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CHAPTER 5

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 firms 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 behaviorthat is, the total set of actions and responses
taken by all firms competing within a marketis called competitive dynamics.
Competitive rivalrys effect on the firms strategies is shown by the fact that a strategys
success is determined not only by the firms 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 firms business-level strategy or strategies. Indeed, firms actions and responses to those of
their rivals are the basic building blocks of business-level strategies.
5-1 A MODEL OF COMPETITIVE RIVALRY
Competitive rivalry evolves from the pattern of actions and responses as one firms
competitive actions have noticeable effects on competitors, eliciting competitive responses from
them.

5-2

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.
5-2a 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.
5-2b Resource Similarity
Resource similarity is the extent to which the firms tangible and intangible resources are
comparable to a competitors 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.
5-3

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 firms 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 firms incentive to take action or to respond to a
competitors 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 wont be damaged if it doesnt respond.
Market commonality affects the firms 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 firms
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.

5-4

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 competitors 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
5-4a 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 competitors 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.
5-5

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.
5-5a 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 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 movers 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 movers action and the second movers response. However, on occasion, late
movers can be successful if they develop a unique way to enter the market and compete.

5-5b Organizational Size


An organizations 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.
5-5c 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
when the firms 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 competitors sales revenue
until the quality issues are resolved.
5-6 LIKELIHOOD OF RESPONSE
In general a firm is likely to respond to a competitors action when
1. The action leads to better use of the competitors capabilities to develop a stronger
competitive advantage or an improvement in its market position
2. The action damages the firms ability to use its core competencies to create or maintain and
advantage, or
3. The firms market position becomes harder to defend.
5-6a 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 competitors response to that action.
5-6b Actors 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 competitors 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.
5.6c Market Dependence
Market dependence denotes the extent to which a firms 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.
5-7 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.
5-7a Slow-Cycle Markets
Slow-cycle markets are markets which the firms 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.
5-7b Fast-Cycle Markets
Fast-cycle markets are markets in which the firms capabilities that contribute to
competitive advantages arent shielded from imitation where imitation is often rapind and
inexpensive. Thus, competitive advantages arent sustainable in fast-cycle markets. Innovation
plays a critical role in the competitive dynamics in fast-cycle markets.
5-7c Standard-Cycle Markets
Standard-cycle markets are markets in which the firms 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 firms
operations in order to consistently provide the same positive experience for customers.