Chapter

Chapter 5
5

Competitive Dynamics

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

©2000 South-Western College Publishing

Ch5
 Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Ch5
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
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
 A firm’s
strategic conduct
is dynamic in
nature

Competitive
Actions taken
responses lead
by one firm Competitive to additional
elicit responses
from Dynamics actions from the
firm that acted
competitors
originally

Actions and
responses shape the
competitive positions
of each firm’s
business level
strategy
Ch5
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Do managers understand
Awareness the key characteristics of
Motivation competitors?
Capability

Ch5
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Does the firm have
Motivation appropriate incentives to
Capability attack or respond?

Ch5
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Does the firm have the
Capability necessary resources to
attack or respond?

Ch5
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market Do firms compete with each
Commonality other in multiple markets?

Resource
Similarity

Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market Multipoint competition tends to
reduce competitive interactions, but
Commonality
increases the likelihood of response
where interaction occurs
Resource
Similarity For example, airlines price flights
similarly but respond quickly when
competitors introduce promotional
prices

Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality

Resource Do competitors possess similar

Similarity types or amounts of
resources?

Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market
Firms are less inclined to attack a
Commonality firm that is likely to retaliate
Resource Firms with similar resources are
Similarity more likely to be aware of each
other’s competitive moves

Firms with dissimilar resources

are more likely to attack
Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5-
 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
Actor’s Reputation
Dependence on the
Market
Resource Availability Ch5-
 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-
 Second Mover
Firms that respond to a First Mover’s 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-
 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 Whether a competitor
Action
is likely to respond
Actor’s Reputation
depends on several
Dependence on the
Market key factors
Resource Availability Ch5-
 Types of Competitive Actions
Significant commitments of specific and
Strategic distinctive organizational resources
Actions Difficult to implement
Difficult to reverse

Example Major Acquisition

Undertaken to “fine tune” strategy

Tactical
Actions Relatively easy to implement
Relatively easy to reverse
Example Price cut Ch5-
 Gauging the Likelihood of Response
Type of Competitive Action -Tactical or Strategic
Easier to respond to
Require fewer resources to mount a response

Actor’s 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-
 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-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response
Firm size can have
Relative Size opposing effects on
competitive dynamics
Speed
Innovation

Quality
Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Large firms may exert market power
Action and over rivals and erect barriers to
Response entry against smaller competitors

Relative Size However, smaller competitors

may be more nimble and
Speed innovative

Innovation “Think and act big and we’ll get

smaller. Think and act small
and we’ll get bigger.”
Quality -- Herb Kelleher,
CEO, Southwest Airlines
Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response

Relative Size Quick response is

crucial to both the
Speed
first mover and the
Innovation fast second mover

Quality
Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response

Relative Size
Speed Consistent innovation
is required for market
Innovation
leadership in many
dynamic industries
Quality
Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response

Relative Size
Speed
Innovation Exceeding customer
expectations is a necessity
Quality to compete in the 21st
century
Ch5-
 Quality Dimensions of Goods & Services
Product Quality Dimensions:
Performance Operating characteristics
Features Important special characteristics
Flexibility Meeting operating specifications over time
Durability Amount of use before performance
deteriorates
Conformance Match with pre-established standards
Serviceability Ease and speed of repair or normal service
Aesthetics How a product looks and feels
Perceived quality Subjective assessment of
characteristics (product image)
Ch5-
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-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Outcomes
Competitive Market Types Slow cycle markets are
Slow, Standard or Fast Cycle frequently shielded by
monopoly power or very
Competitive Outcomes strong brand loyalties
Sustained Competitive
Advantage This market outcome and
Temporary Advantage lack of interfirm rivalry
may lead to sustained
Evolutionary Outcomes
competitive advantage
Evolutionary Actions
Growth-Oriented Actions
Market-Power Actions Ch5-
 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 Sustained competitive
Growth-Oriented Actions advantage is a possible
Market-Power Actions outcome in this instance Ch5-
 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-
 Gradual Erosion of a
Sustained Competitive Advantage
Returns
from a
Sustained
Competitive
Advantage Exploitation
Counterattack

Launch

Time (years)
10 Ch5-
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 competitor’s 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-
 Obtaining Temporary Advantages
to Create Sustained Advantage

Returns
from a
Sustained
Competitive
Advantage

Exploitation Counterattack
Launch

5 Time (years) 10 15 Ch5-

 Obtaining Temporary Advantages
to Create Sustained Advantage

Returns
from a
Sustained
Competitive Firm has already moved
Advantage on to Advantage No. 2

Exploitation Counterattack
Launch

5 Time (years) 10 15 Ch5-

 Obtaining Temporary Advantages
to Create Sustained Advantage

Returns
from a
Sustained
Competitive Firm continues to move
Advantage on to the next Advantage

Exploitation Counterattack
Launch

5 Time (years) 10 15 Ch5-

 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 Younger firms and
Sustained Competitive emerging industries are
Advantage
generally characterized by
Temporary Advantage entrepreneurial actions
Evolutionary Outcomes Growth-oriented and
Evolutionary Actions Market-power strategies
Growth-Oriented Actions dominate established or
Market-Power Actions mature industries Ch5-
 Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive Outcomes
Ability for
Behavior Interfirm Rivalry: Action and Competitive
Awareness Attack & Response Market Types
Response
Motivation Slow, Standard
Capability Likelihood of Attack Relative Size or Fast Cycle
First Mover Incentives Speed Competitive
Likelihood of Response Innovation Outcomes
Type of Competitive Quality Sustained
Competitive
Competitor Action Advantage
Actor’s Reputation
Analysis Temporary
Dependence on the Advantage
Market Market
Commonality Resource Availability Evolutionary
Resource Outcomes
Similarity Entrepreneurial
Growth-Oriented
Feedback or Market-Power
Action Ch5-
 An Action-Based Model of the
Industry Life Cycle
Key Task Key Task Key Task

Exploiting Open Exploiting Factors Exploiting Market

Niches (Blind Spots) of Production Position
Firm Resource and Competitive
& Uncertainty
Market Strength Market-Power
Actions

Growth-Oriented
Actions
Entrepreneurial
Actions

Emerging Stage Growth Stage Mature Stage

Time Ch5-