Strategy

Session 5: Competitive Strategy

Agenda
• Competitive Strategy
• Competitive actions and responses
• Drivers of competitive behavior

• Example: Streaming Wars (Monday)

• Multi-market contact

 For Monday: Streaming Wars readings (Moodle)

BL strategy creates differences between the firm’s position and its competitors
Determines who it will be competing with
(HIH)

Competitive Dynamics /
Competitive Strategy
Competitive Strategy
Identify competitors
Competitors
 Firms operating in same market/industry, offering similar products and
targeting similar customers
 Firms whose strategic choices directly affect one another (Besanko et al, 2013)

 When the firms offer products / services that

 Have the same or similar product performance characteristics
 Have the same or similar occasions for use
 Are sold in the same geographic area
(and is difficult to obtain travelling elsewhere, and transportation costs are high)
Grocery Industry
Grocery industry players (US state of Wisconsin)

High-end products One of the first discount

grocer
Natural and organic
products Natural, ethnic, organic food, Gourmet foods and bakery items,
in-store pharmacy, banking full-service deli

Had to close some stores due to

financial difficulties
How will the existing players react?

What are their Business-level strategies? Aldi is entering the market …

Who should be most concerned?

Specialty cheeses, wine and 24-hour, 228 stores in 8 Midwestern

bakery items, imports states

“European-style” approach Quality products, low prices, high

Combines a traditional discount to food shopping customer service, in-store dietician
store and a supermarket
Differentiation Integrated cost leadership/Differentiation strategy Cost leadership
 Stuck in the middle?

What dynamics are likely to unfold in this market?

 Outcome
 Even indirect competitors need to be monitored

 Entry of new indirect competitors can trigger changes in business-level

strategies and position of other indirect competitors

 They can then become direct competitors

Direct vs Indirect Competitors
• Direct competitors are part of the same strategic group
• Strategic groups: set of firms that use a similar strategy to target the same customers

• Indirect competitors are from outside the strategic group

• They still compete but with different strategies
• They try to fill the needs of customers in a different way
• Still from within the industry

• Not from the same industry  Substitutes (5F) also compete but even less directly
• Indirect competitors can become direct competitors
• Substitutes can also evolve and enter the industry (as direct or indirect competitors)
• This is dynamic
Competitive Rivalry model
(HIH)
Identifying and Analyzing Competitors
To what extent are firms competitors?

 Combination of market commonality and resource similarity indicate a firm’s

direct competitors

1. Market Commonality
 Each industry composed of various markets which can be subdivided (segments)
(B-L: Who and What?)
 Number of markets in which the firm and its competitors meet each other and
the degree of importance of the individual markets to each
Identifying and Analyzing Competitors
2. Resource Similarity
 Extent to which firm’s tangible/intangible resources are comparable to competitor’s in
type and amount (B-L: How?)

High market commonality + High resource similarity

 Serving the same customers and needs in a similar way (likely with similar BL strategy)
 Direct competition

 Caution: direct competition does not always imply intense rivalry

Framework of Competitor Analysis
(HIH)
After identifying competitors
• Think about what these competitors do and how they behave

• Do they implement competitive actions? What kind of actions?

• Do they respond to our actions? Do we respond to their actions?

• What is the level of rivalry between us and them?

• How is this affecting the industry dynamics?

• How can we predict what they will do? What type of actions?

•…
Types of Competitive Actions / Responses
Strategic • Significant commitments of specific and distinctive
organizational resources
Actions/ • Difficult to implement
Responses • Difficult to reverse

Example Major Acquisition

Tactical
• Undertaken to “fine tune” strategy
Actions/ • Relatively easy to implement
Responses • Relatively easy to reverse

Example Price cut

 A firm’s
strategic conduct is
Competitive Dynamics dynamic in nature

Competitive
Actions taken by one Competitive responses lead to
firm elicit responses additional actions
from competitors Dynamics from the firm that
acted originally

Actions and responses shape

the competitive positions of
each firm’s BL strategy
(HIH)
Key concepts
Competitive Behavior
 Set of competitive actions and competitive responses the firm takes to build or defend its
competitive advantages and to improve its market position
 Through competitive behavior the firm tries to position itself successfully relative to the 5 forces
and to defend current competitive advantages while building advantages for the future

Competitive Rivalry
 Ongoing set of competitive actions and competitive responses occurring between competitors
as they contend with each other for an advantageous market position

Multimarket Competition
 Firms competing against one another in several product or geographic markets (next)

Competitive Dynamics
 Total set of actions and responses of all firms competing within a market
Competitive asymmetry
Firm A Firm B

M2 M1 M1
M2 M3 M4

Market commonality
• From Firm A ’s point of view? Multimarket contact
• From Firm B’s point of view?
 Implications for competitive behaviors (next)
Drivers of Competitive Behavior
There are 3 important drivers of competitive behavior
(which are influenced by market commonality and resource similarity)

1. Awareness
• Prerequisite to any competitive action
• Competitors recognize degree of mutual interdependence that results
from market commonality and resource similarity
• Market commonality and resource similarity increase awareness
Drivers of Competitive Behavior
2. Motivation
• Firm's incentive to take action, or to respond to a competitor's attack,
as it relates to perceived gains and losses
• Market commonality/ multimarket contact generally reduces the
likelihood of actions
• Many markets at stake: high potential for losses
• Market commonality/ multimarket contact generally increases the
likelihood of responses
• Many markets at stake: high potential for losses  Retaliation
Drivers of Competitive Behavior
3. Ability
• Firm's resources that allow competitive action and responsiveness
• Similar resources  Similar ability to take actions or to respond
• Imbalance may lead to delay in response
 e.g., Wal-Mart initially used cost leadership strategy to compete only in small communities
(where competitors didn’t have the same resources and hence couldn’t react immediately)
Recall the Coopers case

Market commonality and resource similarity between Coopers and LN / Fosters?

Did we see any competitive actions / responses?

What would happen if Coopers changed its business-level strategy?

Coopers case

Coopers increasing market commonality

• They are already aware of each other as competitors
• But it will increase LN and Fosters’ motivation to respond
Resource similarity
• Resource asymmetry in favor of LN and Fosters
• High ability to respond
Coopers: crucial to find / keep own space away from LN and Fosters
 What else influences this?
(besides Awareness, Motivation and Ability?)
Interfirm Rivalry: Likelihood of Attack

In addition to
Three other factors
 Market commonality
 Resource similarity 1. First mover incentives
2. Organizational size
 Awareness 3. Quality
 Motivation
 Ability
Interfirm Rivalry: Likelihood of Attack
1. First Mover Incentives
 Firms can gain loyalty of customers by moving first
 Gain market share that is hard for competitors to take during rivalry

 First mover
 Often has superior R&D skills
 Tend to be aggressive and willing to experiment with innovation
 Tend to take higher, yet reasonable, risks
 Need to have available / slack resources

• Benefits can be substantial

• Progress along the learning curve alone
(cannot learn from others)
Interfirm Rivalry: Likelihood of Attack
2. Organizational Size
 Small firms
• Act as agile and flexible competitors
• Rely on speed and surprise to defend their competitive advantage
• Have greater variety of competitive behavioral options available
 Large firms
• Often have greater slack
• Have greater likelihood to initiate competitive and strategic actions overtime
• Launch greater number of actions
• Tend to rely on a limited variety of competitive actions

“The underdog in many products can pick and choose where to hit the giant; the giant
must defend itself everywhere” --George H. Lesch, former president, Colgate-Palmolive
Interfirm Rivalry: Likelihood of Attack

3. Quality
 Customer perception that the firm's goods or services perform in ways that are
important to customers, meeting or exceeding their expectations

 Solve quality problems first before taking competitive actions (broad sense)

 Once quality issues are resolved competitor will take more aggressive actions
Interfirm Rivalry: Likelihood of Response
Three other factors
In addition to
1. Types and effectiveness of competitive action
 Market commonality • Strategic vs tactical action?
 Resource similarity
2. Actor’s reputation (positive / negative)
• e.g. market leaders’ actions more or less likely
 Awareness to lead to response?
 Motivation • e.g. tactical actions taken by price predator?
 Ability response?
3. Dependence on the market
Competitive Dynamics

• Type of market cycle affects the level of competitive dynamics

• Broad classification of 3 types of market cycles
• Slow-cycle markets
• Fast-cycle markets
• Standard-cycle markets
Gradual Erosion of a Sustained Competitive Advantage
(HIH)
Competitive Dynamics: 3 Market Cycles

1. Slow-Cycle Markets
 Markets in which the firm's competitive advantages are shielded from imitation
for long periods of time, and in which imitation is costly
 Build a one-of-a-kind / unique competitive advantage that creates sustainability
(i.e., proprietary and difficult for competitors to understand)
 Once a proprietary advantage is developed, competitive behavior should be
oriented towards protecting, maintaining, and extending that advantage
 Competitive Dynamics: 3 Market Cycles
2. Fast-Cycle Markets
 Markets in which the firm's capabilities that contribute to competitive advantages are not shielded
from imitation and where imitation is often rapid and inexpensive
 Focus is on learning how to rapidly and continuously develop new competitive advantages that are
superior to those they replace (creating innovation)
 Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new
ones before competitors learn how to do so through successful imitation
 Continually try to move on to another temporary competitive advantage before competitors can
respond to the first one
Obtaining Temporary Advantages to Create Sustained Advantage
Returns from
a Sustained
Competitive Firm continues to move on
Advantage to the next Advantage

Counterattack
Exploitation
Launch

Time
Competitive Dynamics: 3 Market Cycles
3. Standard-Cycle Markets
 Markets where firm’s competitive advantages are moderately shielded from
imitation and where imitation is moderately costly

 Competitive advantages partially sustained as quality is continuously upgraded

 Seek to serve many customers and gain a large market share

 Gain brand loyalty through brand names

 Careful operational control / manage a consistent experience for the customer

Examples
Athletics gear / apparel

• Who are the key players in the market?

• Variation in terms of business-level strategy / positioning?
• What kind of competitive dynamics do you see in this industry?
Athletics gear / apparel
• Athletics gear
• Nike vs Adidas
• Signing of athletes and clubs
• Puma
• Unsuccessful, negative brand image in late 1980s and early1990s
• Shoes sold at low prices in discount stores
• Decided to change its strategy and image
• Focus on market between sports and fashion and retro trends
• Competitor response?
Athletics gear / apparel

Source: https://www.ft.com/content/0537bf9d-e1e4-4f2e-bf2c-17ca8d7268c2
Examples of competitive rivalry
• Intel and AMD (Advanced Micro Devices)
• Boeing and Airbus  example discussed in the 5 forces of the airline industry
• Coca-Cola and Pepsi  the cola wars
• Gillette
• Launch of Sensor razors in the 1990s: top secret, aggresive launch, very different product
• Competitors were not able to retaliate with similar product until 8 months later
• Dell
• Started price war in 2001, reduced prices of PCs by 50% throughout the market
• Competitive response: cut prices, HP and Compaq merger, ….
• Bars
• Happy Hour
• Drink Promotions
• Any other examples?
Next session

• Competitive Strategy (cont.)

• Streaming Wars
• Read bundle of articles posted on Moodle (for next Monday)
• Prepare questions for discussion