COMPETITIVE RIVALRY AND COMPETITIVE DYNAMICS

Firms operating in the same market, offering similar products, and targeting
similar customers are competitors. Firms interact with their competitors as part of
the broad context within which they operate while attempting to earn above-
average returns. The decisions firms make about their interactions with their
competitors significantly affect their ability to earn above average returns.
Competitive rivalry is the ongoing set of competitive actions and competitive
responses that occur among firms as they maneuver for an advantageous market
position. It is important for those leading organizations to understand competitive
rivalry, in that “the central, brute empirical fact in strategy is that some firms
outperform others,” meaning that competitive rivalry influences an individual
firm’s ability to gain and sustain competitive advantages.
Competitive behavior is the set of competitive actions and responses the firm
takes to build or defend its competitive advantages and to improve its market
position. Increasingly, competitors engage in competitive actions and responses in
more than one market. Firms competing against each other in several product or
geographic markets are engaged in multimarket competition. All competitive
behavior—that is, the total set of actions and responses taken by all firms
competing within a market—is called competitive dynamics.
Competitive rivalry’s effect on the firm’s strategies is shown by the fact that a
strategy’s success is determined not only by the firm’s initial competitive actions
but also by how well it anticipates competitors’ responses to them and by how well
the firm anticipates and responds to its competitors’ initial actions (also called
attacks). Although competitive rivalry affects all types of strategies (e.g.,
corporate-level, acquisition, and international), its dominant influence is on the
firm’s business-level strategy or strategies. Indeed, firms’ actions and responses to
those of their rivals are the basic building blocks of business-level strategies.
1-1 A MODEL OF COMPETITIVE RIVALRY
Competitive rivalry evolves from the pattern of actions and responses as one
firm’s competitive actions have noticeable effects on competitors, eliciting
competitive responses from them.

1-2 COMPETITOR ANALYSIS

As previously noted, a competitor analysis is the first step the firm takes to be
able to predict the extent and nature of its rivalry with each competitor. The
number of markets in which firms compete against each other (called market
commonality, defined on the following pages) and the similarity in their resources
(called resource similarity, also defined in the following section) determine the
extent to which the firms are competitors. Firms with high market commonality
and highly similar resources are “clearly direct and mutually acknowledged
competitors.

1-2a Market Commonality

Each industry is composed of various markets. Competitors tend to agree
about the different characteristics of individual markets that form an industry.
Firms sometimes compete against each other in several markets that are in
different industries. As such these competitors interact with each other several
times, a condition called market commonality. More formally, market
commonality is concerned with the number of markets with which the firm and a
competitor are jointly involved and the degree of importance of the individual
markets to each.

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1-2b Resource Similarity
Resource similarity is the extent to which the firm’s tangible and intangible
resources are comparable to a competitor’s in terms of both type and amount.
Firms with similar types and amounts of resources are likely to have similar
strengths and weaknesses and use similar strategies.

1-3 DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES

Market commonality and resource similarity influence the drivers (awareness,
motivation, and ability) of competitive behavior. In turn, the drivers influence the
firm’s competitive behavior, as shown by the actions and responses it takes while
engaged in competitive rivalry.
Awareness, which is a prerequisite to any competitive action or response
taken by a firm, refers to the extent to which competitors recognize the degree of
their mutual interdependence that results from market commonality and resource
similarity. Awareness tends to be greatest when firms have highly similar
resources to use while competing against each other in multiple markets.
Motivation, which concerns the firm’s incentive to take action or to respond
to a competitor’s attack, relates to perceived gains and losses. Thus, a firm may be
aware of competitors but may not be motivated to engage in rivalry with them if it
perceives that its position will not improve or that its market position won’t be
damaged if it doesn’t respond. Market commonality affects the firm’s perceptions
and resulting motivation.
The firm may be aware of the markets it shares with a competitor and be
motivated to respond to an attack by that competitor, but lack the ability to do so.
Ability relates to each firm’s resources and the flexibility they provide. Without
available resources, the firm lacks the ability to attack a competitor or respond to
its actions. For example, smaller and newer firms tend to be more innovative but
generally have fewer resources to attack larger and established competitors.
Resource dissimilarity also influences competitive actions and responses
between firms, in that “the greater is the resource imbalance between the acting
firm and competitors or potential responders, the greater will be the delay in
response” by the firm with a resource disadvantage.

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1-4 COMPETITIVE RIVALRY
The ongoing competitive action/response sequence between a firm and a
competitor affects the performance of both firms; thus it is important for
companies to carefully analyze and understand the competitive rivalry present in
the markets they serve to select and implement successful strategies.
Understanding a competitor’s awareness, motivation, and ability helps the firm to
predict the likelihood of an attack by that competitor and the probability that a
competitor will respond to actions taken against it

1-4a Strategic and Tactical Actions

Firms use both strategic and tactical actions when forming their competitive
actions and competitive responses in the course of engaging in competitive rivalry.
A competitive action is a strategic or tactical action the firm takes to build or
defend its competitive advantages or improve its market position. A competitive
response is a strategic or tactical action the firm takes to counter the effects of a
competitor’s competitive action. A strategic action or a strategic response is a
market-based move that involve a significant commitment of organizational
resources and is difficult to implement and reverse. A tactical action or a tactical
response is a market-based move that is taken to fine-tune a strategy; it involves
fewer resources and is relatively easy to implement and reverse.
When engaging rivals in competition, firms must recognize the differences
between strategic and tactical actions and responses and should develop an
effective balance between the two types of competitive actions and responses.

1-5 LIKELIHOOD OF ATTACK

In addition to market commonality, resource similarity, and the drivers of
awareness, motivation, and ability, other factors affect the likelihood a competitor
will use strategic actions and tactical actions to attack its competitors.
1-5a First-Mover Incentives
A first mover is a firm that takes an initial competitive action in order to build
or defend its competitive advantages or to improve its market position. In general,
first movers “allocate funds for product innovation and development, aggressive
advertising, and advanced research and development.”
In addition to earning above-average returns until its competitors respond to
its successful competitive action, the first mover can gain (1) the loyalty of
customers who may become committed to the goods or services of the firm that

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first made them available, and (2) market share that can be difficult for competitors
to take during future competitive rivalry.
A second mover is a firm that responds to the first mover’s competitive
action, typically through imitation. More cautious than the first mover, the second
mover studies customers’ reactions to product innovations. Second movers also
have the time to develop processes and technologies that are more efficient than
those used by the first mover or that create additional value for consumers.
A late mover is a firm that responds to a competitive action a significant
amount of time after the first mover’s action and the second mover’s response.
However, on occasion, late movers can be successful if they develop a unique way
to enter the market and compete.

1-5b Organizational Size

An organization’s size affects the likelihood it will take competitive actions as
well as the types and timing of those actions. In general, small firms are more
likely than large companies to launch competitive actions and tend to do it more
quickly. Smaller firms are thus perceived as nimble and flexible competitors who
rely on speed and surprise to defend their competitive advantages or develop new
ones while engaged in competitive rivalry, especially with large companies, to gain
an advantageous market position. Small firms’ flexibility and nimbleness allow
them to develop variety in their competitive actions; large firms tend to limit the
types of competitive actions used.
Large firms, however, are likely to initiate more competitive actions along
with more strategic actions during a given period.81 Thus, when studying its
competitors in terms of organizational size, the firm should use a measurement
such as total sales revenue or total number of employees.
1-5c Quality
Quality has many
definitions, including well-
established ones relating it to the
production of goods or services
with zero defects and as a cycle
of continuous improvement.
From a strategic perspective, we
consider quality to be the
outcome of how a firm
completes primary and support
activities. Thus, quality exists

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when the firm’s goods or services meet or exceed customers’ expectations.
In the eyes of customers, quality is about doing the right things relative to
performance measures that are important to them. Quality affects competitive
rivalry. The firm evaluating a competitor whose products suffer from poor quality
can predict declines in the competitor’s sales revenue until the quality issues are
resolved.

1-6 LIKELIHOOD OF RESPONSE

In general a firm is likely to respond to a competitor’s action when
1. The action leads to better use of the competitor’s capabilities to develop a
stronger competitive advantage or an improvement in its market position
2. The action damages the firm’s ability to use its core competencies to create or
maintain and advantage, or
3. The firm’s market position becomes harder to defend.

1-6a Type of Competitive Action

Competitive responses to strategic actions differ from responses to tactical
actions. Strategic actions commonly receive strategic responses and tactical actions
receive tactical responses. In general, strategic actions elicit fewer total
competitive responses because strategic responses, such as market-based moves,
involve a significant commitment of resources and are difficult to implement and
reverse. Another reason that strategic actions elicit fewer responses than do tactical
actions is that the time needed to implement a strategic action and to assess its
effectiveness can delay the competitor’s response to that action.

1-6b Actor’s Reputation

In the context of competitive rivalry, an actor is the firm taking an action or a
response while reputation is “the positive or negative attribute ascribed by one
rival to another based on past competitive behaviour.” A positive reputation may
be a source of above-average returns, especially for consumer goods producers.
Thus, a positive corporate reputation is of strategic value and affects competitive
rivalry. To predict the likelihood of a competitor’s response to a current or planned
action, firms evaluate the responses that the competitor has taken previously when
attacked – past behaviour is assumed to be a predictor of future behaviour.

1.6c Market Dependence

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 Market dependence denotes the extent to which a firm’s revenues or profits
are derived from a particular market. In general, competitors with high market
dependence are likely to respond strongly to attacks threatening their market
position.

1-7 COMPETITIVE DYNAMICS

Competitive dynamics concerns the ongoing actions and responses among all
firms competing within a market for advantageous position. To explain
competitive dynamics, we explore the effects of varying rates of competitive speed
in different markets (called slow-cycle, fast-cycle, and standard-cycle markets) on
behaviour (actions and responses) of all competitors within a given market.

1-7a Slow-Cycle Markets

Slow-cycle markets are markets which the firm’s competitive advantages are
shielded from imitation, commonly for long periods of time, and where imitation is
costly. Thus, competitive advantages are sustainable over longer periods of time in
slow-cycle markets.

1-7b Fast-Cycle Markets

Fast-cycle markets are markets in which the firm’s capabilities that contribute
to competitive advantages aren’t shielded from imitation where imitation is often
rapind and inexpensive. Thus, competitive advantages aren’t sustainable in fast-
cycle markets. Innovation plays a critical role in the competitive dynamics in fast-
cycle markets.

1-7c Standard-Cycle Markets

Standard-cycle markets are markets in which the firm’s competitive
advantages are partially shielded from imitation and imitation is moderately costly.
Competitive advantages are partially sustainable in standard-cycle markets, but
only when the firm is able to continuously upgrade the quality of its capabilities as
a foundation for being able to stay ahead of competitors. The competitive actions
and responses in standard-cycle markets are designed to seek large market shares,
to gain customer loyalty through brand names, and to carefully control a firm’s
operations in order to consistently provide the same positive experience for
customers.

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