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ESSAY

1. Define and differentiate competitive rivalry, competitive behaviour and competitive dynamics.

ANS:
Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur
between competitors as they manoeuvre for an advantageous market position. Especially in highly
competitive industries, firms constantly jockey for advantage as they launch strategic actions and respond
or react to rivals’ moves. It is important for those leading organisations to understand competitive rivalry,
as it influences an individual firm’s ability to gain and sustain competitive advantages. Ultimately, rivalry
is a consequence of firms initiating their own competitive actions and then responding to actions taken by
competitors.
Competitive behaviour is the set of competitive actions and competitive responses a firm takes to
build or defend its competitive advantages and to improve its market position. Through competitive
behaviour, a firm tries to successfully position itself relative to the five forces of competition and to
defend current competitive advantages while building advantages for the
future. Increasingly, competitors engage in competitive actions and responses in more than one market.
Firms competing against each other in several product or geographic markets are engaged in multi-market
competition.
The total set of actions and responses taken by all firms competing within a market is called
competitive dynamics.

PTS: 1 DIF: Moderate REF: Introduction

2. What is competitor analysis? What determines the extent to which firms are competitors?

ANS:
A competitor analysis is the first step a firm takes to be able to predict the extent and nature of its rivalry
with each competitor. The number of markets in which the firms compete against each other (market
commonality) and the similarity in their resources (resource similarity) determine the extent to which the
firms are competitors. Firms with high market commonality and highly similar resources are direct
competitors. The drivers of competitive behaviour – as well as factors influencing the likelihood that a
competitor will initiate competitive actions and will respond to its competitors’ actions – influence the
intensity of rivalry, even for direct competitors.

PTS: 1 DIF: Easy REF: Competitor analysis

3. Define market commonality? What are the characteristics of competition and rivalry when firms engage
in multi-market competition?

ANS:
Market commonality is concerned with the number of markets in which a firm and a competitor are
 jointly involved and the degree of importance of the individual markets to each. When firms produce
similar products and compete for the same customers, the competitive rivalry is likely to be high. A firm
competing in several markets has the potential to respond to a competitor’s actions not only within the
market in which the actions are taken, but also in other markets where it competes with the rival. This
potential complicates the rivalry between competitors. Research suggests that a firm with greater multi-
market contact is less likely to initiate an attack but more likely to respond aggressively when attacked. In
general, multi-market competition reduces competitive rivalry, but some firms will compete when the
potential rewards are high.

PTS: 1 DIF: Moderate REF: Market commonality

4. What are the advantages and disadvantages of being a first mover, second mover and late mover?

ANS:
First movers can gain a competitive advantage and customer loyalty by being the first in the market, and
they are often high performers. However, first movers also take more risks.
Second movers can also gain a competitive advantage and earn (at least) average returns because they
imitate first movers without taking on the same risk. This is especially true for those that are larger and
faster. In fact, some second movers may gain significant market share and outperform first movers. They
do so when they carefully observe the market’s reaction and are able to improve the first mover’s product
and correct its mistakes. However, the more time required for the second mover to respond, the higher the
probability that the first mover will enjoy strong performance gains.
Late movers, those that respond a long time after the original action was taken, tend to be lower
performers and much less effective.

PTS: 1 DIF: Moderate REF: First-mover incentives

5. What factors contribute to the likelihood of a response to a competitive action?

ANS:
The probability of a response by a competitor to a competitive action is based partially on the extent to
which the competitor is dependent on the particular market in which the action was taken. In addition, the
probability of response is based on the type of action, the reputation of the firm taking the strategic action
(the expectation of success) and the resources available to the competitor contemplating response.

PTS: 1 DIF: Hard REF: Likelihood of response