Chapter 5
Competitive Rivalry and
Competitive Dynamics
Diane M. Sullivan, Ph.D., 2015
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Sections modified from Gentner (2009)
The Strategic Management Process
• After selecting a
business-level
strategy, firms must
remain aware of
competitive rivalry
and dynamics that
affect the success of
their competitive
actions and that
allow them to predict
competitor’s actions
Insert figure 1.1 graphic
Competitive Rivalry and Dynamics: Key Definitions
• Competitors
– Firms operating in the same market, offering similar products and targeting similar
customers
• Competitive Rivalry (firm-to-firm competitive actions)
– Ongoing set of actions and responses occurring between competitors as they contend
with each other for an advantageous market position
– Also called interfirm rivalry
• Competitive Dynamics (sum of all firm competitive actions)
– Total set of actions and responses of all firms competing within a market
• Strategic Action
– Significant commitment of a specific and distinctive resource that is irreversible
(Boeing’s midsized jet liner; Guess positioning to be more upscale)
• Tactical Action
– Commitment of less specific resources, taken to fine-tune a strategy, that is reversible
(e.g., pricing, advertising)
Competitive Rivalry and Dynamics: Examples
• Ex. 1: The “Dell way”: bypass middle-man and
sell custom-built computers directly to consumer
– This business model lowered costs and hence prices of
products
– But as of 2006, no longer created value to the degree it
had and
• End of 2006: HP 18.1% vs. Dell’s 14.7% market share
Why?
• Ex. 2: Fast food industry
The Essence of Competitive Action and Response
Industry Environment
Company ‘A’ (e.g., Starbucks)
Initiates Competitive Action
Industry Environment is Changed
Company ‘B’ (e.g., McDonald’s)
Initiates Competitive Response
Industry Environment is Changed Again
The World Automobile Industry: Strategic Groups
High
Ferrari
Lamborghini
Porsche
Mercedes
BMW
Price
Toyota
Ford
General
Motors
Chrysler
Honda
Nissan
Hyundai
Kia
High
Low
Low
Breadth of Product Line
Note: Members of each strategic group are only illustrative – not inclusive.
CapSim and Strategic Groups
Low
Size
Perf.
Trad
Size
High
Performance
A Model of Competitive Rivalry
Step 1: Conduct General Competitive Analysis
• Purpose: assess similarity of firms to determine
the extent to which they are competitors
• Two components
Market
Commonality
Resource
Similarity
Extent
of
Competitive
Rivals
Market Commonality and Resource Similarity
• Market Commonality (MC)
– Increases when firms compete in similar markets
– The more overlapping markets (e.g., multimarket competition),
the higher the MC
• E.g., geographic, product, customer, etc.
• McDonald’s and Burger King: High MC
• Resource Similarity (RS)
– How comparable are competitor’s tangible and intangible
resources in type and amount?
• FedEx and UPS: High RS
Market Commonality and Resource Similarity (Con’t)
• Firms should be less inclined to attack a firm that
is likely to retaliate
– High MC and RS should reduce likelihood of attack
• Firms with high MC and with similar resources are more
likely to be aware of each other’s competitive moves
• When attacked, similar firms more likely to aggressively
retaliate
– Can lock firms into mutually destructive competitive situations
» Fast food industry participants
» Netflix and Blockbuster
Step 2: Study Drivers of Competitive Behavior
• Awareness
– Are managers aware of and do they understand key competitors?
• Motivation
– Does the firm have an “incentive” to take action or respond?
• Ability
– Does the firm have the necessary resources to attack?
• Understanding competitor’s awareness, motivation and
ability helps the firm to predict competitor behavior
Step 3: Examine Likelihood of Attack & Response
• Likelihood of Attack Factors
– First-mover advantages—innovative actions can
create competitive advantages. Can result in:
• 1) customer loyalty and 2) above-average market share
• Be cautious of 2nd movers who can imitate at 65% of the cost
of 1st movers
– Organizational Size
• Small firms are nimble/flexible so can more quickly act with a
variety of actions;
• Large firms actions are more numerous, but often predictable
Step 3: Examine Likelihood of Attack & Response
• Likelihood of Response Factors
– A firm is likely to respond when the competitor’s action
1. Might produce a stronger competitive advantage for them
2. Damages the firm’s ability to create/maintain an advantage
3. The firm’s market position is less defensible
– Three Factors to consider:
1. Type of competitive action
2. Reputation
3. Market dependence
Competitive Dynamics
• Competitive Dynamics concern actions and
responses among all firms in a market
• Deal with the relative competitive speed in
different markets
– Slow-cycle
– Standard-cycle
– Fast-cycle
• Different speeds, or cycles, will affect competitive
behavior (actions and responses)
Competitive Dynamics Continued
• Slow-cycle markets
– Often shielded from imitation due to costs and/or very
strong brand loyalties
– May lead to SCA, but eventually it will erode over time
• Pharmaceuticals
Slow-cycle Market Gradual Erosion of SCA
Returns
from a
Sustained
Competitive
Advantage
(SCA)
Exploitation
Counterattack
Launch
Time (years)
10
Competitive Dynamics Continued
• Standard-cycle markets
– Lead to highly competitive pressures despite world
class products
– Multimarket competition may dampen rivalry
somewhat
– SCA is possible
• Fast-cycle markets
– Intensely dynamic; 1st mover advantage unsustainable
– Firms may cannibalize older generation products
– SCA unlikely
Developing Temporary Advantages to Create Sustained
Advantage in Fast- and Standard-Cycle Markets