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Gaining and losing market share and returns: a

competitive dynamics model

Scott David Williams a

a
Department of Management, Raj Soin College of Business, Wright State
University, Dayton, Ohio 45435
Online Publication Date: 01 May 2007
To cite this Article: Williams, Scott David (2007) 'Gaining and losing market share
and returns: a competitive dynamics model', Journal of Strategic Marketing, 15:2,
139 - 148
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JOURNAL OF STRATEGIC MARKETING 15 139148 (MAYJULY 2007)

Gaining and losing market share and returns:

a competitive dynamics model
SCOTT DAVID WILLIAMS*

Department of Management, Raj Soin College of Business, Wright State University, 3640
Colonel Glenn Hwy, Dayton, Ohio 45435, USA

In competitive environments, firms take strategic action in pursuit of superior returns

or market power that will enhance returns. Drawing upon decades of competitive
dynamics research, a model linking strategic action to shifts in market share and
returns is presented. Research shows that firms take strategic action when aware of
opportunities or threats, able to take action, and motivated to do so. Competitive
actions that are not met with responses by rivals generate the most favorable
consequences for actors. The greater the number of competitors responses, and the
more quickly they respond, the greater the attenuation of the initiators gains from
their action. Significant strategic actions that are difficult to implement and
demonstrate strategic commitment on the part of the actor discourage response.
Complex and unpredictable strategic actions promote market share gains, and the
number of moves a firm makes is positively associated with profitability. Directions for
future research are discussed.
KEYWORDS: Competitive dynamics; rivalry; market share; tactics; retaliation

Vital strategic management concerns for firms include identification of opportunities and means
to gain market share and improve returns as well as threats to losing market share and returns
(Ferrier, Smith and Grimm, 1999). Firms engage in varying degrees of rivalrous activity to
enhance their profitability. Particularly when industry growth is slow, competitors attempt to
increase their market share as a means to achieving profits (Porter, 1980). Research on
competitive dynamics has provided insights on these topics.
This paper presents a competitive dynamics model of prerequisites to gaining and
vulnerabilities to losing market share and returns. Identifying opportunities for enhancing market
share and returns involves evaluating key characteristics of competitors. The analysis must also
include examination of the firm pursuing a strategy to enhance its position (the actor) and the
nature of the actions taken. Accordingly, the model presented here (see Figure 1) addresses actor
characteristics, rival characteristics, action characteristics, and consequences. Two decades of
competitive dynamics research serve as the basis for the model presented here.

* Tel: +937 775 4513; Fax: +937 775 3545; Email: scott.williams@wright.edu

Journal of Strategic Marketing ISSN 0965254X print/ISSN 14664488 online # 2007 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/09652540701321033

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140

Figure 1.

WILLIAMS

A model of competitive dynamics.

Examination of the competitive dynamics literature reveals many potential indicators of

opportunities for market share and profitability gain through strategic action. Firms that act
strategically, making moves that are more difficult to implement and are irreversible demonstrate
the firms commitment to competing and they provoke fewer competitive responses to their
actions. Advantages gained by actors are mitigated by competitors responses, so actions that
engender little, delayed or no response lead to the greatest gains in market share and performance.
Firms are also less likely to respond quickly to competitive action if they have a history of good
performance and are not dependent on the market. Directions for future research are also
discussed.
COMPETITIVE DYNAMICS RESEARCH
Competitive dynamics are described in the literature as sequences of competitive moves and
countermoves firms pursue with the goal of enhancing profits (Smith et al., 2001). This
perspective is consistent with Schumpeterian economics and the theory of creative destruction
(cf. Schumpeter, 1934). One firm acts to improve its circumstances and other firms, observing
that action and recognizing an opportunity or threat, respond to protect and/or improve their
circumstances. Such competitive dynamics promote creativity, innovation and efficiency.
The prevailing approach to competitive dynamics research assumes that: (a) firms are
interacting; (b) firms, rather than groups, are the appropriate level of analysis; and (c) firms should
be analyzed pair-wise (Chen, 1996; Smith et al., 2001). The assumption that firms are
interdependent and generally aware of each others moves is consistent with Schumpeterian
economics. In instances where two firms are unaware of each other, a central assumption of
competitive dynamics research is violated, and shifts in relative market power among the firms
should not be attributed to rivalry (perhaps not attributed to strategic management of any variety).

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When competitors are unaware of each other, firms may act (e.g., product innovation,
promotional campaign, price cuts), but no actions could accurately be classified as reactions.
Competitive dynamics research and the model presented here identify a focal firm and a
competitor (Chen, 1996). The level of analysis in competitive dynamics research is the firm rather
than a strategic group. Institutional, ecological and strategic group influences are acknowledged,
but are clearly not the primary focus of competitive dynamics research (Smith et al., 1997; Smith,
et al., 2001). In accord with the resource-based view, each firm is treated as controlling a unique
set of resources; hence, a firms relative strengths and weaknesses vary across competitors (Chen,
1996). Such pair-wise comparisons are essential for the model presented here as shifts in market
share occur in a context of competitive interdependence. That is, for one firm to improve its
market share, at least one other has to lose. For this reason, the focus of the model is not simply on
firms motivated and able to enhance their competitive position, but also on firms vulnerable to
loss of market power.
By basing competitive dynamics research on pair-wise analyses and acknowledging competitive
interdependence, a clear implication is the necessity of including competitors reactions to
strategic action in the model. The outcomes of competitive actions are affected by the
competitive responses, if any, they engender. Not all competitive actions generate reactions, and
competitive responses can enhance as well as mitigate the outcomes of actions. Nevertheless, rival
responses to competitive actions are a key strategic management consideration and a prominent
feature of this model.
While profitability is the long-run consequence firms pursue (particularly above-average
returns), a variety of intermediate outcomes are useful steps in a process that results in profitability.
Market share, a commonly used indicator of market power, promotes profitability in several ways
(Buzzell, Gale and Sultan, 1975). Most notably, firms with greater sales volume than competitors
can lower their average costs through economies of scale. More proximal outcomes for
competitive actions include the rivals response. Schumpeterian economics proposes that rival
firms are inclined to imitate each others innovative actions. Such imitation has the effect of
mitigating the competitive advantage achieved for the initial actor. Accordingly, competitive
dynamics research finds that actions that rivals are slow to react to, or that generate no response,
tend to lead to more favorable outcomes for the initial actor (Chen and Miller, 1994).
The model presented here draws on competitive dynamics research demonstrating effects on
multiple levels of outcomes; rivals responses triggered, market share gained (or lost) and
profitability. Factors influencing these outcomes of competitive dynamics include a variety of
actor characteristics, action characteristics and rival characteristics.
ACTOR CHARACTERISTICS
Prerequisites to taking competitive action include the actors awareness, motivation and ability to
perform strategic action. In addition, actor characteristics influence which action is chosen, how
quickly it is chosen, competitors awareness of the action and competitors motivation to respond.
Awareness
Awareness of an opportunity or threat in the competitive environment is a precursor to any
strategic action (Chen, 1996). Strategists perceive opportunities and threats in their environment
and take strategic action to exploit opportunities and neutralize threats (Porter, 1980).
Competitive dynamics research emphasizes awareness of competitors strengths and weaknesses.

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WILLIAMS

Yet strategists have limits to their ability to perceive and process information regarding
competitors (Porac and Thomas, 1990). To simplify information processing, they use strategic
groups as a cognitive cluster of competitors having strategic commonalities (Reger and Huff,
1993). Such similarity judgments can be inaccurate and can lead to strategic errors (Farjoun and
Lai, 1997). Strategists have even greater difficulty identifying new competitors and potential
entrants to their markets (Geroski, 1999).
Strategists are not prompted to take strategic action unless they are aware of opportunities to be
exploited or threats to be addressed. However, awareness itself is not a sufficient impetus for
strategic actionthe ability and motivation to act are prerequisites as well.
Ability
The ability to take strategic action is a function of the firms strategic decision-making processes
and resources (Smith et al., 2001). The nature and composition of a firms top management team
(TMT) affects its ability to act. Large TMTs, suffering from difficulties communicating and
coordinating, are more inclined than smaller TMTs to carry out competitive actions of a tactical
rather than a strategic nature (Hambrick, Cho and Chen, 1996). Also, TMT member education
levels have been shown to be positively associated with the significance of the actions taken (e.g.,
by making investment in fixed assets, or involving changes in structure or personnel), but their
actions provoked fewer competitive responses by being more focused and attracting less industry
attention (ibid.).
Chen and Hambrick (1995) found that a competitors size affects its strategic behavior. Small
airlines are able to act with greater speed and stealth when initiating attacks than large airlines.
Unabsorbed slack (liquid assets) is a key resource supporting a firms ability to take strategic
action. Unabsorbed slack is correlated with faster execution (Hambrick et al., 1996), and allows a
firm to select strategic actions of longer duration and more complex sequence (Ferrier, 2000).
The ability to initiate a competitive attack does not equate to the motivation to do so; in fact,
the two can be inversely related. Firms experiencing a comparative abundance of resources can
mobilize them to pursue an improvement of their competitive positions, but firms experiencing
resource scarcity tend to be more likely to initiate a competitive attack. Accordingly, Hambrick
and colleagues (1996) found that firms with high levels of unabsorbed slack resources were less
likely to be initiators.
Motivation
Motivation to take strategic action pertains to the perceived incentives that drive a firm to
undertake action, shaped by strategists beliefs of whether the firm stands to gain from taking
action or lose from not acting (Smith et al., 2001). Motivation is a stronger predictor of interfirm
rivalry than is capability (Chen, 1996; Chen and Miller, 1994).
Several studies suggest that larger, more successful companies have less motivation to initiate
attack. A history of successful performance tends to create levels of complacency and inertia.
Firms that have been successful in the past tend to attribute (and misattribute) their success to their
strategic actions, and therefore are motivated to repeat their strategies (Miller and Chen, 1994),
while firms with a history of poor past performance are motivated to try new strategies (Miller and
Chen, 1995). Firms with a history of success tend to take simple, conformist actions, and
demonstrate repertoire inertia (i.e., few changes in market-oriented actions in a given year)
(Ferrier, 2000; Miller and Chen, 1994, 1995, 1996).

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The industry environment, in particular the scarcity of growth opportunities, affects a firms
motivation to initiate competitive action. Favorable industry characteristicsgrowth, concentration, barriers to entry, etc.reduce a firms motivation to compete aggressively (Smith et al.,
1996; Smith et al., 2001).
Mutual forbearance resulting from rivals multi-market contact serves to reduce a firms
motivation. Frequency of action between rivals decreases as multi-market contact between them
increases (Young et al., 2000). Gimeno and Woo (1996a, 1996b) found that price/cost margins
were higher in markets where competitors experienced multi-market contact. Li and Greenwood
(2004) found that the amount of multi-market contact among rivals is inversely related to
performance unless the firms compete in a quite similar set of markets, in which case the effect of
multi-market contact on performance is positive.
Actor characteristics and rivals response
In addition to influencing the actors own awareness, ability and motivation to act, actor
characteristics also influence rivals responses. For instance, market share leaders were more likely
than other actors to have their actions met with rivals responses (Smith, Grimm and Gannon,
1992). Moreover, historical patterns in competitive actions taken by a firm can earn it a reputation
in the industry. Competitors learn to anticipate future actions and respond accordingly (ibid.).
Firms with reputations for taking a greater number of strategic actions elicited slower responses to
their competitive actions and a lower likelihood that rivals imitated their actions. On the other
hand, firms with a reputation for taking many pricing actions generated faster responses to their
competitive actions, but the responses involved less imitation by the responding firms.
ACTION CHARACTERISTICS
There are diverse competitive actions that firms can take when they are aware of an opportunity
or threat, and motivated and able to take action. Not all competitive actions amount to strategies.
In competitive dynamics research, actions are defined as externally directed, specific, and
observable competitive move(s) initiated by a firm to enhance its relative competitive position
(Smith et al., 2001, p. 321). Examples of competitive actions include pricing changes, product
changes, new product introductions, promotional and advertising campaigns, capacity- and scalerelated actions, service and operations actions, and signaling (Debruyne et al., 2002; Smith et al.,
2001). The actions taken affect rivals responses and the gains (or losses) experienced by the actor.
With regard to new product innovations, first movers and second movers achieve better
returns than late movers (Lee et al., 2000). However, imitation by second movers erodes first
movers advantages, and subsequent imitation by additional rivals erodes first-mover advantage
even more.
Action characteristics influence the likelihood, speed and type of competitive response. A firm
whose actions demonstrate commitment to competing in a certain manner and in a certain
market can discourage retaliation (Porter, 1980). Research has found that competitors are less
likely to respond to actions that are strategic in nature rather than tactical (Chen, Smith and
Grimm, 1992). Response likelihood also declines as the implementation requirements of the
action increase (ibid.). Competitors are less likely to respond to actions that are irreversible, such as
mergers or investment in new facilities (Chen and MacMillan, 1992).
The total number of responses prompted by an action is, understandably, influenced by the
number of competitors threatened by the action (Chen et al., 1992; Smith et al., 1992), and the

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number of competitors customers affected by the action (Chen and MacMillan, 1992; Chen
et al., 1992; Smith et al., 1992). Visible and noteworthy (i.e., publicized and reported on) actions
also elicit a large number of competitive responses (Chen and Miller, 1994). Research by Chen
and Miller (ibid.) confirmed that firms taking actions that elicit fewer total responses experience
better performance.
Because competitive advantages generated by strategic actions tend to dissipate after competitors
have imitated them or responded in a substitute fashion, slower competitor responses to actions are
generally preferred to rapid responses. Competitors respond more slowly to strategic moves (more
difficult to implement and less reversible) than tactical moves, perhaps because the consequence of
strategic moves may not be as easy to determine as the consequences of simpler, tactical moves (Chen
and MacMillan, 1992; Chen et al., 1992; Smith et al., 1992). However, actions that radically deviate
from the industry norm engender faster responses (Smith et al., 1992). Competitors who had a greater
proportion of their customers affected by another firms strategic move responded more slowly,
perhaps not to escalate the rivalry (Chen et al., 1992).
Several studies have demonstrated effects of action characteristics on market share and returns. To
improve their profitability, research suggests that firms need to make many strategic moves (Smith
et al., 1996; Young, Smith and Grimm, 1996). Moreover, the frequency of actions taken is positively
associated with market share gains and decreases a market share leaders chances of being dethroned
by challengers (Ferrier et al., 1999). Strategies that are complex (Ferrier, 2000; Ferrier et al., 1999;
Miller and Chen, 1996), unpredictable and different than rivals actions, and pursue a multi-action
attack for significant duration (Ferrier, 2000) lead to better performance. However, strategists must
avoid tactical indirection (Miller and Chen, 1996) as strategic inertiawhich is perilous long term
(Ferrier et al., 1999) but also supports parsimony and efficiencyhas been found to be positively
associated with short-term performance (Miller and Chen, 1994).
With regard to consequences associated with the type of action taken, challengers to market leaders
tend to achieve faster gains from pricing actions than from marketing or capacity-related actions
(Ferrier, 1997); and, new product actions lead to slightly better performance than pricing actions
(Smith et al., 1992). Moreover, overt signaling of strategic moves by challengers significantly erodes the
market share and profitability lead held by market share leaders (Ferrier, 1997); but the more visible a
new product launch is, the more likely it is to prompt competitive response (Debruyne et al., 2002).
RIVAL CHARACTERISTICS
As with the initiators of a competitive action, rivals must be aware, able and motivated to respond
if the initial action is to generate a competitive response. Competitive moves initiated carry
messages regarding the actor, the strategy pursued and/or the intention of the move. It is the task
of the rival to decode the messages, consider response and pursue response when motivated and
able to do so (Smith et al., 1991). Responses can include imitation or a different competitive
move. Firms vary in their awareness, ability and motivation to respond.
Chen and Hambrick (1995) found that when compared to smaller firms, large firms are more
likely to respond to rivals competitive challenges, and their responses tend to be less visible. They
also found that while large firms formulate and announce responses more quickly than small firms,
execution of the response tended to be slower for large firms. Slow execution may be attributable
to structural complexity being greater for larger firms. Structurally complex firms are less likely to
respond to competitive challenges, and less likely to be one of the first rivals to react to a
competitive challenge in the market (Smith et al., 1991).

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Rivals motivation to respond is affected by their perception of the degree of threat

accompanying an action and the importance they place on the market. When attacked in markets
on which they significantly depend, firms responses are vigorous (Chen and MacMillan, 1992;
Gimeno, 1999; Karnani and Wernerfelt, 1985) and often imitative of the initiators competitive
move, but they tend to respond more slowly (Chen and MacMillan, 1992).
Competitors who perceive a threat from another firms new product launch are more motivated
to respond than those who are less threatened by a new product launch. A study of 509 industrial
product launches in the US, UK and the Netherlands found that two-thirds of new product launches
prompt competitive response, and that response is even more likely when the launch is highly visible
(Debruyne et al., 2002). Radically innovative products were less likely than incrementally innovative
products to engender response because there was less certainty regarding the threat of the new
product. Pricing changes were the most common type of response.
A history of success may mitigate a firms motivation to respond to competitors strategic
moves. Firms with a history of success are less likely to respond to challenges, and move slowly
when they do respond (Hambrick et al., 1996).
TMT characteristics also influence rivals responses. Due to communication and coordination
difficulties, larger TMTs are less likely than smaller TMTs to respond to competitive challenges
(ibid.). Experienced TMTs, perhaps due to complacency and a lack of awareness, are less likely to
respond to competitive challenges carried out by rivals, and do so after other players in the
industry have responded (Smith et al., 1991). On the other hand, highly educated TMTs are more
likely to respond to competitive challenges (Hambrick et al., 1996) and do so by matching the
attackers action (Smith et al., 1991).
IMPLICATIONS OF THE MODEL
As the model presented here indicates, firms pursue competitive action to improve market share and/
or returns when they are aware of opportunities or threats, able to take action and motivated to do so.
The prerequisites of awareness, ability and motivation also apply to rivals responses to competitive
action. Awareness is influenced by the top management teams information processing and the
visibility of competitors actions. Ability derives from the knowledge, skills and coordination of the
top management team, and from the firms resources. Motivation is affected by market dependence,
mutual forbearance from multimarket contact and learning from past experience.
Competitive actions that are not met with response generate the most favorable consequences
for actors. The greater the number of competitors responses, and the more quickly they respond,
the greater the attenuation of the initiators gains from their action. Significant strategic actions
that are difficult to implement and demonstrate strategic commitment on the part of the actor
discourage response. Complex and unpredictable strategic actions promote market share gains,
and the total number of moves a firm makes is positively associated with profitability. Thus, the
model summarizes empirical research on competitive dynamics and strategic action with clear
implications for strategic management. It also indicates numerous needs for future research,
several of which are described below.
DIRECTIONS FOR FUTURE RESEARCH
The model presented here is anchored in numerous empirical studies of competitive dynamics,
but it raises questions that need to be addressed by additional research. First, market share and
profitability are not interchangeable consequences of competitive action. For the sake of

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parsimony, they are combined in the model. However, profitability can be increased or decreased
without gaining or losing market share. Moreover, strategists often sacrifice short-term profits to
capture market share that will support future profitability (Ellison, 2003). Furthermore, some
firms use their smaller size to their advantage earning profits in spite of their relatively low market
power (Chen and Hambrick, 1995; Hambrick, MacMillan and Day, 1982). With advances in
competitive dynamics research, two diverging models may surface, one that best predicts market
share outcomes and another that predicts profitability.
Second, the field of competitive dynamics would benefit from additional insights into the
antecedents of delays to competitive response. A firm is said to have a sustained competitive
advantage when it is implementing a value creating strategy not simultaneously being
implemented by any current or potential competitors and when these other firms are unable
to duplicate the benefits of this strategy (Barney, 1991, p. 102). Hence, a competitive advantage is
not sustained once competitive response duplicates the benefits of a strategic action through
imitation or a substitute strategy with the same benefits. Chen and MacMillan (1992) found that
market dependence reduces the likelihood of a quick response when, rationally, the motivation of
market dependent firms to respond quickly would seem to be high. Chen and Hambrick (1995)
found that small firms initiate attacks with speed and stealth, but they are slow to respond to
attacks by large firms. Deliberative strategic decision making was the explanation the researchers
offered for the former finding, and not having a reputation at risk was the explanation for the
latter. Future research on different samples demonstrating the generalizability of these findings and
elucidating the mediating processes (i.e., deliberation and judgments about reputation) would be
informative.
Finally, additional research that clarifies the relationship between a history of success and the
number of competitive actions a firm is inclined to take would be instructive. Prior research has
found that firms with a history of success tend to take simple, conformist actions, and demonstrate
repertoire inertia (Miller and Chen, 1994, 1995, 1996). They are less likely to respond to
challenges, and move slowly when they do respond (Hambrick et al., 1996). Successful firms
might not perceive a need to change. Nevertheless, Young and colleagues (1996) found that a
history of success made a firm execute more actions. Further research is needed to clarify the
nature of these relationships.

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