Chapter 6

Competitive Rivalry and

Competitive Dynamics

Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland

©2004 by South-Western/Thomson Learning 1

The Strategic Management Process
Chapter 1
Strategic Chapter 2
Introduction to
Thinking Strategic Leadership
Strategic Management

Chapter 3 Chapter 4
Strategic Strategic Intent
The External The Internal
Analysis Environment Organization
Strategic Mission

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Strategy Competitive Dynamics
Corporate-Level Strategy
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisition and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
2
Opportunities
Discussion Questions
Click
Here 1. What is competitive dynamics and why
is it important?
Click
Here 2. What are the reasons why rivalry
increases or decreases between
firms?
Click
Here 3. What factors drive awareness of the
potential for increased rivalry and
competitive attack and response?

Click
Here More discussion questions 3
Discussion Questions (cont.)
Click
Here 4. What factors lead to motivation and
ability for competitive attack and
response?
Click
Here 5. Besides market commonality and
resource similarity, what additional
factors might lead a firm to attack?
Click
Here 6. Once competitive action is taken,
what factors increase the likelihood of
competitive response?
Click
Here More discussion questions 4
Discussion Questions (cont.)
Click
Here 7. What strategic approach is necessary
to compete in slow versus fast cycle
or hyper-competitive markets?

5
Discussion Question 1

What is competitive dynamics and

why is it important?

6
Definitions
 Competitors
– firms operating in the same market, offering
similar products and targeting similar
customers
 Competitive rivalry
– the ongoing set of competitive actions and
responses occurring between competitors
– competitive rivalry influences an individual
firm’s ability to gain and sustain competitive
advantages
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Definitions
 Competitive behavior
– the set of competitive actions and competitive
responses the firm takes to build or defend its
competitive advantages and to improve its
market position
 Competitive dynamics
– the total set of actions and responses taken by
all firms competing within a market

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 From Competitors to
Competitive Dynamics
Competitors • To gain an advantageous
Engage in Why? market position
Competitive
rivalry • Through competitive
How? behavior
• Competitive actions
What results? • Competitive responses
What results?

Competitive Dynamics
• Competitive actions and responses taken by all
firms competing in a market 9
Effect of Competitive Rivalry on
a Firm’s Strategies
 Success of a strategy is determined by:
– the firm’s initial competitive actions
– how well it anticipates competitors’ responses
to them
– how well the firm anticipates and responds to its
competitors’ initial actions
 Competitive rivalry
– affects all types of strategies
– most dominant influence is on the firm’s
business-level strategy or strategies.
Click
Here Return to Discussion Questions 10
Discussion Question 2

What are the reasons why rivalry

increases or decreases between
firms?

11
 A Model of Competitive
Rivalry
Outcomes
Competitive Analysis feedback • Market position
• Market commonality • Financial performance
• Resource similarity

Interfirm Rivalry
• Likelihood of Attack
Drivers of Competitive • First mover incentives
Behavior • Organizational size
• Awareness • Quality
• Motivation • Likelihood of Response
• Ability • Type of competitive action
• Reputation
• Market dependence 12
Competitive Rivalry
 Firms are mutually interdependent
– one firm’s competitive actions have noticeable
effects on competitors
– one firm’s competitive actions elicit
competitive responses from competitors
– competitors feel each other’s actions and
responses
 Marketplace success is a function of both
individual strategies and the
consequences of their use
13
Competitor Analysis
 Competitor analysis
– a technique firms use to understand their
competitive environment. Along with the general
and industry environments, the competitive
environment comprises the firm’s external
environment
– a technique used to help the firm understand its
competitors
– the first step to being able to predict
competitors’ behavior in the form of its
competitive actions and responses
Click
Here Return to Discussion Questions 14
 Discussion Question 3

What factors drive awareness of the

potential for increased rivalry and
competitive attack and response?

15
Market Commonality
 Market Commonality is concerned with
– the number of markets with which a firm and a
competitor are jointly involved
– the degree of importance of the individual markets to
each competitor
 Most industries’ markets are somewhat related in
terms of
– technologies
– core competencies
 Multimarket competition
– Firms competing in several markets
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Resource Similarity
 Resource similarity
– 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
– use similar strategies
 Assessing resource similarity can be difficult if
critical resources are intangible rather than
tangible
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 A Framework of Competitor
Analysis
High
Market II I
Commonality III IV
Low
KEY
The shaded area represents Low High
degree of market commonality Resource
between two firms Similarity
Resource endowment A

Resource endowment B
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 Drivers of Competitive Actions
and Responses: Awareness
Drivers of competitive behavior
 Awareness is the extent to which
Awareness competitors recognize the degree of
their mutual interdependence
– mutual interdependence results
from
• market commonality
• resource similarity

Click
Here Return to Discussion Questions 19
Discussion Question 4

What factors lead to motivation

and ability for competitive attack
and response?

20
 Drivers of Competitive Actions
and Responses: Motivation
Drivers of competitive behavior
 Motivation concerns the firm’s
Awareness incentive
– to take action
Motivation – or to respond to a competitor’s
attack
– and relates to perceived gains and
losses

21
 Drivers of Competitive Actions
and Responses: Ability
Drivers of competitive behavior
 Ability relates
Awareness – to each firm’s resources
– the flexibility these resources
Motivation provide
 Without available resources the firm
lacks the ability
Ability
– to attack a competitor
– to respond to the competitor’s
actions

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 Drivers of Competitive Actions
and Responses: Dissimilarity
Drivers of competitive behavior
 Dissimilarity refers to the resource
Awareness imblance between the acting firm and
– competitors
Motivation – potential responders
 The greater the imbalance, the
Ability greater will be the delay in
response by the firm with the
resource disadvantage
Dissimilarity

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 Drivers of Competitive Actions
and Responses: Market Commonality
Drivers of competitive behavior influenced by
Market
 A firm is more likely to attack the
commonality rival with whom it has low market
commonality than the one with whom
it competes in multiple markets
 Because of the high stakes of
competition under the condition of
market commonality, there is a high
probability that the attacked firm will
respond to its competitor’s action in
an effort to protect its position in one
or more markets
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 Drivers of Competitive Actions
and Responses: Resource Similarity
Drivers of competitive behavior influenced by
Market
 The greater the resource imbalance
commonality between the acting firm and
competitors or potential responders,
Resource the greater will be the delay in
similarity response by the firm with a resource
disadvantage
 When facing competitors with greater
resources or more attractive market
positions, firms should eventually
Click
Here Return to respond, no matter how challenging
Discussion the response
Questions 25
Discussion Question 5

Besides market commonality and

resource similarity, what additional
factors might lead a firm to attack?

26
Factors Affecting Likelihood of
Attack: First Mover Incentives
First mover  First movers allocate funds for
incentives – product innovation and development
– aggressive advertising
– advanced research and development
 First movers can gain
– the loyalty of customers who may
become committed to the firm’s goods
or services
– market share that can be difficult for
competitors to take during future
competitive rivalry

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Factors Affecting Likelihood of
Attack: Size
First mover  Small firms are more likely
incentives – to launch competitive actions
– to be quicker in doing so
Size  Small firms are perceived as
– nimble and flexible competitors
– relying on speed and surprise to
defend their competitive advantages
or develop new ones while engaged
in competitive rivalry
 Small firms have the flexibility needed
to launch a greater variety of
competitive actions
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Factors Affecting Likelihood of
Attack: Size
First mover  Large firms are likely to initiate more
incentives competitive actions as well as
strategic actions during a given time
Size period
 Large organizations commonly have
the slack resources required to
launch a larger number of total
competitive actions
“Think and act big and we’ll get smaller. Think and
act small and we’ll get bigger.”
- Herb Kelleher,
Former CEO, Southwest Airlines
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Factors Affecting Likelihood of
Attack: Quality
First mover  Quality exists when the firm’s goods
incentives or services meet or exceed
customers’ expectations
Size  Product quality dimensions include
– Performance
– Features
Quality – Flexibility
– Durability
– Conformance
– Serviceability
– Aesthetics
– Perceived quality

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Factors Affecting Likelihood of
Attack: Quality
First mover  Quality exists when the firm’s goods
incentives or services meet or exceed
customers’ expectations
Size
 Service quality dimensions include
– Timeliness
– Courtesy
Quality – Consistency
– Convenience
– Completeness
– Accuracy

Click
Here Return to Discussion Questions
31
Discussion Question 6

Once competitive action is taken,

what factors increase the
likelihood of competitive
response?

32
 Factors Affecting Likelihood of
Response
 Firms study three factors to predict how a
competitor is likely to respond to
competitive actions
– type of competitive action
– reputation
– market dependence

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Strategic and Tactical Actions
 Strategic action or a strategic response
– a market-based move that involves a
significant commitment of organizational
resources and is difficult to implement and
reverse
 Tactical action or a tactical response
– a market-based move that is taken to fine-tune
a strategy; it involves fewer resources and is
relatively easy to implement and reverse

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Factors Affecting Likelihood of
Response: Type of Competitive Action
Type of  Strategic actions receive strategic
competitive responses
action  Tactical responses are taken to
counter the effects of tactical actions
 Strategic actions elicit fewer total
competitive responses
 A competitor likely will respond
quickly to a tactical action
 The time needed to implement and
assess a strategic action delays
competitors’ responses

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Factors Affecting Likelihood of
Response: Reputation
Type of  An actor is the firm taking an action
competitive or response
action  Reputation is the positive or negative
attribute ascribed by one rival to
Reputation another based on past competitive
behavior
 The firm studies responses that a
competitor has taken previously when
attacked to predict likely responses

36
Factors Affecting Likelihood of
Response: Market Dependence
Type of  Market dependence is
competitive – the extent to which a firm’s
action revenues or profits are derived
from a particular market
Reputation  In general, firms can predict that
competitors with high market
Market dependence are likely to respond
dependence strongly to attacks threatening their
market position

Click
Here Return to Discussion Questions 37
Discussion Question 7

What strategic approach is

necessary to compete in slow
versus fast cycle or hyper-
competitive markets?

38
Competitive Dynamics:
Slow-Cycle Markets
Slow-cycle  Slow-cycle markets
markets – the firm’s competitive advantages
are shielded from imitation for long
periods of time
– imitation is costly
 Competitive advantages are
sustainable in slow-cycle markets
 A proprietary, one-of-a-kind
competitive advantage leads to
competitive success in a slow-cycle
market

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Gradual Erosion of a Sustainable
Competitive Advantage
Returns from a Sustainable

Exploitation
Competitive Advantage

Launch Counterattack

0 5
Time (Years)
10
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Competitive Dynamics:
Fast-Cycle Markets
Slow-cycle  Fast-cycle markets
markets – the firm’s competitive advantages
aren’t shielded from imitation
Fast-cycle – imitation happens quickly and
markets
somewhat inexpensively
 Competitive advantages aren’t
sustainable
 Competitors use reverse engineering
to quickly imitate or improve on the
firm’s products
 Non-proprietary technology is
diffused rapidly
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Obtaining Temporary Advantages to
Create Sustained Advantage
of Replicable Actions
Returns from a Series

Firm has already moved

Exploitation to next advantage
Launch Counterattack

0 5 10 15
Time (Years)

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 Competitive Dynamics:
Standard-Cycle Markets
Slow-cycle  Standard-cycle markets
markets – the firm’s competitive advantages may
be shielded from imitation
Fast-cycle – imitation is moderately costly
markets  Competitive advantages are partially
sustainable if the firm is able to
Standard-cycle continuously upgrade the quality of its
markets competitive advantages
 Firms
– seek large market shares
– gain customer loyalty through brand
names
– carefully control operations
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