F Ch05 Competitive Dynamics

© Dr. D. Bhattacharjee

Welcome To

A Session On

Competitive Dynamics

Welcome To

A Session On

Competitive Dynamics


Chapter 5Chapter 5Competitive DynamicsCompetitive Dynamics

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

Reference:


Chapter 3Chapter 3InternalInternal

EnvironmentEnvironment

Chapter 2Chapter 2ExternalExternal

EnvironmentEnvironmentThe StrategicThe StrategicManagementManagement

ProcessProcess

The StrategicThe StrategicManagementManagement

ProcessProcess

Strategic IntentStrategic Intent

Strategic MissionStrategic Mission

StrategicStrategicCompetitivenessCompetitivenessAbove AverageAbove Average

ReturnsReturnsFeedback

Strategy FormulationStrategy Formulation

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Chapter 5Chapter 5CompetitiveCompetitive

DynamicsDynamics

Chapter 6Chapter 6Corporate-LevelCorporate-Level

StrategyStrategy

Chapter 8Chapter 8InternationalInternational

StrategyStrategy

Chapter 9Chapter 9CooperativeCooperative

StrategiesStrategies

Chapter 7Chapter 7Acquisitions &Acquisitions &RestructuringRestructuring

Strategy ImplementationStrategy Implementation

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Chapter 11Chapter 11StructureStructure& Control& Control

Chapter 12Chapter 12StrategicStrategic

LeadershipLeadership

Chapter 13Chapter 13Entrepreneurship & InnovationEntrepreneurship & Innovation

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The Generic Building Blocks of Competitive Advantage


What is meant by competitive dynamics?

Competitive dynamics refers to firm’s changing strategies and their implementation that result from a series of competitive actions and competitive responses among firms competing within a particular industry.

What is meant by competitive rivalry?


What is meant by competitive rivalry?

Competitive rivalry exists when two or more firms jockey with one another in the pursuit of an advantageous market position.

What is meant by mutual interdependence ?


What is meant by mutual interdependence ?

Mutual interdependence among firms means that strategic competitiveness and above average returns result only when companies recognize that their strategies are not implemented in isolation from their competitor’s actions and responses.


Declining emphasis on single, domestic markets and Declining emphasis on single, domestic markets and increasing emphasis on global marketsincreasing emphasis on global markets

Advances in communication technology make Advances in communication technology make coordination easier across multiple marketscoordination easier across multiple markets

Advances in technology and innovation have increased Advances in technology and innovation have increased competitiveness of small and medium sized firmscompetitiveness of small and medium sized firms

National barriers are falling due to the number and scope of National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)trade agreements (GATT, NAFTA, EEC)

Factors Leading to More Complex RivalryFactors Leading to More Complex Rivalry


What are the assumptions of competitive dynamics?


Actions and responses Actions and responses shape the competitive shape the competitive

positions of each firm’s positions of each firm’s business level strategybusiness level strategy

Actions taken by Actions taken by one firm elicit one firm elicit responses from responses from competitorscompetitors

A firm’s A firm’s strategic conduct is strategic conduct is dynamic in naturedynamic in nature

Competitive Competitive responses lead to responses lead to

additional actions additional actions from the firm that from the firm that

acted originallyacted originally

CompetitiveCompetitive Dynamics Dynamics


Relative SizeSpeed

InnovationQuality

Ability for Ability for Action and Action and ResponseResponse

OutcomesOutcomesDrivers of Drivers of

Competitive Competitive BehaviorBehaviorAwarenessMotivationCapability

Competitor Competitor AnalysisAnalysis

MarketCommonality

ResourceSimilarity

Interfirm Rivalry:Interfirm Rivalry:Attack & ResponseAttack & Response

Likelihood of AttackLikelihood of AttackFirst Mover Incentives

Likelihood of ResponseLikelihood of ResponseType of Competitive

Action

Dependence on theMarket

Resource Availability

Actor’s Reputation

CompetitiveCompetitive

Slow, Standardor Fast Cycle

Market TypesMarket Types


SustainedOutcomesOutcomes

CompetitiveAdvantageTemporaryAdvantageEvolutionaryEvolutionaryOutcomesOutcomes

Entrepreneurial

or Market-PowerGrowth-Oriented

ActionsFeedbackFeedback

Model of Interfirm Rivalry:Model of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of Attack and Response


Drivers of Drivers of Competitive Competitive

BehaviorBehavior

Motivation

Capability

Awareness


Do managers understand the Do managers understand the key characteristics of key characteristics of competitors?competitors?

Do managers understand the Do managers understand the key characteristics of key characteristics of competitors?competitors?

AwarenessAwareness


Does the firm have Does the firm have appropriate incentives to appropriate incentives to attack or respond?attack or respond?


BehaviorBehavior

MotivationMotivation

Capability

Awareness



Does the firm have the Does the firm have the necessary resources to attack necessary resources to attack or respond?or respond?


BehaviorBehavior

Motivation

CapabilityCapability

Awareness



Relative SizeSpeed

InnovationQuality





MarketCommonality

ResourceSimilarity




Action










Entrepreneurial






Resource Similarity

Market Commonality


Do firms compete with each Do firms compete with each other in multiple markets?other in multiple markets?Do firms compete with each Do firms compete with each other in multiple markets?other in multiple markets?

Market Commonality

Market Commonality



Resource Similarity

Market Commonality

Market Commonality

Multipoint competition tends to reduce Multipoint competition tends to reduce competitive interactions, but increases competitive interactions, but increases the likelihood of response where the likelihood of response where interaction occursinteraction occurs

For example, airlines price flights For example, airlines price flights similarly but respond quickly when similarly but respond quickly when competitors introduce promotional pricescompetitors introduce promotional prices




Resource SimilarityResource Similarity

Do competitors possess similar Do competitors possess similar types or amounts of resources?types or amounts of resources?

Market Commonality




Resource SimilarityResource Similarity

Market Commonality

Firms are less inclined to attack a firm Firms are less inclined to attack a firm that is likely to retaliatethat is likely to retaliate

Firms with dissimilar resources are Firms with dissimilar resources are more likely to attackmore likely to attack

Firms with similar resources are more Firms with similar resources are more likely to be aware of each other’s likely to be aware of each other’s competitive movescompetitive moves



Relative SizeSpeed

InnovationQuality





MarketCommonality

ResourceSimilarity




Action










Entrepreneurial






Likelihood of AttackLikelihood of Attack

First Mover IncentivesLikelihood of ResponseLikelihood of Response

Type of CompetitiveAction






First Mover IncentivesFirst Mover IncentivesFirst Mover advantage First Mover advantage can be substantialcan be substantial


First MoverFirst Mover

Firms that take an initial competitive actionFirms 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

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 respondCan earn above average profits until competitors respond

Gain customer loyalty, helping to create a barrier to entry by competitorsGain customer loyalty, helping to create a barrier to entry by competitors

Advantage depends upon difficulty of imitationAdvantage depends upon difficulty of imitation


Second MoverSecond Mover

Firms that respond to a First Mover’s actionsFirms that respond to a First Mover’s actions

Second Movers frequently imitate First MoversSecond Movers frequently imitate First Movers

Speed of response often dictates successSpeed of response often dictates success

Should evaluate customers’ response before movingShould evaluate customers’ response before moving

“Fast” Second Movers can capture some of initial customers and develop some brand loyalty“Fast” Second Movers can capture some of initial customers and develop some brand loyalty

Avoid some of the risks associated with First MoveAvoid some of the risks associated with First Move

Must possess necessary capabilities to imitateMust possess necessary capabilities to imitate




First Mover IncentivesFirst Mover IncentivesLikelihood of ResponseLikelihood of Response

Type of CompetitiveType of CompetitiveActionAction

Dependence on theDependence on theMarketMarket

Resource AvailabilityResource Availability

Actor’s ReputationActor’s Reputation

Whether a competitor is Whether a competitor is likely to respond likely to respond depends on several key depends on several key factorsfactors



Likelihood of Attack and ResponseLikelihood of Attack and Response

What is competitive action?

A competitive action is a significant competitive move taken by a firm that is designed to gain a competitive advantage in a market.

How can you classify movers?


How can you classify movers?

First mover

Second mover

Late movers


How can you classify movers? First mover is a firm that takes an initial action.

Second mover is a firm that responds to a first

mover’s competitive action, often through imitation or

a move designed to counter the effects of the action.

A late mover is a firm that responds to a competitive

action, but only after considerable time has elapsed

after the first mover’s action and second mover’s

response.

What is competitive response?


What is competitive response?

A competitive response is a move taken to counter effects of an action by a competition.

What are competitive actions?


Strategic Action

Tactical Action

Types of Competitive ActionsTypes of Competitive ActionsTypes of Competitive ActionsTypes of Competitive Actions


Strategic action is macro-oriented (for all of you econ buffs) with an emphasis on the big picture and long term goals and objectives, usually in 3 to 5 year increments. This type of action guides the fundamental (i) decisions and (ii) actions that will shape the long term direction of a business and one’s personal development. It focuses on the core of Who (you are), What (you want to accomplish) and Why (do you want to accomplish the what) of organizations and people. Strategic decision includes areas like (i) business’ market share; (ii) professional career path; (iii) life and/or business vision; (iv) investment goals; (v) personal and/or professional opportunity costs; (vi) mission; and (v) the allocation of resources.

Strategic ActionStrategic Action


Tactical action is micro-oriented and focused short term S.M.A.R.T. goals, which usually have 1 to 18 month time frames. This type of short term action is all about the How (i.e., process) of getting things doing. The focus is on operations, which includes creating and executing effective, efficient action plans.

Areas that are covered in tactical action include (i) monthly or quarterly sales goals; (ii) improving customer service in specific areas, (iii) reducing the number of your outside commitments so that you can simplify your life and (iv) creating action plans for your strategic (big picture) objectives.

Tactical ActionTactical Action


TacticalTacticalActionsActionsTacticalTacticalActionsActions

Major AcquisitionMajor AcquisitionExampleExample

Features of strategic and tactical actionsFeatures of strategic and tactical actionsFeatures of strategic and tactical actionsFeatures of strategic and tactical actions

Strategic Strategic ActionsActionsStrategic Strategic ActionsActions

Price cutPrice cutExampleExample

Significant commitments of specific and distinctive organizational resourcesSignificant commitments of specific and distinctive organizational resources

Difficult to implementDifficult to implement

Difficult to reverseDifficult to reverse

Relatively easy to implementRelatively easy to implementRelatively easy to implementRelatively easy to implement

Relatively easy to reverseRelatively easy to reverseRelatively easy to reverseRelatively easy to reverse

Undertaken to “fine tune” strategyUndertaken to “fine tune” strategyUndertaken to “fine tune” strategyUndertaken to “fine tune” strategy


Distinction between strategic action and Distinction between strategic action and tactical actiontactical action

Since upper managers generally have a better understanding of the organization as a whole than lower level managers do, upper management generally takes the strategic actions, while generally the lower level managers takes the tactical actions as lower level managers generally have better understanding of the day to day organizational operations. Strategic action emphasizes the future, and tactical action emphasizes the everyday functioning of the organization. Strategic actions are based primarily on a prediction of the future, while tactical actions are based on known circumstances that exist within the organization.


Distinction between strategic action and Distinction between strategic action and tactical actiontactical action

Strategic actions cover a relatively long period of time whereas tactical plans cover a relatively short period of time.

Despite their differences, tactical and strategic actions are integrally related. Tactical actions should focus on what to do in the short term to the organization, strategic actions aims at achieving the long term objectives determined by strategic planning.


Gauging the Likelihood of ResponseGauging the Likelihood of Response

Actor’s ReputationActor’s Reputation

Market leaders are more likely to be copiedMarket leaders are more likely to be copiedMarket leaders are more likely to be copiedMarket leaders are more likely to be copied

““Risk taking” firms are less likely to be copiedRisk taking” firms are less likely to be copied““Risk taking” firms are less likely to be copiedRisk taking” firms are less likely to be copied

““Price Predators” are less likely to be copied Price Predators” are less likely to be copied ““Price Predators” are less likely to be copied Price Predators” are less likely to be copied


Market DependenceMarket Dependence

Competitor ResourcesCompetitor Resources

Smaller firms are more likely to respond to tactical actionsSmaller firms are more likely to respond to tactical actionsSmaller firms are more likely to respond to tactical actionsSmaller firms are more likely to respond to tactical actions

Limited resources may lead to alternatives such as Strategic Limited resources may lead to alternatives such as Strategic AlliancesAlliancesLimited resources may lead to alternatives such as Strategic Limited resources may lead to alternatives such as Strategic AlliancesAlliances

Gauging the Likelihood of ResponseGauging the Likelihood of Response

Firms that are more dependent on a single industry are more likely to respond than are diversified firmsFirms that are more dependent on a single industry are more likely to respond than are diversified firms

Industry dependent firms will likely respond to either strategic or tactical actionsIndustry dependent firms will likely respond to either strategic or tactical actions


Relative SizeSpeed

InnovationQuality





MarketCommonality

ResourceSimilarity




Action










Entrepreneurial





Relative Size

Quality

Innovation

Speed



Relative SizeRelative SizeFirm size can have Firm size can have opposing effects on opposing effects on competitive dynamicscompetitive dynamics

Firm size can have Firm size can have opposing effects on opposing effects on competitive dynamicscompetitive dynamics


Quality

Speed

Large firms may exert market power Large firms may exert market power over rivals and erect barriers to entry over rivals and erect barriers to entry against smaller competitorsagainst smaller competitors

However, smaller competitors may be However, smaller competitors may be more nimble and innovativemore nimble and innovative


Relative SizeRelative Size

Innovation


““Think and act big and we’ll get Think and act big and we’ll get smaller. Think and act small and smaller. Think and act small and we’ll get bigger.”we’ll get bigger.”

-- Herb Kelleher, CEO, Southwest Airlines-- Herb Kelleher, CEO, Southwest Airlines


Relative Size

Quality

Innovation

SpeedSpeed

Quick response is crucial Quick response is crucial to both the first mover to both the first mover and the fast second and the fast second movermover




Consistent innovation is Consistent innovation is required for market required for market leadership in many leadership in many dynamic industries dynamic industries


Relative Size

Quality

InnovationInnovation

Speed



Exceeding customer Exceeding customer expectations is a necessity to expectations is a necessity to compete in the 21st centurycompete in the 21st century


Relative Size

QualityQuality

Innovation

Speed



What is meant by quality?

Quality involves meeting or exceeding customer expectations in the goods an/or services offered.


What are the quality dimensions of goods and services?


Quality Dimensions of Goods Quality Dimensions of Goods

ProductProduct Quality Dimensions: Quality Dimensions:

Perceived quality Perceived quality Subjective assessment of characteristics Subjective assessment of characteristics (product image)(product image)

Performance Performance Operating characteristicsOperating characteristics

Features Features Important special characteristicsImportant special characteristicsFlexibility Flexibility Meeting operating specifications over timeMeeting operating specifications over time

Durability Durability Amount of use before performance Amount of use before performance deterioratesdeteriorates

Conformance Conformance Match with pre-established standardsMatch with pre-established standards

Serviceability Serviceability Ease and speed of repair or normal serviceEase and speed of repair or normal service

Aesthetics Aesthetics How a product looks and feelsHow a product looks and feels


Quality Dimensions of ServicesQuality Dimensions of Services

ServiceService Quality Dimensions: Quality Dimensions:

Timeliness Timeliness Performed in promised period of timePerformed in promised period of time

Courtesy Courtesy Performed cheerfullyPerformed cheerfully

Consistency Consistency Giving all customers similar experiencesGiving all customers similar experiences

Convenience Convenience Accessibility to customersAccessibility to customers

Completeness Completeness Fully serviced, as requiredFully serviced, as required

Accuracy Accuracy Performed correctly each timePerformed correctly each time


How does quality affect profit?


FIGURE 4.4

The Impact of Quality on Profits


Deming’s Fourteen Points to Quality

1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.

2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.

3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.

4. End the practice of awarding business on the basis of price tag. Instead, minimize total cost.

5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly reduce costs.

TABLE 5.2



6. Institute training on the job.

7. Institute leadership. The aim of leadership should be to help people and machines and gadgets do a better job. Leadership of management is in need of an overhaul, as well as leadership of production workers.

8. Drive out fear, so that everyone may work effectively for the company.

9. Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.

10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships. The bulk of the causes of low quality and productivity belong to the system and thus lie beyond the power of the work force.



11. (a) Eliminate work standards on the factory floor. Substitute leadership. (b) Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

12. (a) Remove barriers that rob hourly workers of their right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. (b) Remove barriers that rob people in management and in engineering of their right to pride of workmanship.

13. Institute a vigorous program of education and self-improvement.

14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.


What are various market types?


Market Types Slow Cycle Markets: Products in slow-cycle markets reflect strongly

shielded resource positions where competitive pressures do not readily penetrate a firm’s sources of strategic competitiveness.

Standard-cycle markets: Products in standard-cycle markets reflect moderately shielded resource positions where competitive interaction penetrates firms sources of strategic competitiveness, but with improvement of its capabilities, the firm may be able to sustain competitive advantage.

Fast-cycle Markets: In fast-cycle markets, a competitive advantage can not be sustained, firms attempt to gain temporary competitive advantages by strategically disrupting the market.


Relative SizeSpeed

InnovationQuality





MarketCommonality

ResourceSimilarity




Action










Entrepreneurial





OutcomesOutcomes

Evolutionary ActionsGrowth-Oriented Actions Market-Power Actions

Evolutionary OutcomesEvolutionary Outcomes

Sustained Competitive

Competitive Market TypesCompetitive Market TypesSlow, Standard or Fast Cycle

Competitive OutcomesCompetitive Outcomes

Advantage

Temporary Advantage


Slow cycle markets are Slow cycle markets are frequently shielded by frequently shielded by monopoly power or very monopoly power or very strong brand loyaltiesstrong brand loyalties

Slow cycle markets are Slow cycle markets are frequently shielded by frequently shielded by monopoly power or very monopoly power or very strong brand loyaltiesstrong brand loyalties

This market outcome and This market outcome and lack of interfirm rivalry may lack of interfirm rivalry may lead to sustained competitive lead to sustained competitive advantageadvantage

This market outcome and This market outcome and lack of interfirm rivalry may lack of interfirm rivalry may lead to sustained competitive lead to sustained competitive advantageadvantage

Sustained CompetitiveSustained Competitive

Competitive Market TypesCompetitive Market TypesSlow, Standard or Fast CycleSlow, Standard or Fast Cycle


AdvantageAdvantage

Temporary AdvantageTemporary Advantage


OutcomesOutcomes



Sustained competitive Sustained competitive advantage is a possible advantage is a possible outcome in this instanceoutcome in this instance

Standard cycle markets Standard cycle markets often lead to highly often lead to highly competitive pressures competitive pressures despite world class productsdespite world class products

Firms with multimarket Firms with multimarket competition may dampen competition may dampen rivalry somewhatrivalry somewhat




AdvantageAdvantage





OutcomesOutcomes



AdvantageAdvantage



Fast cycle markets are Fast cycle markets are intensely dynamic and a first intensely dynamic and a first mover advantage is often mover advantage is often unsustainableunsustainable


Firms may cannibalize older Firms may cannibalize older generation products while generation products while introducing new innovative introducing new innovative premium productspremium products

Sustainable competitive Sustainable competitive advantage is unlikelyadvantage is unlikely


© Dr. D. Bhattacharjee Time (years)Time (years) 1010

LaunchLaunch

ExploitationExploitationCounterattackCounterattack

Gradual Erosion of a Gradual Erosion of a Sustained Competitive Advantage Sustained Competitive Advantage

Returns from a Returns from a Sustained Sustained

Competitive Competitive AdvantageAdvantage


How do firms maintain competitive advantage in fast cycle markets?


Some Firms Maintain Competitive Advantage Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiativein Fast-Cycle Markets by Seizing the Initiative

Disrupting the Status QuoDisrupting the Status QuoIdentify new opportunities to serve the customer by shifting the Identify new opportunities to serve the customer by shifting the rules of competition through speed and varietyrules of competition through speed and variety

Creating Temporary AdvantageCreating Temporary AdvantageUse superior knowledge of the customer, technology and the future Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workersto enhance customer orientation and empower workers

Seizing the InitiativeSeizing the InitiativeMove aggressively into new areas of competition to create new Move aggressively into new areas of competition to create new advantage and undermine a competitor’s old advantageadvantage and undermine a competitor’s old advantage

11

22

33

44Sustaining the MomentumSustaining the MomentumTake several actions in a row in order to seize the initiative and Take several actions in a row in order to seize the initiative and create momentum to develop new advantagescreate momentum to develop new advantages


LaunchLaunch

ExploitationExploitation CounterattackCounterattack



Obtaining Temporary Advantages Obtaining Temporary Advantages to Create Sustained Advantageto Create Sustained Advantage

55 1515


LaunchLaunch




55 1515

Firm has already moved on Firm has already moved on to Advantage No. 2to Advantage No. 2



LaunchLaunch




55 1515

Firm continues to move on to Firm continues to move on to the next Advantagethe next Advantage



Strategies may be deter-Strategies may be deter-mined by the life cycle of the mined by the life cycle of the industryindustry

Younger firms and emerging Younger firms and emerging industries are generally industries are generally characterized by characterized by entrepreneurial actionsentrepreneurial actions

Growth-oriented and Growth-oriented and Market-power strategies Market-power strategies dominate established or dominate established or mature industriesmature industries

Sustained Competitive

OutcomesOutcomes

Competitive Market TypesCompetitive Market TypesSlow, Standard or Fast Cycle


Advantage

Temporary Advantage






Relative SizeSpeed

InnovationQuality





MarketCommonality

ResourceSimilarity




Action










Entrepreneurial





Identify stages of industry evolution and explain the types of competitive actions emphasized in those stages.


An Action-Based Model of the An Action-Based Model of the Industry Life CycleIndustry Life CycleKey TaskKey Task

Exploiting Open Niches Exploiting Open Niches (Blind Spots) and (Blind Spots) and

Competitive UncertaintyCompetitive Uncertainty

Entrepreneurial Entrepreneurial ActionsActions

Key TaskKey Task

Growth-OrientedGrowth-OrientedActionsActions

Exploiting Factors of Exploiting Factors of ProductionProduction

Key TaskKey Task

Market-PowerMarket-PowerActionsActions

Exploiting Market Exploiting Market PositionPosition

Firm Resource Firm Resource &&

Market StrengthMarket Strength

Emerging StageEmerging Stage Growth StageGrowth Stage Mature StageMature Stage

TimeTime


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F Ch05 Competitive Dynamics

Documents

demings fourteen points

obtaining temporary advantages

market resource availability

exceeding customer expectations

create sustained advantagereturns

competitive market typesslow

sustained competitive advantage

power actions dr