Chapter 5

COMPETITIVE RIVALRY AND DYNAMICS

Learning Objectives:

Studying this chapter should provide you with the strategic management knowledge needed to:

1. Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.

2. Describe market commonality and resource similarity as the building blocks of a competitor analysis.

3. Explain awareness, motivation, and ability as drivers of competitive behavior.

4. Discuss factors affecting the likelihood a competitor will take competitive actions.

5. Discuss factors affecting the likelihood a competitor will respond to actions taken against it.

6. Explain competitive dynamics in slow-cycle, fast-cycle, and standard-cycle markets.

Lecture Notes

• Competitors are firms competing in the same market, offering similar products, and targeting similar
customers. Competitive rivalry is the ongoing set of competitive actions and competitive responses
occurring between competitors as they compete against each other for an advantageous market
position. The outcomes of competitive rivalry influence the firm’s ability to sustain its competitive
advantages as well as the level (average, below average, or above average) of its financial returns.

• For the individual firm, the set of competitive actions and responses it takes while engaged in
competitive rivalry is called competitive behavior. Competitive dynamics is the set of actions and
responses taken by all firms that are competitors within a particular market.

• Firms study competitive rivalry in order to be able to predict the competitive actions and responses
that each of their competitors likely will take. Competitive actions are either strategic or tactical in
nature. The firm takes competitive actions to defend or build its competitive advantages or to improve
its market position. Competitive responses are taken to counter the effects of a competitor’s
competitive action. A strategic action or a strategic response requires a significant commitment of
organizational resources, is difficult to successfully implement, and is difficult to reverse. In contrast, a
tactical action or a tactical response requires fewer organizational resources and is easier to implement
and reverse. For an airline company, for example, entering major new markets is an example of a
strategic action or a strategic response; changing its prices in a particular market is an example of a
tactical action or a tactical response.

• A competitor analysis is the first step the firm takes to be able to predict its competitors’ actions and
responses. In Chapter 2, we discussed what firms do to understand competitors. This discussion is
extended in this chapter as we described what the firm does to predict competitors’ market-based
actions. Thus, understanding precedes prediction. Market commonality (the number of markets with
which competitors are jointly involved and their importance to each) and resource similarity (how
comparable competitors’ resources are in terms of type and amount) are studied to complete a
competitor analysis. In general, the greater the market commonality and resource similarity, the more
that firms acknowledge that they are direct competitors.

• Market commonality and resource similarity shape the firm’s awareness (the degree to which it and its
competitor understand their mutual interdependence), motivation (the firm’s incentive to attack or
respond), and ability (the quality of the resources available to the firm to attack and respond). Having
knowledge of a competitor in terms of these characteristics increases the quality of the firm’s
predictions about that competitor’s actions and responses.

• In addition to market commonality and resource similarity and awareness, motivation, and ability,
three more specific factors affect the likelihood a competitor will take competitive actions. The first of
these concerns first-mover incentives. First movers, those taking an initial competitive action, often earn
aboveaverage returns until competitors can successfully respond to their action and gain loyal
customers. Not all firms can be first movers in that they may lack the awareness, motivation, or ability
required to engage in this type of competitive behavior. Moreover, some firms prefer to be a second
mover (the firm responding to the first mover’s action). One reason for this is that second movers,
especially those acting quickly, can successfully compete against the first mover. By evaluating the first
mover’s product, customers’ reactions to it, and the responses of other competitors to the first mover,
the second mover can avoid the early entrant’s mistakes and find ways to improve upon the value
created for customers by the first mover’s good or service. Late movers (those that respond a long time
after the original action was taken) commonly are lower performers and are much less competitive.

• Organizational size, the second factor, tends to reduce the variety of competitive actions that large
firms launch while it increases the variety of actions undertaken by smaller competitors. Ideally, the firm
would like to initiate a large number of diverse actions when engaged in competitive rivalry. The third
factor, quality, is a base denominator to successful competition in the global economy. It is a necessary
prerequisite to achieve competitive parity. It is a necessary but insufficient condition for gaining an
advantage.

• The type of action (strategic or tactical) the firm took, the competitor’s reputation for the nature of its
competitor behavior, and that competitor’s dependence on the market in which the action was taken
are studied to predict a competitor’s response to the firm’s action. In general, the number of tactical
responses taken exceeds the number of strategic responses. Competitors respond more frequently to
the actions taken by the firm with a reputation for predictable and understandable competitive
behavior, especially if that firm is a market leader. In general, the firm can predict that when its
competitor is highly dependent for its revenue and profitability in the market in which the firm took a
competitive action, that competitor is likely to launch a strong response. However, firms that are more
diversified across markets are less likely to respond to a particular action that affects only one of the
markets in which they compete.

• Competitive dynamics concerns the ongoing competitive behavior occurring among all firms
competing in a market for advantageous positions. Market characteristics affect the set of actions and
responses firms take while competing in a given market as well as the sustainability of firms’ competitive
advantages. In slow-cycle markets, where competitive advantages can be maintained, competitive
dynamics finds firms taking actions and responses that are intended to protect, maintain, and extend
their proprietary advantages. In fast-cycle markets, competition is almost frenzied as firms concentrate
on developing a series of temporary competitive advantages. This emphasis is necessary because firms’
advantages in fast-cycle markets aren’t proprietary and, as such, are subject to rapid and relatively
inexpensive imitation. Standard-cycle markets experience competition between slow-cycle and fast-
cycle markets; firms are moderately shielded from competition in these markets as they use capabilities
that produce competitive advantages that are moderately sustainable. Competitors in standard-cycle
markets serve mass markets and try to develop economies of scale to enhance their profitability.
Innovation is vital to competitive success in each of the three types of markets. Companies should
recognize that the set of competitive actions and responses taken by all firms differs by type of market.