CHAPTER 5

STRATEGIC ACTIONS: STRATEGY FORMULATION

The Competitive Nature of Strategy

Strategic Management Management of Strategy
Competitiveness and Globalization: Concepts Seventh Concepts and Cases and Casesedition
Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

PowerPoint Presentation by Charlie Cook The University of West Alabama © 2007 Thomson/South-Western. All rights reserved.

KNOWLEDGE 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.
© 2007 Thomson/South-Western. All rights reserved. 5–2

Definitions
• Competitors
 Firms operating in the same market, offering similar products and targeting similar customers.

• Competitive Rivalry
 The ongoing set of competitive actions and responses occurring between competitors.  Competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages.

© 2007 Thomson/South-Western. All rights reserved.

5–3

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.
© 2007 Thomson/South-Western. All rights reserved. 5–4

5–5 . All rights reserved.From Competitors to Competitive Dynamics Why? • To gain an advantageous market position • Competitive Behavior • Competitive actions • Competitive responses Competitors Engage in Competitive Rivalry How? What Results? What Results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market © 2007 Thomson/South-Western.

1996. Chen. 21: 100–134. Competitor analysis and interfirm rivalry: Toward a theoretical integration. 5–6 . All rights reserved. © 2007 Thomson/South-Western.1 From Competitors to Competitive Dynamics Source: Adapted from M.-J. Academy of Management Review.Figure 5.

Competitive Rivalry’s Effect on Strategy • Success of a strategy is determined by:  The firm’s initial competitive actions. • Competitive rivalry:  Affects all types of strategies. All rights reserved. © 2007 Thomson/South-Western.  How well the firm anticipates and responds to its competitors’ initial actions. 5–7 .  Has the strongest influence on the firm’s businesslevel strategy or strategies.  How well it anticipates competitors’ responses to them.

All rights reserved.  Competitors feel each other’s actions and responses.A Model of Competitive Rivalry • Firms are mutually interdependent  A firm’s competitive actions have noticeable effects on its competitors.  A firm’s competitive actions elicit competitive responses from its competitors. 5–8 . © 2007 Thomson/South-Western. • Marketplace success is a function of both individual strategies and the consequences of their use.

A Model of Competitive Rivalry Competitive Analysis • Market commonality • Resource similarity Drivers of Competitive Behavior • Awareness • Motivation • Ability Feedback Outcomes • Market position • Financial performance Interfirm Rivalry • Likelihood of Attack • First-mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation • Market dependence © 2007 Thomson/South-Western. 5–9 . All rights reserved.

Competitor analysis and interfirm rivalry: Toward a theoretical integration. © 2007 Thomson/South-Western.FIGURE 5. 21: 100–134. 5–10 . Academy of Management Review.-J.2 A Model of Competitive Rivalry Source: Adapted from M. All rights reserved. Chen. 1996.

assumptions. 5–11 .Competitor Analysis • Competitor analysis is used to help a firm understand its competitors. © 2007 Thomson/South-Western. • The firm studies competitors’ future objectives. current strategies. • With the analysis. and capabilities. All rights reserved. a firm is better able to predict competitors’ behaviors when forming its competitive actions and responses.

5–12 . but more likely to more respond aggressively when attacked.  A firm with greater multimarket contact is less likely to initiate an attack. • Firms competing against one another in several or many markets engage in multimarket competition. © 2007 Thomson/South-Western.Market Commonality • Market commonality is concerned with:  The number of markets with which a firm and a competitor are jointly involved.  The degree of importance of the individual markets to each competitor. All rights reserved.

• Assessing resource similarity can be difficult if critical resources are intangible rather than tangible. © 2007 Thomson/South-Western.  Use similar strategies. All rights reserved. 5–13 .Resource Similarity • Resource Similarity  How comparable the firm’s tangible and intangible resources are to a competitor’s in terms of both types and amounts. • Firms with similar types and amounts of resources are likely to:  Have similar strengths and weaknesses.

Academy of Management Review.FIGURE 5. 1996. 21: 100–134. Competitor analysis and interfirm rivalry: Toward a theoretical integration. All rights reserved. © 2007 Thomson/South-Western.3 A Framework of Competitor Analysis Source: Adapted from M.-J. 5–14 . Chen.

Drivers of Competitive Behavior Awareness • Awareness is  the extent to which competitors recognize the degree of their mutual interdependence that results from: • Market commonality • Resource similarity © 2007 Thomson/South-Western. 5–15 . All rights reserved.

5–16 .Drivers of Competitive Behavior (cont’d) Awareness Motivation • Motivation concerns  the firm’s incentive to take action  or to respond to a competitor’s attack  and relates to perceived gains and losses © 2007 Thomson/South-Western. All rights reserved.

Drivers of Competitive Behavior (cont’d) Awareness Motivation Ability • Ability relates to  each firm’s resources  the flexibility these resources provide • Without available resources the firm lacks the ability to  attack a competitor  respond to the competitor’s actions © 2007 Thomson/South-Western. 5–17 . All rights reserved.

© 2007 Thomson/South-Western. it is likely that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets. All rights reserved. • Given the strong competition under market commonality.Drivers of Competitive Behavior (cont’d) Awareness Motivation Ability Market Commonality • A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. 5–18 .

All rights reserved. Resource Dissimilarity © 2007 Thomson/South-Western. no matter how challenging the response. 5–19 .Drivers of Competitive Behavior (cont’d) Awareness Motivation Ability Market Commonality • The greater the resource imbalance between the acting firm and competitors or potential responders. the greater will be the delay in response by the firm with a resource disadvantage. • When facing competitors with greater resources or more attractive market positions. firms should eventually respond.

© 2007 Thomson/South-Western. 5–20 .Competitive Rivalry • Competitive Action  A strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. All rights reserved. • Competitive Response  A strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

© 2007 Thomson/South-Western. 5–21 .Strategic and Tactical Actions • Strategic Action (or Response)  A market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. All rights reserved. • Tactical Action (or Response)  A market-based move that is taken to fine-tune a strategy: • Usually involves fewer resources. • Is relatively easy to implement and reverse.

5–22 .  Market share that can be difficult for competitors to take during future competitive rivalry.Factors Affecting Likelihood of Attack First-Mover Incentives First Mover A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. All rights reserved. • First movers allocate funds for:  Product innovation and development  Aggressive advertising  Advanced research and development • First movers can gain:  The loyalty of customers who may become committed to the firm’s goods or services. © 2007 Thomson/South-Western.

and avoid them. © 2007 Thomson/South-Western.  Tries to find any mistakes the first mover made. 5–23 . typically through imitation:  Studies customers’ reactions to product innovations. Second Mover Incentives  May develop more efficient processes and technologies.Factors Affecting Likelihood of Attack (cont’d) First Mover • Second mover responds to the first mover’s competitive action. All rights reserved.  Can avoid both the mistakes and the huge spending of the firstmovers.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover • Late mover responds to a competitive action only after considerable time has elapsed. • Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create value for customers. • Any success achieved will be slow in coming and much less than that achieved by first and second movers. © 2007 Thomson/South-Western. 5–24 . All rights reserved.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover Organizational Size. • Small firms are perceived as:  Nimble and flexible competitors  Relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive rivalry.Small • Small firms are more likely:  To launch competitive actions. All rights reserved.  Having the flexibility needed to launch a greater variety of competitive actions. 5–25 .  To be quicker in doing so. © 2007 Thomson/South-Western.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover Organizational Size -Large • Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period • Large organizations commonly have the slack resources required to launch a larger number of total competitive actions • Think and act big and we’ll get smaller. Herb Kelleher Former CEO. Think and act small and we’ll get bigger. All rights reserved. 5–26 . Southwest Airlines © 2007 Thomson/South-Western.

• Quality exists when the firm’s goods or services meet or exceed customers’ expectations • Product quality dimensions include:  Performance  Features  Conformance  Serviceability  Flexibility  Durability  Aesthetics  Perceived quality 5–27 . All rights reserved.Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover Organizational Size Quality (Product) © 2007 Thomson/South-Western.

5–28 . New York:The Free Press. Aesthetics—How a product looks and feels 8. © 2007 Thomson/South-Western. Sergesketter. Paul. Perceived quality—Subjective assessment of characteristics (product image) SOURCES: Adapted from J. 1988. & J. Roberts & B. F. Evans. Features—Important special characteristics 3.1 Quality Dimensions of Goods and Services Product Quality Dimensions 1.W. Dean. Garvin. St. H. Organization and Society. Conformance—Match with preestablished standards 6. Performance—Operating characteristics 2. New York:The Free Press. R. Total Quality: Management. Serviceability—Ease and speed of repair 7. Durability—Amount of use before performance deteriorates 5. 1993.V.Table 5. Jr. MN:West Publishing Company. Flexibility—Meeting operating specifications over some period of time 4. 1994. Managed Quality: The Strategic and Competitive Edge. D. Quality Is Personal.. All rights reserved.

Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover Organizational Size Quality (Service) © 2007 Thomson/South-Western. All rights reserved. • Service quality dimensions include:  Timeliness  Courtesy  Consistency  Convenience  Completeness  Accuracy 5–29 .

Roberts & B. Organization and Society. Dean. Consistency—Giving all customers similar experiences each time 4. Completeness—Fully serviced. F. D.W. Convenience—Accessibility to customers 5. Paul. R. © 2007 Thomson/South-Western. Jr. St. Managed Quality: The Strategic and Competitive Edge.1 Quality Dimensions of Goods and Services (cont’d) Service Quality Dimensions 1. 5–30 . H. Accuracy—Performed correctly each time SOURCES: Adapted from J. & J.V. Timeliness—Performed in the promised period of time 2. 1994. New York:The Free Press. Sergesketter. All rights reserved. Evans. MN:West Publishing Company. 1993. New York:The Free Press.Table 5.. Quality Is Personal. Total Quality: Management. Garvin. Courtesy—Performed cheerfully 3. 1988. as required 6.

 Damages the firm’s ability to use its capabilities to create or maintain an advantage. 5–31 .Likelihood of Response • Responses to a competitor’s action are taken when the action:  Leads to better use of the competitor’s capabilities to gain or produce stronger competitive advantages or an improvement in its market position.  Makes the firm’s market position becomes less defensible. © 2007 Thomson/South-Western. All rights reserved.

5–32 . All rights reserved.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  Reputation  Market dependence © 2007 Thomson/South-Western.

5–33 . All rights reserved.Factors Affecting Strategic Response Type of Competitive Action • Strategic actions receive strategic responses  Strategic actions elicit fewer total competitive responses. • Tactical responses are taken to counter the effects of tactical actions  A competitor likely will respond quickly to a tactical actions © 2007 Thomson/South-Western.  The time needed to implement and assess a strategic action delays competitor’s responses.

Factors Affecting Strategic Response (cont’d) Type of Competitive Action Actor’s Reputation • An actor is the firm taking an action or response • Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior. All rights reserved. © 2007 Thomson/South-Western. • The firm studies responses that a competitor has taken previously when attacked to predict likely responses. 5–34 .

5–35 . All rights reserved. Dependence on the market © 2007 Thomson/South-Western. firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position. • In general.Factors Affecting Strategic Response (cont’d) Type of Competitive Action Actor’s Reputation • Market dependence is the extent to which a firm’s revenues or profits are derived from a particular market.

• Competitive Rivalry Ongoing actions and responses taking place between an individual firm and its competitors for advantageous market position. 5–36 . All rights reserved.Competitive Dynamics versus Rivalry • Competitive Dynamics Ongoing actions and responses taking place between all firms competing within a market for advantageous positions. © 2007 Thomson/South-Western.

5–37 . motivation and ability  First mover incentives.Competitive Dynamics versus Rivalry (cont’d) • Competitive Rivalry (Individual firms)  Market commonality and resource similarity  Awareness. and standard-cycle  Effects of market speed on actions and responses of all competitors in the market © 2007 Thomson/South-Western. size and quality • Competitive Dynamics (All firms)  Market speed (slowcycle. All rights reserved. fast-cycle.

• All firms concentrate on competitive actions and responses to protect. maintain and extend proprietary competitive advantage. © 2007 Thomson/South-Western.Competitive Dynamics Slow-Cycle Markets • Competitive advantages are shielded from imitation for long periods of time and imitation is costly. 5–38 . All rights reserved. • Competitive advantages are sustainable in slow-cycle markets.

FIGURE 5. All rights reserved. C. 11(2): 111–118.4 Gradual Erosion of a Sustained Competitive Advantage SOURCE: Adapted from I. Academy of Management Executive. © 2007 Thomson/South-Western. Controlling competitive dynamics by taking strategic initiative. 1988. 5–39 . MacMillan.

• Imitation happens quickly and somewhat expensively • Competitive advantages aren’t sustainable.  Competitors use reverse engineering to quickly imitate or improve on the firm’s products • Non-proprietary technology is diffused rapidly © 2007 Thomson/South-Western.Competitive Dynamics (cont’d) Slow-Cycle Markets Fast-Cycle Markets • The firm’s competitive advantages aren’t shielded from imitation. All rights reserved. 5–40 .

5–41 .FIGURE 5. Controlling competitive dynamics by taking strategic initiative. All rights reserved.5 Developing Temporary Advantages to Create Sustained Advantage Source: Adapted from I. 11(2): 111–118. © 2007 Thomson/South-Western. Academy of Management Executive. C. MacMillan. 1988.

• Firms Standard-Cycle Markets  Seek large market shares  Gain customer loyalty through brand names  Carefully control operations © 2007 Thomson/South-Western. All rights reserved. • Competitive advantages are partially sustainable if their quality is continuously upgraded. 5–42 .Competitive Dynamics (cont’d) Slow-Cycle Markets Fast-Cycle Markets • Moderate cost of imitation may shield competitive advantages.

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