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Student Version

Chapter 5
Competitive Rivalry and
Competitive Dynamics

Part 2 Strategic Actions: Strategy Formulation

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. by Charlie Cook
Glossary
Competitive action : Is a strategic or tactical action the firm takes to
build or defend its competitive advantages or improve its market
position.
Competitive behavior : Is the set of competitive actions & responses a
given firm takes to build or defend its competitive advantages & to
improve its market position.
Competitive dynamics : Isthe total set of actions & responses taken by
all firms competing within a market.
Competitive response : Is a strategic or tactical action the firm takes to
counter the effects of a competitors competitive action.
Competitive rivalry : Is the ongoing set of competitive actions &
competitive responses that occur among firms as they manuver for an
advantageous market position.
Competitor : Firms operating in the same market, offering similar
products, and targeting similar customers.

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Glossary

Fast-cycle markets : Are markets in which the firms


capabilities that contribute to competitive
advantages arent shielded from imitation and where
imitation is often rapid and inexpensive.
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.
Late mover : Is a firm that responds to a competitive
action a significant amount of time after the first
movers action & the second movers response.

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Glossary

Market commonality : Is concerned with the number of


markets with which the firm and a competitor are jointly
involved & the degree of importance of the individual
markets to each.
Multimarket competition : Occurs when firms compete
against each other in several product or geographic
markets.
Quality : Exists when the firms goods or services meet
or exceed customers expectations
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.
Second mover : Is a firm that responds to the first
movers competitive action, typically through imitation
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Glossary

Slow-cycle markets : Are markets in which the firms


competitive advantages are shielded from imitation, commonly
for long periods of time, and where imitation is costly.
Standard-cycle markets: Are markets in which the firms
competitive advantages are partially shelded from imitation and
imitation is moderately costly.
Strategic action/ strategic response : Is a market based move
that involves a significant commitment of organizational
resources and is difficult to implement and reverse.
Tactical action/ tactical response : Is a market based move that
is taken to fine-tune a strategy ; it involves fever resources and
is relatively easy to implements and reverse.

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Definitions

Competitors
Are firms operating in the same market, offering
similar products, and targeting similar customers.

Competitive Rivalry
Is the ongoing set of competitive actions and
responses occurring between competitors.
Influences an individual firms 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.
Multimarket Competition
Firms competing against each other in several
product or geographic markets.
Competitive Dynamics
The total set of actions and responses taken by all
firms competing within a market.

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Competitive Rivalrys Effect on Strategy

Success of a strategy is determined by:


The firms 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.
Has a dominant influence on the firms business-level
strategy or strategies.

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A Model of Competitive Rivalry

Firms are mutually interdependent


A firms competitive actions have noticeable effects
on its competitors.
A firms competitive actions elicit competitive
responses from its competitors.
Competitors feel each others actions and responses.
Marketplace success is a function of both
individual strategies and the consequences of
their use.

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Drivers of Competitive Behavior

Awareness is
Awareness
the extent to which competitors
recognize the degree of their
mutual interdependence that
results from:
Market commonality
Resource similarity

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Drivers of Competitive Behavior (contd)

Awareness Motivation concerns


the firms incentive to take
action
Motivation or to respond to a
competitors attack
and relates to perceived
gains and losses

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Drivers of Competitive Behavior (contd)

Awareness Ability relates to


each firms resources
the flexibility that these
Motivation resources provide
Without available resources
Ability the firm lacks the ability to
attack a competitor
respond to the competitors
actions

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Drivers of Competitive Behavior (contd)

A firm is more likely to attack


Awareness
the rival with whom it has low
market commonality than the
Motivation one with whom it competes in
multiple markets.
Given the strong competition
Ability under market commonality, it is
likely that the attacked firm will
Market respond to its competitors
Commonality action in an effort to protect its
position in one or more
markets.

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Drivers of Competitive Behavior (contd)

Awareness
The greater the resource
imbalance between the acting firm
Motivation and competitors or potential
responders, the greater will be the
delay in response by the firm with
Ability a resource disadvantage.
When facing competitors with
greater resources or more
Market attractive market positions, firms
Commonality should eventually respond, no
matter how challenging the
Resource response.
Dissimilarity

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Factors Affecting Likelihood of Attack

First-Mover First movers allocate funds for:


Incentives Product innovation and
development
Aggressive advertising
First Mover
Advanced research and
A firm that takes an development
initial competitive action
in order to build or First movers can gain:
defend its competitive The loyalty of customers who may
advantages or to become committed to the firms
improve its market goods or services.
position. Market share that can be difficult
for competitors to take during
future competitive rivalry.

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Factors Affecting Likelihood of Attack (contd)

First Mover Second mover responds to the


first movers competitive action,
typically through imitation:
Second Mover Studies customers reactions to
Incentives product innovations.
Tries to find any mistakes the first
mover made, and avoid them.
Can avoid both the mistakes and
the huge spending of the first-
movers.
May develop more efficient
processes and technologies.

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Factors Affecting Likelihood of Attack (contd)

First Mover Late mover responds to a


competitive action only after
considerable time has elapsed.
Second Mover Any success achieved will be slow
in coming and much less than that
achieved by first and second
Late Mover movers.
Late movers competitive action
allows it to earn only average
returns and delays its
understanding of how to create
value for customers.

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Factors Affecting Likelihood of Attack (contd)

First Mover Small firms are more likely:


To launch competitive actions.
To be quicker in doing so.
Second Mover
Small firms are perceived as:
Nimble and flexible competitors
Late Mover Relying on speed and surprise to
defend competitive advantages or
develop new ones while engaged in
Organizational competitive rivalry.
Size- Small Having the flexibility needed to
launch a greater variety of
competitive actions.

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Factors Affecting Likelihood of Attack (contd)

First Mover Large firms are likely to initiate


more competitive actions as well
as strategic actions during a given
Second Mover time period
Large organizations commonly
have the slack resources required
Late Mover to launch a larger number of total
competitive actions
Think and act big and well get
Organizational smaller. Think and act small and
Size- Large well get bigger.
Herb Kelleher
Former CEO, Southwest Airlines

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Factors Affecting Likelihood of Attack (contd)

First Mover
Quality exists when the
firms goods or services
Second Mover meet or exceed customers
expectations
Late Mover Product quality dimensions
include:
Organizational Performance Conformance
Size Features Serviceability
Flexibility Aesthetics
Quality
(Product) Durability Perceived
quality

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Factors Affecting Likelihood of Attack (contd)

First Mover

Second Mover Service quality


dimensions include:
Late Mover Timeliness
Courtesy
Organizational Consistency
Size Convenience
Completeness
Quality
Accuracy
(Service)

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Factors Affecting Likelihood
of Response

Firms study three other factors to predict how


a competitor is likely to respond to competitive
actions:
Type of competitive action
Actors reputation
Market dependence

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Competitive Dynamics

Slow-Cycle Competitive advantages are


Markets shielded from imitation for long
periods of time and imitation is
costly.
Competitive advantages are
sustainable in slow-cycle markets.
All firms concentrate on
competitive actions and responses
to protect, maintain and extend
proprietary competitive advantage.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 523
Competitive Dynamics (contd)

The firms competitive advantages


Slow-Cycle
Markets arent shielded from imitation.
Imitation happens quickly and
somewhat expensively.
Fast-Cycle
Markets Competitive advantages are not
sustainable.
Competitors use reverse engineering to
quickly imitate or improve on the firms
products
Non-proprietary technology is
diffused rapidly.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 524
Competitive Dynamics (contd)

Slow-Cycle
Moderate cost of imitation may
Markets shield competitive advantages.
Competitive advantages are
partially sustainable if their quality
Fast-Cycle
Markets is continuously upgraded.
Firms
Seek large market shares
Standard-Cycle
Markets Gain customer loyalty through brand
names
Carefully control operations

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 525

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