Chapter 5

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

2000 South-Western College Publishing

Ch5-1

Strategic
Inputs

Chapter 2
External
Environment

Strategic Intent
Strategic Mission

Chapter 3
Internal
Environment

Strategy Implementation

Chapter 4
Business-Level
Strategy

Chapter 5
Competitive
Dynamics

Chapter 6
Corporate-Level
Strategy

Chapter 10
Corporate
Governance

Chapter 11
Structure
& Control

Chapter 7
Acquisitions &
Restructuring

Chapter 8
International
Strategy

Chapter 9
Cooperative
Strategies

Chapter 12
Strategic
Leadership

Chapter 13

Outcomes

Strategic

Strategic
Actions

Strategy Formulation

The Strategic
Management
Process

Feedback

Entrepreneurship

& Innovation

Strategic
Competitiveness
Above Average
Returns
Ch5-2

Factors Leading to More Complex Rivalry

Declining emphasis on single, domestic markets and
increasing emphasis on global markets
Advances in communication technology make
coordination easier across multiple markets
Advances in technology and innovation have increased
competitiveness of small and medium sized firms
National barriers are falling due to the number and
scope of trade agreements (GATT, NAFTA, EEC)
Ch5-3

Competitive Dynamics
Results from a series of competitive actions and
competitive responses among firms competing within
a particular industry

Competitive Rivalry
Exists when two or more firms jockey with one another
in the pursuit of better market position
Ch5-4

A firms
strategic conduct
is dynamic in
nature

Actions taken
by one firm
elicit responses
from
competitors

Competitive
Dynamics
Actions and
responses shape the
competitive positions
of each firms
business level
strategy

Competitive
responses lead
to additional
actions from the
firm that acted
originally

Ch5-5

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-6

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation

Do managers understand
the key characteristics of
competitors?

Capability

Ch5-7

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Does the firm have

appropriate incentives to
attack or respond?

Ch5-8

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Does the firm have the

necessary resources to
attack or respond?

Ch5-9

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-10

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality

Do firms compete with each

other in multiple markets?

Resource
Similarity

Ch5-11

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality
Resource
Similarity

Multipoint competition tends to

reduce competitive interactions, but
increases the likelihood of response
where interaction occurs
For example, airlines price flights
similarly but respond quickly when
competitors introduce promotional
prices
Ch5-12

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality
Resource
Similarity

Do competitors possess similar

types or amounts of resources?

Ch5-13

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality
Resource
Similarity

Firms are less inclined to attack a

firm that is likely to retaliate
Firms with similar resources are
more likely to be aware of each
others competitive moves
Firms with dissimilar resources
are more likely to attack
Ch5-14

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-15

Model of Interfirm Rivalry:

Likelihood of Attack and Response

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover advantage
First Mover Incentives can be substantial
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ch5-16

First Mover
Firms 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

Can earn above average profits until competitors

respond
Gain customer loyalty, helping to create a barrier to
entry by competitors
Advantage depends upon difficulty of imitation
Ch5-17

Second Mover
Firms that respond to a First Movers actions
Second Movers frequently imitate First Movers
Speed of response often dictates success

Should evaluate customers response before moving

Fast Second Movers can capture some of initial
customers and develop some brand loyalty
Avoid some of the risks associated with First Move
Must possess necessary capabilities to imitate

Ch5-18

Model of Interfirm Rivalry:

Likelihood of Attack and Response

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Whether a competitor
is likely to respond
depends on several
key factors
Ch5-19

Types of Competitive Actions

Strategic
Actions

Significant commitments of specific and

distinctive organizational resources
Difficult to implement
Difficult to reverse

Example

Tactical
Actions

Major Acquisition
Undertaken to fine tune strategy
Relatively easy to implement
Relatively easy to reverse

Example

Price cut

Ch5-20

Gauging the Likelihood of Response

Type of Competitive Action -Tactical or Strategic
Easier to respond to
Require fewer resources to mount a response

Actors Reputation
Market leaders are more likely to be copied
Risk taking firms are less likely to be copied
Price Predators are less likely to be copied
Ch5-21

Gauging the Likelihood of Response

Market Dependence
Firms 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 actions

Competitor Resources
Smaller firms are more likely to respond to tactical
actions
Limited resources may lead to alternatives such as
Strategic Alliances

Ch5-22

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-23

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Speed

Firm size can have

opposing effects on
competitive dynamics

Innovation
Quality
Ch5-24

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Large firms may exert market power

over rivals and erect barriers to
entry against smaller competitors
However, smaller competitors
may be more nimble and
innovative
Think and act big and well get
smaller. Think and act small
and well get bigger.
-- Herb Kelleher,
CEO, Southwest Airlines
Ch5-25

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Speed
Innovation

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

Quality
Ch5-26

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Consistent innovation
is required for market
leadership in many
dynamic industries
Ch5-27

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Exceeding customer
expectations is a necessity
to compete in the 21st
century
Ch5-28

Quality Dimensions of Goods & Services

Product Quality Dimensions:
Performance
Features
Flexibility
Durability
Conformance
Serviceability
Aesthetics

Operating characteristics
Important special characteristics
Meeting operating specifications over time
Amount of use before performance
deteriorates
Match with pre-established standards
Ease and speed of repair or normal service
How a product looks and feels

Perceived quality Subjective assessment of

characteristics (product image)

Ch5-29

Quality Dimensions of Goods & Services

Service Quality Dimensions:
Timeliness

Performed in promised period of time

Courtesy

Performed cheerfully

Consistency

Giving all customers similar experiences

Convenience

Accessibility to customers

Completeness

Fully serviced, as required

Accuracy

Performed correctly each time

Ch5-30

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-31

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Outcomes
Competitive Market Types Slow cycle markets are
Slow, Standard or Fast Cycle

Competitive Outcomes
Sustained Competitive
Advantage
Temporary Advantage

Evolutionary Outcomes
Evolutionary Actions
Growth-Oriented Actions
Market-Power Actions

frequently shielded by
monopoly power or very
strong brand loyalties

This market outcome and

lack of interfirm rivalry
may lead to sustained
competitive advantage

Ch5-32

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Outcomes
Standard cycle markets
Competitive Market Types often lead to highly
Slow, Standard or Fast Cycle competitive pressures
Competitive Outcomes despite world class
products
Sustained Competitive
Advantage
Firms with multimarket
Temporary Advantage
competition may dampen
Evolutionary Outcomes rivalry somewhat
Evolutionary Actions
Growth-Oriented Actions
Market-Power Actions

Sustained competitive
advantage is a possible
outcome in this instance
Ch5-33

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Outcomes
Fast cycle markets are
Competitive Market Types
intensely dynamic and a
Slow, Standard or Fast Cycle first mover advantage is
Competitive Outcomes often unsustainable
Sustained Competitive
Firms may cannibalize
Advantage
older generation products
Temporary Advantage
while introducing new
Evolutionary Outcomes innovative premium
products
Evolutionary Actions
Growth-Oriented Actions
Sustainable competitive
Market-Power Actions
advantage is unilkely Ch5-34

Gradual Erosion of a
Sustained Competitive Advantage
Returns
from a
Sustained
Competitive
Advantage

Exploitation
Counterattack
Launch

Time (years)

10

Ch5-35

Some Firms Maintain Competitive Advantage

in Fast-Cycle Markets by Seizing the Initiative
1 Disrupting the Status Quo

Identify new opportuntites to serve the customer by

shifting the rules of competition through speed and variety

2 Creating Temporary Advantage

Use superior knowledge of the customer, technology and the

future to enhance customer orientation and empower
workers

3 Seizing the Initiative

Move aggressively into new areas of competition to create

new advantage and undermine a competitors old advantage

4 Sustaining the Momentum

Take several actions in a row in order to seize the initiative

and create momentum to develop new advantages
Ch5-36

Obtaining Temporary Advantages

to Create Sustained Advantage
Returns
from a
Sustained
Competitive
Advantage

Exploitation

Counterattack

Launch

Time (years) 10

15

Ch5-37

Obtaining Temporary Advantages

to Create Sustained Advantage
Returns
from a
Sustained
Competitive
Advantage

Firm has already moved

on to Advantage No. 2

Exploitation

Counterattack

Launch

Time (years) 10

15

Ch5-38

Obtaining Temporary Advantages

to Create Sustained Advantage
Returns
from a
Sustained
Competitive
Advantage

Firm continues to move

on to the next Advantage

Exploitation

Counterattack

Launch

Time (years) 10

15

Ch5-39

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Outcomes
Competitive Market Types Strategies may be deter-

mined by the life cycle of

Slow, Standard or Fast Cycle
the industry

Competitive Outcomes

Sustained Competitive
Advantage
Temporary Advantage

Evolutionary Outcomes
Evolutionary Actions
Growth-Oriented Actions
Market-Power Actions

Younger firms and

emerging industries are
generally characterized by
entrepreneurial actions
Growth-oriented and
Market-power strategies
dominate established or
mature industries
Ch5-40

Model of Interfirm Rivalry:

Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability

Competitor
Analysis
Market
Commonality
Resource
Similarity

Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actors Reputation
Dependence on the
Market
Resource Availability

Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality

Feedback

Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Action
Ch5-41

An Action-Based Model of the

Industry Life Cycle

Firm Resource
&
Market Strength

Key Task

Key Task

Exploiting Open
Niches (Blind Spots)
and Competitive
Uncertainty

Exploiting Factors
of Production

Key Task

Exploiting Market
Position

Market-Power
Actions
Growth-Oriented
Actions
Entrepreneurial
Actions
Emerging Stage

Growth Stage

Time

Mature Stage
Ch5-42