Competitive Dynamics in Strategic Management

Competitive Dynamics in Strategic Management

Claudio Giachetti, Department of Management, Ca' Foscari University of Venice and Giovanni
Battista Dagnino, Department of Law, Palermo Campus, LUMSA

https://doi.org/10.1093/acrefore/9780190224851.013.16
Published online: 31 August 2021

Summary
Competitive dynamics inquiry originates from a sequence of attacks and counterattacks
among firms in an industry. Firms attack and respond to attacks of rivals in order to
strengthen or defend their competitive position within their competitive space. Competitive
dynamics research is thus centered on the analysis of how the firm’s actions affect rivals’
reactions and performance. Actually, the nature of competitive dynamics research is the open
recognition that firm strategies are “dynamic”: Strategic actions initiated by one firm may
trigger a series of actions among rival firms. The new competitive environment in many
industries has generated the inception of furious competition, emphasizing flexibility, speed,
and innovation in response to fast-changing technological and institutional conditions and
temporary competitive advantages.

The key constructs and the intellectual roots of competitive dynamics (i.e., Schumpeter’s
theory of creative destruction and industrial organization economics and related oligopoly
theories) offer some practical examples of industry and firm cases where competitive
dynamics have found their main applications.

The relevant underpinnings of the awareness–motivation–capability (AMC) framework provide

an integrative model of the key behavioral drivers that shape a competitive actions and
responses framework (i.e., the factors influencing the firm’s awareness of the context; the
factors inducing or impeding the motivation of firms to respond to competitors’ action; and the
capability-based factors affecting the firm’s ability to undertake actions), the three key
attributes (i.e., the specific actions of firms in the industry, the firm’s competitive
interdependence, and the antecedents and performance implications of firms’ competitive
actions and reactions), and the three main levels of analysis used in competitive dynamics
literature (i.e., action-level studies, business-level studies, and corporate-level studies).

Some insights regarding the relationship between dynamic competition and the sources of
temporary competitive advantage, coopetition dynamics, as well as the kind of accelerated
competition epitomizing early 21st-century digital dynamics settings update the traditional
competitive dynamics flavor, as they are connected with firms’ strategic interaction and the
pursuit of temporary advantages.

Keywords: competitive dynamics, competitive action and reaction, action repertoire, competitive
aggressiveness, multimarket competition, temporary competitive advantage, digital dynamics

Subjects: Business Policy and Strategy, Entrepreneurship

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Competitive Dynamics: Key Constructs and Examples

Competitive dynamics emanate from a sequence of attacks and counterattacks among firms in
an industry. Firms attack and respond to attacks of rivals in order to strengthen or defend
their competitive position within their competitive arena (MacMillan et al., 1985). Successful
actions, namely those attacks that help the focal firm to increase its performance vis-à-vis
rivals, trigger a reaction by rivals, which may attempt to obstruct or emulate the focal firm’s
actions and in turn affect the latter’s attempt to sustain its competitive advantage.
Competitive dynamics research is centered on the analysis of how the firm’s actions affect
rivals’ reactions and performance (Chen & Miller, 2012, 2015; Smith et al., 2006).

As the phrase “competitive dynamics” states, the essence of competitive dynamics research is
an explicit recognition that firm strategies are “dynamic”: Strategic actions initiated by one
firm may trigger a series of actions among (a number of) rival firms. The new competitive
environment epitomizing many industries, as described by some authors (Bettis & Hitt, 1995;
Thomas & D’Aveni, 2009), has given rise to vicious competition, emphasizing flexibility, speed,
and innovation in response to fast-changing technological and institutional conditions and
temporary competitive advantages (D’Aveni et al., 2010). Authors have used the term
“hypercompetition” (D’Aveni, 1994) precisely to describe the rapidly changing conditions that
can be observed in many industries. Since the beginning of the 1990s, three factors have
contributed to accelerate the pace of market evolution and to trigger competitive warfare in
many industries: (a) the globalization process and the related boost to foreign markets
competition, (b) the wave of deregulation that has spread out in both developed, transitioning,
and developing countries in the form of pro-market reforms and liberalization, and (c) radical
changes in technology, especially driven by the diffusion of digital technologies, biomedical
machinery, and the internet.

Authors have examined competitive dynamics in various industries, from commodities to

technology-based products. In fact, competitive actions and reactions can be of different
types, from price wars to comparative advertising, from retail chain geographical expansion to
change in retail formats, from new product introduction to product imitations, from market
entry to market exit. An action is a specific and detectable market move initiated by a firm,
while a response is a specific and datable countermove that a firm takes to defend or improve
its performance in its industry (Chen & Miller, 2012). An example of competitive dynamics is
the clash between Coca-Cola (Coke) and Pepsi-Cola (Pepsi) that various authors started
analyzing since the early 1990s (D’Aveni, 1994; Fosfuri & Giarratana, 2008; Ghemawat, 1991).
The two U.S. multinational beverage companies began to aggressively compete against each
other at the beginning of the last century. Although Coke dominated the soft drink market
with a wide market share gap vis-à-vis Pepsi, the latter decided to challenge Coke’s market
power during the 1930s and 1940s by initiating a series of aggressive price cuts of all its cola
drinks. Coke, probably underestimating Pepsi’s potential counterattack strategy, did not
immediately respond with a price reduction, and given the similarity of the two “commodity”
products, this resulted in a situation where Pepsi was able to reduce its market share gap
relative to Coke. To keep up its momentum, in the 1950s, Pepsi added to its competitive action

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repertoire a set of aggressive investment campaigns in advertising. Low price and massive
advertising helped Pepsi to continue gaining share, but also damaged its profitability. In the
1960s, both soft drink vendors increased the number of drinks in their product portfolio, a
strategic action aimed at reaching the rapidly growing market made of increasingly
heterogeneous consumer segments. At the beginning of the 1970s, Pepsi began to attack Coke
with a series of comparative advertising campaigns aimed at signaling to consumers Pepsi’s
different, sweeter taste. Coke, aware that its brand image was not enough to block Pepsi’s
growth path, this time responded by reducing prices of its cola drinks. Then Pepsi
counterresponded by changing its advertising strategy, showing celebrity endorsements in its
commercials, one of the most effective strategic decisions that helped the firm to finally
dethrone Coke temporarily from its market share leadership. Due to the new Pepsi market
leadership in the mid-1980s, Coke decided to introduce a new cola, which it called “New
Coke,” with a new flavor formula that tasted similar to the sweeter Pepsi drink, and also
decided to withdraw the original Coke flavor. The result was a total failure because this action
signaled a change in the original Coke’s timeless flavor. Coke then decided to strategically
retreat by reintroducing Coke’s original formula, rebranded as “Coca-Cola Classic,” and this
competitive reaction resulted in a significant gain in sales so that Coke regained its market
share leadership in many countries. The battle between Coke and Pepsi has been
characterized by rapid and continuous attacks and counterattacks between the two soft drink
vendors. Every time a competitive action was undertaken, it was followed by the rival’s
countermove, with an effect on both firms’ performances.

Another interesting example of competitive dynamics is the incessant head-to-head rivalry to

get or to keep ahead of one another in the mobile phone industry. In fact, as observed by some
authors, mobile phone vendors have always struggled to imitate each other’s product
innovations in a race to maintain competitive parity of their new phones (Giachetti et al.,
2017). Focal mobile phone vendors that successfully adopt new product technologies before
rivals obtain first-mover advantages (e.g., sales increases). The higher performance of these
first movers, combined with performance losses experienced by rivals, motivate rivals to
respond by imitating as quickly as possible successful technologies introduced by first movers.
The more intense and rapid the rivals’ imitative response, the more the focal mobile phone
vendor experiences a threat to its performance, and the more it feels pressure to respond by
launching new product technologies or by imitating those introduced by competitors. The
result is that when handset vendors learn that the competitive advantage of a new line of
phones is temporary, they undertake competitive actions in response to competition, thereby
intensifying the level of competition further. This intensification triggers further competitive
actions, which foster still stronger competition, and so on. For example, Nokia’s pioneering of
most digital technologies for mobile phones, such as infrared, games, email client, and
wireless application protocol (WAP) during the 1990s, elicited various reactions from rivals.
Siemens was among the first ones to install the latest generations’ technologies in its devices.
This strategic move reinforced Siemens’ product portfolio competitiveness and increased its
sales performance relative to slower adopters, such as NEC, Philips, and Sagem. Still, these
competitive actions helped Siemens to enjoy only a temporary competitive advantage until
Nokia’s innovations were adopted by other handset vendors. The challenge to rapidly adopt
new product technologies occurred once more at the beginning of the 2000s when some
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handset vendors pioneered other product technologies such as Bluetooth, MMS, and photo
camera. But this time companies like Sony-Ericsson and Samsung were able to install this set
of features in their new lines of phones more quickly than Siemens. Although in the first time
period (i.e., during the 1990s decade) Siemens was able to adopt quickly the latest generation
technologies and, in turn, enjoyed a temporary competitive advantage, in the second time
period (i.e., the beginning of the 2000s), it did not possess the resources and capabilities
required to adopt the newly introduced technologies earlier than its key rivals and soon it had
to abandon the field, thereby withdrawing its mobile phone business from most countries.
Interestingly, the escalating pressure to be aligned with competitors as concerns the newly
introduced product technologies not only increased rivalry among mobile phone vendors, but
also accelerated the technological evolution of the industry. In fact, since the first digital
mobile phone introduced at the beginning of the 1990s, in a few years the industry moved
away from basic portable devices capable of providing merely phone calls to highly
convergent multitasking devices that integrate nearly all types of nonvoice functionality.

Competitive Dynamics, Intellectual Roots, and Initial Evolution

Schumpeter’s Theory of Creative Destruction

The importance of competitive dynamics was first emphasized by the Austrian-born economist
Joseph Schumpeter (1934, 1950). Schumpeter pioneered the theorizing about how competitive
dynamics affect not only firm and industry performance, but also the economy as a whole.
During the late 1930s, Schumpeter developed the concept of “creative destruction” to explain
the dynamic market process by which firms act upon and react to one another in the pursuit
of market opportunities. According to Schumpeter, new products and processes introduced by
innovative firms are “creative” because they are able to bring new solutions to consumers and
the economy as a whole. Nonetheless, they are also “disruptive” as they make obsolete the
previous products and technologies performing similar functions, thereby threatening the
survival of firms that relied on them. In fact, creative destruction was defined as the inevitable
decline of firms through the process of competitive action and reaction. Firms act and rivals
respond, and these actions and reactions determine eventually their survival and long-term
performance (Chen & Miller, 2012).

Schumpeter’s framework was based on the idea that market share and profit gains obtained
by an innovative entrepreneur that introduced a new successful product, service, or product
process will motivate other firms to undertake new competitive actions in an attempt to catch
up to the pioneer entrepreneur’s initial advantage (i.e., try to gain competitive parity). The
outcome of this market process is inevitable market share and profit erosion experienced by
innovative entrepreneurs over time through the process of competition (Schumpeter, 1934,
1950). Schumpeter emphasized that as a result of this creative destruction process, no market
leadership is safe or sustainable. The empirical test of Schumpeter’s idea concerning the
condition that, over time, the creative actions of challengers threaten the stability of the
innovative firm position, thereby determining its dethronement, was in fact one of the goals of
the first wave of competitive dynamics studies (e.g., Ferrier et al., 1999).

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Industrial Organization and Oligopoly Theories

Although Schumpeter’s creative destruction is the key intellectual root of competitive
dynamics studies, most of the studies that emphasize competitive dynamics find their roots
also (a) in industrial organizational economics (Caves & Porter, 1977; Porter, 1979, 1980)
because they examine how firms can sustain their competitive advantage by means of
competitive actions and reactions within an industry, and (b) in oligopoly theories (Edwards,
1955; Knickerbocker, 1973) as they examine how interfirm rivalry can be mitigated by
strategic actions that deter rivalry, eventually leading to collusive behaviors. For example,
studies about multimarket competition, that is, the situations in which firms compete
simultaneously against the same rivals in more than one market (Karnani & Wernerfelt, 1985),
trace their primary theoretical origin to Edwards’ (1955) studies on oligopolistic competition.
In multimarket competition, firms that meet each other in multiple markets are likely to show
lower rivalry because they realize that their strategic interdependence increases the risk of
starting a dangerous warfare in all markets they have in common, a situation commonly
known as “mutual forbearance” (Ma, 1998; Yu et al., 2009). In their seminal work, Bernheim
and Whinston (1990) offered one of the initial formal treatments of multimarket contact and
tacit collusion. Subsequently, competitive dynamics studies have drawn on industrial
organizations’ oligopoly theories to examine the firms’ propensity to undertake competitive
actions and reactions (and performance consequences) when they encounter rivals in multiple
markets (e.g., Baum & Korn, 1996; Gimeno & Woo, 1996; Yu et al., 2009).

Initial Evolution of the Field

The initial empirical studies on competitive dynamics appeared in the mid-1980s with the
analysis of MacMillan et al. (1985) on the response times of competitors to easily imitate new
products in the banking industry. A couple of years later, Bettis and Weeks (1987) published a
study on stock market reactions to product moves and countermoves in the instant
photography industry, and Smith et al. (1989) followed up with a research piece identifying
the characteristics of competitive actions triggering rapid countermoves in technology-
intensive industries.

Over the 1990s, various articles were published on the drivers and performance implications
of competitive actions and reactions using as an empirical setting mainly the U.S. airlines
industry (e.g., Chen & Hambrick, 1995; Chen & MacMillan, 1992; Chen & Miller, 1994; Chen
et al., 1992; Smith et al., 1991, 1992).

In the next sections, the evolution of the field of competitive dynamics in the past three
decades (since the 1990s) is described by regrouping the key papers published according to
their key methodological and theoretical characteristics.

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The Awareness–Motivation–Capability (AMC) Framework

Competitive dynamics examines the interactions between and among competitors, focusing
not only on actions but also on the responses elicited. Authors have noted that in order to
predict competitive responses, it is essential to understand how a competitive action affects
the internal behavior of the defending organization (Chen & Miller, 1994). In fact, the firm will
respond to the rivals’ attacks only if it is aware of the attacks. This means that competitive
actions have to generate clear signals that are visible to the firm (Chen et al., 1992; Smith &
Grimm, 1991). Moreover, the motivation that actors have to attack or respond to rivals’
actions depends on the potential performance gains or losses from the contested product
(Ferrier, 2001). Finally, the decision to attack or to defend depends on the firms’ capabilities
to do so (Smith et al., 1991). More specifically, there are three organizational characteristics
that influence strategic actions: (a) factors that influence the awareness of the context and
signal threats or opportunities for focal firms; (b) factors that induce or impede the motivation
of firms to respond to competitors’ actions; and (c) the capability-based factors that affect the
firm’s ability to undertake actions (Chen, 1996; Smith et al., 2006).

The awareness–motivation–capability (AMC) framework provides an integrative model of the

three key behavioral drivers that shape a competitive action and response framework (Chen,
1996; Grimm et al., 2006; Smith et al., 2001; Yu & Cannella, 2007).

Individual AMC components are manifested in a range of variables. For example, awareness
about rivals’ actions has been measured with rivals’ size (e.g., revenues or market share) or
the visibility of rivals’ actions (given by their appearance in business-oriented magazines),
where larger size or action visibility results in greater awareness (Chen & Hambrick, 1995).
Motivation to attack a rival was measured by the extent to which a focal firm meets its rivals
in multiple markets (Gimeno & Woo, 1996), where higher multimarket contact results in
mutual forbearance and less motivation to trigger warfare. The capability to attack rivals was
measured with organizational slack (i.e., the resources available to the firm above the
resources necessary to achieve immediate business and operational requirements), where a
higher slack resource level results in a greater capability to attack (Smith et al., 1991).

The AMC framework has been used to examine interfirm rivalry in several industries (see
Chen & Miller, 2012, for a comprehensive review). For example, authors have noted that the
AMC framework is useful to understand the drivers of international market entry. In their
analysis of patent wars and international market entry in the global mobile phone industry,
Onoz and Giachetti (2021) have shown that to understand how and if a firm will respond to a
patent litigation risk in a target country, it is necessary to concurrently assess if the firm is
aware of this risk, if it is motivated to react to this risk, and if it is able to respond to this risk.
A firm’s awareness of the threats and opportunities related to patent wars in a country was
conceptualized in terms of the firm’s previous experience with patent infringement lawsuits. A
firm’s motivation to enter a country was conceptualized in terms of the share of a firm’s
current patent applications in a target country. Finally, the size of a firm’s patent stock was
used to capture a firm’s ability to navigate patent infringement lawsuits in a specific country,
a resource endowment protecting the firm from plaintiffs in the host country.
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Key Attributes of Competitive Dynamics Studies

Literature review studies (e.g., Chen & Miller, 2012; Smith et al., 2006) suggest three key
attributes of competitive dynamics research. First, competitive dynamics studies are centered
on the specific actions of firms in the industry. Each action occurs at a particular moment in
time and in a particular business environment (e.g., country, industry). For example, a firm
can introduce a new product technology, enter a new market, lessen the price of one of its
products, or launch a new advertising campaign with the aim of increasing its performance
vis-à-vis rivals. Accordingly, overall, the field of competitive dynamics offers a detailed
approach aimed at understanding what a particular firm, such as Pepsi, does when it
competes with specific rivals, such as Coke, and how this action–reaction process shapes
firms’ and rivals’ performances.

Second, competitive dynamics research examines the firms’ competitive interdependence,

which is a firm’s performance as a function of the actions of the firm and the responses of its
rivals. In this vein, competition is considered to be “dynamic” and “interactive,” and action
and response dyads and repertoires of actions constitute the building blocks of competition.
Competitive dynamics studies thus focus directly on interfirm rivalry, an aspect widely
discussed in all models of competitive advantage.

Third, competitive dynamics research has focused on the analysis of the antecedents and
performance implications of competitive actions and reactions. The analysis of antecedents is
important in understanding what motivates a firm to attack or to respond to rivals. The
analysis of performance outcomes is important to understand which competitive actions have
a greater impact on firm performance.

Levels of Analysis in Competitive Dynamics

Action-Level Studies: Action–Response Dyads

An influential stream of studies in the competitive dynamics literature has taken the exchange
of individual competitive actions and responses as the level of analysis and has elaborated on
a number of hypotheses as the drivers of competitive responses (Baum & Korn, 1999; Chen &
Miller, 1994; Lee et al., 2000; Smith et al., 1992, 2001).

For example, Chen and Miller (1994), by relying on a sample of competitive action and
response dyads in the U.S. airline industry, examined how competitive attacks can best reduce
the chances of retaliation. Results of this study show that undetectable attacks would provoke
fewer responses than more visible and more easily imitated moves. In their action-level study,
Lee et al. (2000) examined the effects of timing, order of strategic moves, and the durability of
first-mover advantages by analyzing the stock market reactions to new product introductions
and imitations in various industries. The authors found that both timing and order of strategic
moves are important features and that rivals’ reactions usually undermine the durability of
first-mover advantages.

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Business-Level Studies: Action Repertoire

Another stream of competitive dynamics studies focuses on the firm or business level, thereby
looking at the whole set of competitive actions undertaken by a firm over a given time period
(usually 1 year) and examining the antecedents and performance outcomes of this action
repertoire. Firm-level data used in this stream are inferred by examining a wide variety of
competitive moves that firms take in engaging with their rivals over time.

For instance, Chen and Hambrick (1995) examined how small firms differ in their competitive
behaviors from their large rivals in the U.S. domestic airline industry and explored the
implications of performance differences. The unit of analysis was the firms’ action and
response behaviors in a given year. Per each of the 16 different action types, ranging from
new product offerings, mergers, and new hub creations, to price cuts, new promotional
campaigns, and joint advertising efforts, the average annual company scores were calculated
for each of the seven action (propensity for action, action execution speed, action visibility)
and response (responsiveness, response announcement speed, response execution speed,
response visibility) attributes. The authors found that small firms differ descriptively from
their larger counterparts in their competitive behaviors. For instance, small firms tend to be
more active than large ones in initiating competitive moves.

Giachetti et al. (2017) built a model that captures how decisions to imitate new product
technologies stimulate further imitation by rivals and how this “competitive imitation” in turn
influences and is influenced by changing industry conditions. They argue that in this situation,
managers face two basic issues when they consider imitation as the best next move. The first
issue is how many product technologies to copy (i.e., “imitation scope”). The second issue is
how quickly to imitate (i.e., “imitation speed”). Using data on the U.K. mobile phone industry
extracted during the 1990s and 2000s, the authors show that the scope and speed decisions of
one firm in a given year influence the scope and speed decisions of rivals in the subsequent
year. Rivals’ imitation scope and speed decisions will then influence the firms’ subsequent
scope and speed decisions as well as the focal firm’s performance. What emerges is an
interesting coevolutionary process that results when firms learn to undertake competitive
actions in response to competition, thereby intensifying the level of competition. This
competitive intensification triggers further learning and competitive actions, which foster
stronger competition, and so on. The more rapidly firms accumulate competitive experience,
the faster they learn, and the more powerful they become. The peculiarity of this process is
that firms are forced to compete if they want to retain their competitive position, but more
intense competition will at best keep them in the same position (i.e., the so-called Red Queen
effect).

Other authors (Ferrier, 2001; Ferrier & Lee, 2002), also adopting a repertoire approach,
introduced the concept of “competitive aggressiveness,” defined as the extent to which a firm
forcefully takes a large number and a large variety of actions to outperform its competitors.
Aggressive firms, relative to conservative firms, are regarded as those that demonstrate
greater “intensity” and greater “complexity” of strategic activity. Competitive dynamics
theorists have defined “strategic intensity” as the firm’s capability to “carry out a large

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number of competitive actions in rapid succession” (Ferrier & Lee, 2002, p. 164), and
“strategic complexity” as the “extent to which a sequence of actions is composed of actions of
many different types” (Ferrier & Lee, 2002, p. 164). Based on a multiyear, multi-industry study
of thousands of competitive actions, the authors found that a firm’s competitive
aggressiveness is influenced by past performance, organizational slack, and top management
team (TMT) heterogeneity, as well as industry characteristics such as growth and
concentration.

Moreover, findings of competitive dynamics research show that action aggressiveness is

positively related to firm profitability and market share (Chen & MacMillan, 1992; Chen et al.,
2010; Ferrier, 2001; Ferrier et al., 1999; Giachetti, 2016; Young et al., 1996). Action
aggressiveness has been shown to be beneficial to both market leaders and challengers. On
the one hand, competitive dynamics scholars have shown that challengers forcefully taking a
large number of competitive actions are more likely to catch up with market leaders. On the
other hand, “leaders that carry out more competitive actions than challengers will have a
lower rate of market share gap erosion” (Ferrier et al., 1999, p. 375). For example, Ferrier et
al. (1999) and Smith et al. (2001) investigated the “dethronement” and market-share erosion
of market leaders in approximately 40 industries over a 7-year period. They found that market
leaders are more likely to be dethroned or at least to experience market share erosion when,
compared to their challengers in the industry, they undertake fewer competitive actions, carry
out actions of the same type instead of delving into their repertoire of heterogeneous
competitive actions, and are slower in undertaking competitive actions.

Likewise, in their case study analysis of changes in industrial leadership in the global mobile
phone industry, Giachetti and Marchi (2017) explained the way in which, at the end of the
1990s, Nokia leapfrogged over Motorola by showing that the Finnish vendor took an
aggressive competitive posture during those years, mainly in three ways. First, to exploit the
opportunities offered by the emerging digital standard for mobile phones earlier than its rivals
and much earlier than the other mobile phone vendors, Nokia focused on the development of
digital services and equipment so that it became the leading supplier for GSM cellular
infrastructure in Europe. Second, much earlier than rivals, Nokia installed in its phones most
of the revolutionary innovations based on the digital standard, such as SMS and games,
thereby making its new line of portable phones more technologically advanced vis-à-vis those
of its rivals. Third, it rapidly lengthened its product line with respect to the other handset
vendors in order to offer digital phone customers a larger variety of product choices.

Corporate-Level Studies: Multimarket Competition

While action-level studies focus on the antecedents and performance outcomes of action–
response dyads and firm-level studies examine antecedents and performance implications of
actions repertoires, a third stream of studies in the competitive dynamics literature has
examined how firms manage their competitive action and reactions when competing in
multiple markets. These studies have mainly drawn on “multimarket competition,” arising
from the field of oligopoly theories.

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Since the second half of the 1990s, competitive dynamics research has contributed
significantly to the extension of the theory of multimarket competition (e.g., Baum & Korn,
1999; Gimeno, 1999; Gimeno & Woo, 1996, 1999; Greve, 2008; Yu et al., 2009). Most of these
studies have tested the mutual forbearance hypothesis (Edwards, 1955); that is, the idea that
firms operating in the same markets will recognize their interdependence and, as a result, will
undertake competitive actions in such a way as to minimize the risks of dangerous warfare.

One of the empirical settings competitive dynamics scholars used the most was the U.S.
airline industry. When an airline company competes with another, the two are likely to
encounter each other in a considerable number of markets (routes). The multiplicity of their
contacts may blunt the edge of their competition. A prospect of advantage in one route from
vigorous competition may be weighed against the danger of retaliatory forays by the
competitor in other routes. Therefore, each airline may adopt a live-and-let-live strategic
posture designed to stabilize rivals’ strategic interdependence.

In their dynamic analysis of California commuter airlines from 1979 through 1984, Baum and
Korn (1996) found support for the mutual forbearance hypothesis by showing that (a) close
competitors avoid engaging in intense rivalry, and (b) firms interacting in multiple markets
are less aggressive toward each other than those that interact in one or in a few markets.
Likewise, Yu et al. (2009), using a database of nearly 2,000 competitive actions by 13
automobile companies operating in 27 countries over a 7-year period, examined how the
deterring influence of multimarket contact on the competitive aggressiveness of a
multinational company’s subsidiaries is contingent upon the extent of subsidiary ownership,
the cultural distance from the multinational’s home country, the latitude of local regulatory
restrictions, and the presence of local competitors. They found all these factors to influence
the multimarket contact-competitive aggressiveness relationship. In particular, higher
subsidiary ownership enhances the rivalry, lessening the impact of multimarket contact on
competitive aggressiveness, while cultural distance from the multinational’s home country,
the latitude of local regulatory restrictions, and the presence of local competitors diminish it.

Dynamic Competition and Temporary Competitive Advantage

Competitive dynamics research is closely tied to the study of hypercompetition and temporary
competitive advantage. Actually, in environments epitomized by dynamic competition, more
than building a sustainable competitive advantage, firms must attempt to build a string or a
concatenation of short-lived competitive advantages. This condition is due to the fact that
firm-specific advantages are not sustainable over time (D’Aveni et al., 2010). Actually, in such
environments, far from being enduring, a competitive advantage is ephemeral and fleeting. In
fact, any advantage a firm generates will be inevitably eroded as a result of rivals’ reactions in
an unremitting sequence of punctuations of advantages set by the firms’ actions and
reactions, moves and countermoves (Chen et al., 2010).

There are three key characteristics of the temporary competitive advantages view vis-à-vis the
more traditional sustainable competitive advantage view:

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Competitive Dynamics in Strategic Management

1. Performance variation is greater in this context (Chen et al., 2010).

2. Interfirm heterogeneity is “predominantly a study of experimentation and short-run

failure, not long-term success” (Thomas & D’Aveni, 2009, p. 416).

3. Operational speed is paramount to deliver competitive responses; then success comes

about when the competitor’s rates of response decline to zero.

Accordingly, some empirical studies have shown that performance volatility has greatly
increased in the last half century (since the 1980s) in many country-specific contexts such as
the United States (Thomas & D’Aveni, 2009; Wiggins & Ruefli, 2005). Therefore, recalling the
Austrian school (Jacobson, 1992; Kirzner, 1997), the study of firm and industry performance
heterogeneity, more than leaning toward post-Marshallian partial or sector equilibriums, turns
into the study of a process that is termed “disequilibrium and transience” (Thomas & D’Aveni,
2009). In fact, the strategic capability to deploy operational speed enables the creation of
events. The number of events in any given period of time that requires a competitive response
(also termed “tempo” in warfare manuals; Rao, 2011) is a crucial indicator of operational
speed. The higher the tempo, or the number of events in such a time period that require
competitive response, the higher will be the delivery of shock and surprise. Shock and
surprise in turn degrades and disrupts the competitors’ ability to respond to events, and
success comes about when competitors’ rates of response decline (near or) to zero. This
condition is epitomized by Spotify’s entry into the music streaming service market in the
United Kingdom. Spotify made such steps forward because it was able to enter the music
streaming market by innovating. First, it offered a music streaming service with an entry
point through its free advertising-supported service. Then it managed to protect and nurture
its market by further offering algorithmic data to personalize the user experience and social
1
recommendations. Other music platforms, while “setting their price at £9.99, suggesting that
the amount charged by Spotify has become a kind of ‘going rate’ for streaming services,” did
not follow Spotify but preferred other ways to differentiate (such as exclusive offers from
affiliated musicians) (Lilico & Sinclair, 2017, pp. 60–61).

In addition, rediscovering the prominence of firm actions and behaviors advocated by

D’Aveni’s (1994) initial work, Chen et al. (2010) emphasized the role that top management
teams (TMTs) can play in these dynamic advantage contexts. They show how TMT
sociobehavioral integration (i.e., “how well senior executives of a firm work together, both
socially and as a team” [Chen et al., 2010, p. 1413]) may be a positive component in
accelerating firms’ competitive aggressiveness. It is exactly in hypercompetitive environments
that TMTs may develop into an important element in fostering firms’ capacity to produce a
series of competitive actions that generate a sequence of temporary advantages.

Evidence suggests that TMT integration is vital in subduing environmental noise, trimming
down volatility, and balancing opposite views between managers so as they may take crucial
moves vis-à-vis rivals, especially when the competitive advantage is short-termed and
transitory. The executive teams building the perseverance and strength for such integration
are the ones that are in fact able to spawn more frequent and intense competitive actions and,
through these actions, to perform better than the others.

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Competitive Dynamics in Strategic Management

Digital Dynamics and Temporary Competitive Advantage

In the past decade, since the 2010s, the inception of the so-called digital turn of the economy
and society, or the progressive “virtualization of the world” (Westera, 2012), accelerated
severely by the global spread of the COVID-19 pandemic since 2020, is making individuals
spend an increasing portion of their lives in digital spaces. As such, on one hand, it has
become visible that digital transformation is a process that affects not only a segment but the
firm as a whole, dramatically reshaping its strategies, entrepreneurial processes, innovation,
R&D, and governance structures (Cennamo et al., 2020).

On the other hand, the digitalization process has undoubtedly amplified the dynamics of
competitive intensity among firms (Giachetti & Dagnino, 2014). These new rapidly evolving
virtual settings in which firms increasingly cannot escape, coupled with the pervasive
dissemination of exponential technologies powered by a panoply of interconnected digital
paraphernalia (e.g., big data analytics, machine learning, and artificial intelligence), are
pivotal elements leading to increased technological uncertainty and market ambiguity. In fact,
digitally driven dynamics transform firms and cut across industries in a way that is much
faster (Kunisch et al., 2018), much deeper, and more disruptive (Ansari et al., 2015) than ever
experienced heretofore. In such a way, firms operating in digital environments need to
“continuously search for new technological, organizational, and strategic solutions that may
allow them not only to hang on in the market but also to thrive and prosper” (Dagnino et al.,
2021 [italics in original]). This condition involves exponential technologies scaling up
(Gnyawali et al., 2010), the presence of low or negative entry barriers (once considered as an
exception), and a dynamic exchange or sequence of actions and responses between the digital
disruptor and the incumbent.

In connected digital settings, firms are expected to continuously orchestrate their resources
and capabilities in line with demand and technological uncertainties (Brown & Fai, 2006).
Consequently, firms do not attempt to use the benefits of a competitive advantage over time.
On the contrary, before a disruptor may come over to tear down its advantage, the incumbent
will attempt to win a new advantage. In fact, they “constantly destroy and cannibalize prior
competencies to build up a stock of inimitable and unique competencies” (Fiol, 2001, p. 629).
This means that firms may well decide to self-cannibalize their competitive advantage to
prevent an external attack (Dagnino et al., 2021). Therefore, firms may be able to hold up or
avert the sources of the Red Queen effect (Derfus et al., 2008) or the ones extending from the
so-called technology S curves (Adner & Kapoor, 2016). In such a perspective, far from
benefiting from the profit of a traditional sustainable competitive advantage, disruptors’
moves tend to subvert the conventional nature and duration of competitive advantages to
purposefully nurture a series of short-lived advantages. As such, a sequence of digitally
sourced temporary competitive advantages can make available to firms a full set of resources
and capabilities ready to promote further disruptions (Huang et al., 2015).

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Competitive Dynamics in Strategic Management

Coopetition and Coopetitive Dynamics

An intriguing approach of looking at competitive dynamics from the angle of firms’

opportunity of coupling the dynamics of cooperation with the dynamics of competition is the
one offered by the coopetition research stream (Bengtsson & Koch, 2014; Czakon et al., 2020;
Dagnino & Rocco, 2009; Gnyawali & Ryan Charleton, 2018). As know, coopetition features the
simultaneous existence of “competition and cooperation among firms with the intent to create
value” (Czakon et al., 2020) or, more simply, the firms’ cooperation with their competitors.
Actually, coopetition is deemed a viable strategic option, beyond sheer competition and
cooperation, for firms that want to build and maintain their temporary advantages over time
(Dagnino, 2009). Coopetition strategy has been considered as the use of coopetitive
relationships to reap the advantages of a combination of innovation in new areas as a result of
competition while accessing and exploiting new resources and capabilities as a consequence
of cooperation (Bengtsson et al., 2010). In such a way, it is possible to look at coopetition
dynamics.

One relevant vantage point of this research domain is to look at how the dynamics between
competition and cooperation evolve over time by taking into account the inception of
important learning effects (Han & Cai, 2019). This kind of dynamic evolution of coopetition is
observable in the development path of strategic alliances as well as in the evolving
relationship between the focal firm and its coopetitors’ portfolios (Yan et al., 2020). As such,
Yan et al. (2020) empirically examined a data set of 323 firms operating in the global solar
photovoltaic industry in the period 1995–2015. They analyzed the effect of a focal firm’s
technological, market, and geographical overlap with coopetitors on its ability to engender
breakthrough inventions. In particular, Yan et al. (2020) found an inverted U-shaped
relationship between a focal firm’s technological overlap with its coopetitors’ portfolios and
its breakthrough inventions. Besides, they also found that the focal firm’s market and
geographical overlap with its coopetitors’ portfolios moderate the curvilinear relationship.
Nonetheless, when both market overlap and geographical overlap are simultaneously
considered, the moderation effect of geographical overlap becomes irrelevant. Another study
has examined the dyadic-level evolution of coopetition between Apple and Samsung in the
global smartphone industry while considering a relevant complementor (Google) in the value
net (Park & Kim, 2020). Park and Kim (2020) reported that in industry-convergent conditions,
innovative leaders from other industries are expected to enter newly convergent segments. In
such instances, coopetition between giant entrants and incumbents plays a significant role in
the quest for industry leadership. In addition, the cooperative relationships between giant
entrants and incumbents may transform into coopetition over time. Such results are
particularly interesting because they enlighten the role of technological, market, and
geographical overlap and (shifting) convergent industry characteristics in coopetitive
relationships’ evolution. Further research in coopetition dynamics might explore the change
in the intensity degree of coopetition over time, especially in the presence of multiple
coopetitors’ portfolios and within the realms of entrepreneurial ecosystems, strategic
networks, and digital platforms.

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Competitive Dynamics in Strategic Management

Conclusion

This article focuses on understanding the key constructs and the intellectual roots of
competitive dynamics. To do so, it depicts the key underpinnings of the awareness–
motivation–capability (AMC) framework. In addition, it complements the traditional
competitive dynamics approach with a set of novel insights on the relationship between
dynamic competition and the sources of temporary competitive advantage, coopetition
dynamics, as well as the accelerated competition epitomizing early 21st-century digital
dynamics settings.

To advance further the understanding of competitive dynamics, future research is expected to

tackle some relevant issues such as the following: First, as Chen and Miller (2015) suggested,
it is important to check whether the AMC framework might prove helpful for recognizing not
only competitors, but also cooperative partners. Given the relational orientation of
competitive dynamics and that the causal mechanisms associated with awareness, motivation,
and capability are quite similar in both cases, the AMC view might be possibly used for both
competitive and cooperative analyses and applications.

Second, future research needs to tackle the performance consequences (as well as the
operationalization and the measures) of relational competition (i.e., financial and nonfinancial,
short-term and long-term) and determine the extent to which they emerge in different
contexts. Finally, while this article paves the way by suggesting some fresh insights in this
direction, future research is expected to delve more profoundly and precisely into issues such
as dynamic competition and the sources of temporary competitive advantage, the
antecedents, structure, and consequences of coopetition dynamics, and the accelerated
competition epitomizing early 21st-century digital dynamics settings, also by featuring the
appropriate interconnections between them.

Further Reading
Andrevski, G., Brass, D. J., & Ferrier, W. J. (2016). Alliance portfolio configurations and
competitive action frequency. Journal of Management, 42, 811–837.

Andrevski, G., & Ferrier, W. J. (2019). Does it pay to compete aggressively? Contingent roles of
internal and external resources. Journal of Management, 45, 620–644.

Andrevski, G., Richard, O. C., Shaw, J. D., & Ferrier, W. J. (2014). Racial diversity and firm
performance: The mediating role of competitive intensity. Journal of Management, 40, 820–844.

Bogner, W. C., & Barr, P. S. (2000). Making sense in hypercompetitive environments: A cognitive
explanation for the persistence of high velocity competition. Organization Science, 11, 212–226.

Chen, M. J., Su, K. S., & Tsai, W. P. (2007). Competitive tension: The awareness-motivation-
capability perspective. Academy of Management Journal, 50(1), 101–118.

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Competitive Dynamics in Strategic Management

Dagnino, G. B. (Ed.). (2012). Handbook of research on competitive strategy. Edward Elgar.

Gao, H., Yu, T., & Cannella Jr., A. A. (2017). Understanding word responses in competitive
dynamics. Academy of Management Review, 42(1), 129–144.

Gnyawali, D. R., & Madhavan, R. (2001). Cooperative networks and competitive dynamics: A
structural embeddedness perspective. Academy of Management Review, 26, 431–445.

Ilinitch, A. Y., D’Aveni, R. A., & Lewin, A. Y. (1996). New organizational forms and strategies for
managing in hypercompetitive environments. Organization Science, 7(3), 211–220.

Rindova, V., Ferrier, W. J., & Wiltbank, R. (2010). Value from gestalt: How sequences of
competitive actions create advantage for firms in nascent markets. Strategic Management
Journal, 31, 1474–1497.

Sirmon, D. G., Hitt, M. A., Arregle, J. L., & Campbell, J. T. (2010). The dynamic interplay of
capability strengths and weaknesses: Investigating the bases of temporary competitive
advantage. Strategic Management Journal, 31, 1386–1409.

Smith, K. G., Grimm, C. M., & Gannon, M. J. (1992). Competitive dynamics. SAGE.

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Notes

1. “Algorithms relying on Spotify’s aggregated user data and personal data can help surface the right content at the
right time based on time of day and user context. That level of personalization is much tougher to copy, and Spotify’s
scale gives it a distinct advantage in that realm” (Levy, 2018).

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Competitive Dynamics in Strategic Management

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Page 21 of 21

Printed from Oxford Research Encyclopedias, Business and Management. Under the terms of the licence agreement, an individual
user may print out a single article for personal use (for details see Privacy Policy and Legal Notice).
date: 09 January 2022