUM – Humor
“How many MBAs does it take to build a Lego car?”
• SMALL - Task- or Process-related Small Talk
“This is a pretty cool steering program.”
“I can’t wait to see what the other guys have.”
Page 88
‘Alphabet’ of Verbal Statements
• NEW – New idea
• CHAL – Challenge of idea
• AGR – Agreement with idea
• SMALL – Small talk
• VAL – Validation of idea
• DEF – Defense of idea
• HUM - Humor
a
b
c
d
e
Page 89
Conversation Complexity – Low Herfindahl Index
Total
a
a
a
b
b
c
c
d
d
c
b
2
c
d
e
3
d
3
e
a
d
d
3
a
e
e
c
a
c
c
d
b
b
a
2
e
Observed Sequence of Verbal Statements
Page 91
Conversation Unpredictability – High Distance Scores
Focal Team Decision Phase1
a
a
Focal Team Decision Phase2
a
b
a
b
c
b
b
c
d
c
d
c
d
e
e
a
d
a
b
c
Observed Sequence
e
e
d
b
b
c
c
e
a
Observed Sequence
Page 93
Conversation Non-Conformity – High Distance Scores
Focal Team
a
a
Industry Norm
a
b
b
c
d
a
b
b
c
c
c
d
d
e
e
d
c
e
e
a
a
b
Observed Sequence
a
b
c
d
e
c
b
Observed Sequence
Page 95
Conversation Chunking – Low Separation Scores
a
a
a
b
a
b
b
c
c
d
b
c
c
d
d
e
e
e
a
d
b
e
c
a
c
b
d
b
a
e
c
Observed Sequence of Verbal Statements
Page 97
Conversation Motif
– High Variance of Precedence Scores
(+)1.0 -------------------------------------------------------------------------------------- (-)1.0
a
a
b
b
c
c
d
d
e
e
a
d
a
b
c
a
e
d
b
b
e
c
c
Observed Sequence of Verbal Statements
Page 100
Other Dimensions of Verbal Statements
• Task- vs. Interpersonal-directed
• Task Relatedness/Relevance
• Statement Complexity (number of distinct ideas within
statement)
• Scope (the breadth of total task addressed by statement)
• Statement Duration
• Tone (directive/confident, condescending, worrisome, etc.)
Page 101
Decision Process in Real-Time
• Conversation Phase Predictability
• Conversation Complexity
• Conversation Motif
• Conversation Chunking
Page 102
Propositions
Innovation
& Creativity
Conversation Motif
Conversation Chunking
Conversation Complexity
Conversation Unpredictability
Low
High
Conversational Sequence
Characteristics
Moderated Mediation Model
TMT
CompositionDemographicsProcesses
Conversational
Structure
Innovation
Performance
Page 104
Food for thought…
• Sequence of decision “process” matters
– Decision phases
– Dynamic dimensionality
– Potential impact on decision quality and innovation
• Verbal exchange as informative level of analysis
– Verbal statements as fundamental decision points
• Artifactual data with qualitative flavor
• Avoid self-report bias
– Group-level construct/measure
• Avoid multi-level problems (i.e., aggregating TMT demographics or
questionnaire scales)
Page 105
Dynamic Event Sequencing
• “Event” coding, phasing, and sequencing technique used for
other organizational processes
– Resource acquisition or allocation events
– Inter-organizational alliances events
– New product development phases
– Globalizing or internationalizing events
• Explore link between patterns in a variety of organizational
processes and patterns of behavior
Organizational
Processes
Competitive
Behavior
y
a
z
b
c
x
v
d
w
e
Page 106
Questions or Comments
Page 107
Thank you
Page 108