A market based move to fine tune a strategy

Running head: BUSINESS LAWS AND REGULATIONS 1

BUSINESS LAWS AND REGULATIONS 2

Firms operating in the same market, offering similar products, and targeting similar customers are competitors.1 Southwest Airlines, Delta, United, Continental, and JetBlue are competitors, as are PepsiCo and Coca-Cola Company. As described in the Opening Case, Apple’s family of products (Macs, iPads, iPods, and iPhones) are currently engag- ing in a competitive battle in the video game market with stand-alone and mobile game platforms produced by Sony, Microsoft, and Nintendo. As noted in the Opening Case, in response, Sony has produced a PLAY phone that has its own game console and allows one to use “play station certified games” on the mobile device.2

Firms interact with their competitors as part of the broad context within which they operate while attempting to earn above-average returns.3 The decisions firms make about their interactions with their competitors significantly affect their ability to earn above-average returns.4 Because 80 to 90 percent of new firms fail, learning how to select the markets in which to compete and how to best compete within them is highly important.5

Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position.6 Especially in highly competitive industries, firms constantly jockey for advantage as they launch strategic actions and respond or react to rivals’ moves.7 It is important for those leading organizations to understand competitive rivalry, in that “the central, brute empir- ical fact in strategy is that some firms outperform others,”8 meaning that competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages.9

A sequence of firm-level moves, rivalry results from firms initiating their own com- petitive actions and then responding to actions taken by competitors.10 Competitive behavior is the set of competitive actions and responses the firm takes to build or defend its competitive advantages and to improve its market position.11 Through competitive behavior, the firm tries to successfully position itself relative to the five forces of com- petition (see Chapter 2) and to defend current competitive advantages while building advantages for the future (see Chapter 3). Increasingly, competitors engage in competitive actions and responses in more than one market.12 Firms competing against each other in several product or geographic markets are engaged in multimarket competition.13

All competitive behavior—that is, the total set of actions and responses taken by all firms competing within a market—is called competitive dynamics. The relationships among these key concepts are shown in Figure 5.1.

This chapter focuses on competitive rivalry and competitive dynamics. A firm’s strat- egies are dynamic in nature because actions taken by one firm elicit responses from competitors that, in turn, typically result in responses from the firm that took the initial action.14 As explained in the Opening Case, Apple, Sony, and other video game produc- ers are changing how they compete as they respond to competitive moves. Likewise, Walmart is seeking to enter the video-on-demand market through Vudu as it responds to iTunes dominance in this market.

Competitive rivalries affect a firm’s strategies, as shown by the fact that a strategy’s success is determined not only by the firm’s initial competitive actions but also by how well it anticipates competitors’ responses to them and by how well the firm anticipates and responds to its competitors’ initial actions (also called attacks).15 Although competitive rivalry affects all types of strategies (e.g., corporate-level, acquisition, and international), its dominant influence is on the firm’s business-level strategy or strategies. Indeed, firms’ actions and responses to those of their rivals are the basic building blocks of business- level strategies.16 Recall from Chapter 4 that business-level strategy is concerned with what the firm does to successfully use its competitive advantages in specific product markets. In the global economy, competitive rivalry is intensifying,17 meaning that the significance of its effect on firms’ business-level strategies is increasing. However, firms that develop and use effective business-level strategies tend to outperform competitors in individual product markets, even when experiencing intense competitive rivalry that price cuts bring about.

A Model of Competitive Rivalry

Competitive rivalry evolves from the pattern of actions and responses as one firm’s com- petitive actions have noticeable effects on competitors, eliciting competitive responses from them.19 This pattern suggests that firms are mutually interdependent, that they are affected by each other’s actions and responses, and that marketplace success is a func- tion of both individual strategies and the consequences of their use.20 Increasingly, too, executives recognize that competitive rivalry can have a major effect on the firm’s finan- cial performance.21 Research shows that intensified rivalry within an industry results in decreased average profitability for the competing firms.22 For example, Research in Motion (RIM) dominated the smartphone market with its Blackberry operating sys- tem platform until Apple’s iPhone platform emerged. Likewise, the introduction of the Android platform by Google has cut into RIM’s market share and has thereby lowered the company’s performance expectations.23

Figure 5.2 presents a straightforward model of competitive rivalry at the firm level; this type of rivalry is usually dynamic and complex.24 The competitive actions and responses the firm takes are the foundation for successfully building and using its capa- bilities and core competencies to gain an advantageous market position.25 The model in Figure 5.2 presents the sequence of activities commonly involved in competition between a particular firm and each of its competitors. Companies can use the model to understand how to be able to predict competitors’ behavior (actions and responses) and reduce the uncertainty associated with competitors’ actions.26 Being able to predict competitors’ actions and responses has a positive effect on the firm’s market position and its subsequent financial performance.27 The sum of all the individual rivalries mod- eled in Figure 5.2 that occur in a particular market reflect the competitive dynamics in that market.

The remainder of the chapter explains components of the model shown in Figure 5.2. We first describe market commonality and resource similarity as the building blocks of a competitor analysis. Next, we discuss the effects of three organizational characteristics— awareness, motivation, and ability—on the firm’s competitive behavior. We then exam- ine competitive rivalry between firms, or interfirm rivalry, in detail, by describing the factors that affect the likelihood a firm will take a competitive action and the factors that affect the likelihood a firm will respond to a competitor’s action. In the chapter’s final section, we turn our attention to competitive dynamics to describe how market charac- teristics affect competitive rivalry in slow-cycle, fast-cycle, and standard-cycle markets.

Competitor Analysis

As previously noted, a competitor analysis is the first step the firm takes to be able to predict the extent and nature of its rivalry with each competitor. The number of markets in which firms compete against each other (called market commonality, defined on the following pages) and the similarity in their resources (called resource similarity, also defined in the following section) determine the extent to which the firms are competitors. Firms with high market commonality and highly similar resources are “clearly direct and mutually acknowledged competitors.”28 The drivers of competitive behavior—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.29

In Chapter 2, we discussed competitor analysis as a technique firms use to under- stand their competitive environment. Together, the general, industry, and competitive environments comprise the firm’s external environment. We also described how com- petitor analysis is used to help the firm understand its competitors. This understanding results from studying competitors’ future objectives, current strategies, assumptions, and capabilities (see Figure 2.3 in Chapter 2). In this chapter, the discussion of competitor analysis is extended to describe what firms study to be able to predict competitors’ behav- ior in the form of their competitive actions and responses. The discussions of competi- tor analysis in Chapter 2 and in this chapter are complementary in that firms must first understand competitors (Chapter 2) before their competitive actions and competitive responses can be predicted (this chapter).

Such competitive awareness is illustrated in the Strategic Focus on the competitors in the rivalry among the global automobile producers such as Toyota, Ford, General Motors, Honda, Chrysler, Nissan, and others. These analyses are highly important because they help managers to avoid “competitive blind spots,” in which managers are unaware of spe- cific competitors or their capabilities. If managers have competitive blind spots, they may be surprised by a competitor’s actions, thereby allowing the competitor to increase its market share at the expense of the manager’s firm.30 Competitor analyses are especially important when a firm enters a foreign market. Managers need to understand the local competition and foreign competitors currently operating in the market.31 Without such analyses, they are less likely to be successful.

Market Commonality

Each industry is composed of various markets. The financial services industry has mar- kets for insurance, brokerage services, banks, and so forth. To concentrate on the needs of different, unique customer groups, markets can be further subdivided. The insurance market, for example, could be broken into market segments (such as commercial and consumer), product segments (such as health insurance and life insurance), and geo- graphic markets (such as Western Europe and Southeast Asia). In general, the capabili- ties the Internet’s technologies generate help to shape the nature of industries’ markets along with the competition among firms operating in them. For example, Alex Tosolini, VP of e-commerce for Procter and Gamble (P&G), notes: “Facebook is both a market- ing and a distribution channel, as P&G has worked to develop ‘f-commerce’ capabili- ties on its fan pages, fulfilled by Amazon, which has become a top 10 retail account for Pampers,” a disposable diaper product.32

Competitors tend to agree about the different characteristics of individual markets that form an industry. For example, in the transportation industry, the commercial air travel market differs from the ground transportation market, which is served by such firms as YRC Worldwide (one of the largest transportation service providers in the world) and major YRC competitors Arkansas Best, Con-way Inc., and FedEx Freight.33 Although differences exist, many industries’ markets are partially related in terms of technologies used or core competencies needed to develop a competitive advantage. For example, although railroads and truck ground transport compete in a different segment and can be substitutes, different types of transportation companies need to provide reli- able and timely service. Commercial air carriers such as Southwest, United, and Jet Blue must therefore develop service competencies to satisfy their passengers, while YRC, rail- roads, and their major competitors must develop such competencies to serve the needs of those using their services to ship goods.

Firms sometimes compete against each other in several markets that are in different industries. As such these competitors interact with each other several times, a condition called market commonality. More formally, market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each.34 When firms produce similar products and compete for the same customers, as in the global automobile industry (see Strategic Focus), the competitive rivalry is likely to be high.35 Firms competing against one another in several or many markets engage in multimarket competition.36 Coca-Cola and PepsiCo compete across a number of product (e.g., soft drinks, bottled water) and geographic markets (throughout the United States and in many foreign mar- kets). Airlines, chemicals, pharmaceuticals, and consumer foods are examples of other industries in which firms often simultaneously compete against each other in multiple markets

Firms competing in several markets have the potential to respond to a competitor’s actions not only within the market in which the actions are taken, but also in other mar- kets where they compete with the rival. This potential creates a complicated competitive mosaic in which “the moves an organization makes in one market are designed to achieve goals in another market in ways that aren’t immediately apparent to its rivals.”37 This potential complicates the rivalry between competitors. In fact, research suggests that a firm with greater multimarket contact is less likely to initiate an attack, but more likely to move (respond) aggressively when attacked. For instance, research in the computer industry found that “firms respond to competitive attacks by introducing new products but do not use price as a retaliatory weapon.”38 Thus, in general, multimarket competi- tion reduces competitive rivalry, but some firms will still compete when the potential rewards (e.g., potential market share gain) are high.39

Resource Similarity

Resource similarity is the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount.40 Firms with simi- lar types and amounts of resources are likely to have similar strengths and weaknesses and use similar strategies.41 The competition between FedEx and United Parcel Service (UPS) in using information technology to improve the efficiency of their operations and to reduce costs demonstrates these expectations. Pursuing similar strategies that are supported by similar resource profiles, personnel in these firms work at a feverish pace to receive, sort, and ship packages. Rival DHL is trying to compete with the two global giants supported by the privatized German postal service, Deutsche Post World Net, which acquired it in 2002. DHL has made impressive gains in recent years (though it closed its operations in the United States after acquiring Airborne Express); it competes strongly in Europe and Asia with resources and capabilities similar to those of FedEx and UPS.42 To survive in the United States, it has negotiated a partnership agreement with UPS and others to make its U.S. deliveries. Such arrangements are often referred to as “coopetition” (cooperation between competitors). When performing a competitor analysis, a firm analyzes each of its competitors in terms of market commonality and resource similarity. The results of these analyses can be mapped for visual comparisons. In Figure 5.3, we show different hypothetical intersections between the firm and individual competitors in terms of market com- monality and resource similarity. These intersections indicate the extent to which the firm and those with which it is compared are competitors. For example, the firm and its competitor displayed in quadrant I have similar types and amounts of resources (i.e., the two firms have a similar portfolio of resources). The firm and its competitor in quadrant I would use their similar resource portfolios to compete against each other in many markets that are important to each. These conditions lead to the conclusion that the firms modeled in quadrant I are direct and mutually acknowledged com- petitors (e.g., as in the global auto industry). In contrast, the firm and its competitor shown in quadrant III share few markets and have little similarity in their resources, indicating that they aren’t direct and mutually acknowledged competitors. Thus, a small local, family-owned Italian restaurant does not compete directly against Olive Garden nor does it have resources that are similar to those of Darden Restaurants, Inc. (Olive Garden’s owner). The firm’s mapping of its competitive relationship with rivals is fluid as firms enter and exit markets and as companies’ resources change in type and amount. Thus, the companies with which the firm is a direct competitor change across time.

Drivers of Competitive Actions and Responses

As shown in Figure 5.2 (on page 136), market commonality and resource similarity influ- ence the drivers (awareness, motivation, and ability) of competitive behavior. In turn, the drivers influence the firm’s competitive behavior, as shown by the actions and responses it takes while engaged in competitive rivalry.44

Awareness, which is a prerequisite to any competitive action or response taken by a firm, refers to the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity.45 Awareness tends to be greatest when firms have highly similar resources (in terms of types and amounts) to use while competing against each other in multiple markets. Komatsu Ltd., Japan’s top construction machinery maker, and U.S.-based Caterpillar Inc. have similar resources and are certainly aware of each other’s actions.46 The same is true for Walmart and France’s Carrefour, the two largest supermarket groups in the world. The last two firms’ joint awareness has increased as they use similar resources to compete against each other for dominant positions in multiple European and South American markets. Likewise, a new area of this competition is in China: “Carrefour and Walmart, while they make up a small fraction of China’s total retail outlets, are two of the biggest retailers in the country. Carrefour operates more than 180 hypermarkets in China and Walmart owns more than 200 stores in the country.”47 Awareness affects the extent to which the firm understands the consequences of its competitive actions and responses. A lack of awareness can lead to excessive competition, resulting in a negative effect on all competitors’ performance.48

Motivation, which concerns the firm’s incentive to take action or to respond to a competitor’s attack, relates to perceived gains and losses. Thus, a firm may be aware of competitors but may not be motivated to engage in rivalry with them if it perceives that its position will not improve or that its market position won’t be damaged if it doesn’t respond.49 In some cases, firms may locate near competitors in order to more easily access suppliers and customers. For example, Latin American banks have located operations in Miami, Florida, to reach customers from a similar culture and to access employees who understand this culture as well. In Miami, there are several Latin American banks that direct most of their competitive actions at U.S. financial institutions.50

Market commonality affects the firm’s perceptions and resulting motivation. For example, the firm is generally more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. The primary reason is the high stakes involved in trying to gain a more advantageous position over a rival with whom the firm shares many markets. As mentioned earlier, multimarket competition can find a competitor responding to the firm’s action in a market different from the one in which the initial action was taken. Actions and responses of this type can cause both firms to lose focus on core markets and to battle each other with resources that had been allocated for other purposes. Because of the high stakes of competition under the condition of market commonality, the probability is high that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets.51

In some instances, the firm may be aware of the markets it shares with a competitor and be motivated to respond to an attack by that competitor, but lack the ability to do so. Ability relates to each firm’s resources and the flexibility they provide. Without avail- able resources (such as financial capital and people), the firm lacks the ability to attack a competitor or respond to its actions. For example, smaller and newer firms tend to be more innovative but generally have fewer resources to attack larger and established com- petitors. Likewise, foreign firms often are at a disadvantage against local firms because of the local firms’ social capital (relationships) with consumers, suppliers, and government officials.52 However, similar resources suggest similar abilities to attack and respond. When a firm faces a competitor with similar resources, careful study of a possible attack before initiating it is essential because the similarly resourced competitor is likely to respond to that action.53

Resource dissimilarity also influences competitive actions and responses between firms, in that “the greater is the resource imbalance between the acting firm and com- petitors or potential responders, the greater will be the delay in response”54 by the firm with a resource disadvantage. For example, Walmart initially used a focused cost leader- ship strategy to compete only in small communities (those with a population of 25,000 or less). Using sophisticated logistics systems and extremely efficient purchasing practices, among others, to gain competitive advantages, Walmart created a new type of value (primar- ily in the form of wide selections of products at the lowest competitive prices) for customers in small retail markets. Local competitors lacked the ability to marshal needed resources at the pace required to respond quickly and effec- tively. However, even when facing competitors with greater resources (greater ability) or more attractive market positions, firms should even- tually respond, no matter how daunting the task seems. Choosing not to respond can ultimately result in failure, as happened with at least some local retailers who didn’t respond to Walmart’s competitive actions. Of course, the actions taken by Walmart were only the beginning. Walmart has become the largest retailer in the world and feared by all competitors, large and small.

Competitive Rivalry

The ongoing competitive action/response sequence between a firm and a competitor affects the performance of both firms;55 thus it is important for companies to carefully analyze and understand the competitive rivalry present in the markets they serve to select and implement successful strategies.56 Understanding a competitor’s awareness, motiva- tion, and ability helps the firm to predict the likelihood of an attack by that competitor and the probability that a competitor will respond to actions taken against it.

As we described earlier, the predictions drawn from studying competitors in terms of awareness, motivation, and ability are grounded in market commonality and resource similarity. These predictions are fairly general. The value of the final set of predictions the firm develops about each of its competitors’ competitive actions and responses is enhanced by studying the “Likelihood of Attack” factors (such as first-mover incentives and organizational size) and the “Likelihood of Response” factors (such as the actor’s rep- utation) that are shown in Figure 5.2. Evaluating and understanding these factors allow the firm to refine the predictions it makes about its competitors’ actions and responses.

Strategic and Tactical Actions

Firms use both strategic and tactical actions when forming their competitive actions and competitive responses in the course of engaging in competitive rivalry.57 A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action. A strategic action or a strategic response is a market-based move that involves a signifi- cant commitment of organizational resources and is difficult to implement and reverse. A tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse.

As noted in the Opening Case, Apple opened a service called “Game Center” once it found that users were using its iPhone, iPad, and iPod platforms for video games. With its update to its iOS (operating system) software, game producers began producing game applications to use the Apple system as its graphics became more advanced. This repre- sents a strategic move by Apple. Game platform hardware and software producers such as Nintendo and Sony then created strategic responses to the Apple threat. For example, Sony, which produces the PlayStation console, partnered with Sony Ericsson to make the Xperia PLAY phone, which uses “PlayStation-certified games” and runs on Google’s Android operating system.58

Walmart prices aggressively as a means of increasing revenues and gaining market share at the expense of competitors. However, pricing is a tactical strategy and Walmart’s performance has lagged recently. In recent tactical moves, it has asserted that it will do a better job on competitive pricing.59 Although pricing aggressively is at the core of what Walmart is and how it competes, can the tactical action of aggressive pricing continue to lead to the competitive success the firm has historically enjoyed? Is Walmart achieving the type of balance between strategic and tactical competitive actions and competitive responses that is a foundation for all firms’ success in marketplace competitions?

When engaging rivals in competition, firms must recognize the differences between strategic and tactical actions and responses and should develop an effective balance between the two types of competitive actions and responses. Airbus, Boeing’s major competitor in commercial airliners, is aware that Boeing is strongly committed to taking actions it believes are necessary to successfully launch the 787 jetliner, because deciding to design, build, and launch the 787 is a major strategic action. In fact, many analysts believe that Boeing’s development of the 787 airliner was a strategic response to Airbus’s new A380 aircraft.60

Likelihood of Attack

In addition to market commonality, resource similarity, and the drivers of awareness, motivation, and ability, other factors affect the likelihood a competitor will use strategic actions and tactical actions to attack its competitors. Three of these factors—first-mover incentives, organizational size, and quality—are discussed next.

First-Mover Incentives

A first mover is a firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. The first-mover concept has been influenced by the work of the famous economist Joseph Schumpeter, who argued that firms achieve competitive advantage by taking innovative actions61 (innovation is defined and described in detail in Chapter 13). In general, first movers “allocate funds for product innovation and development, aggressive advertising, and advanced research and development.”62

The benefits of being a successful first mover can be substantial.63 Especially in fast- cycle markets (discussed later in the chapter), where changes occur rapidly and where it is virtually impossible to sustain a competitive advantage for any length of time, a first mover can experience many times the valuation and revenue of a second mover.64 This evidence suggests that although first-mover benefits are never absolute, they are often critical to a firm’s success in industries experiencing rapid technological developments and relatively short product life cycles.65 In addition to earning above-average returns until its competitors respond to its successful competitive action, the first mover can gain (1) the loyalty of customers who may become committed to the goods or services of the firm that first made them available, and (2) market share that can be difficult for competitors to take during future competitive rivalry.66 The general evidence that first movers have greater survival rates than later market entrants is perhaps the culmination of first-mover benefits.

The firm trying to predict its competitors’ competitive actions might conclude that they will take aggressive strategic actions to gain first movers’ benefits. However, even though a firm’s competitors might be motivated to be first movers, they may lack the abil- ity to do so. First movers tend to be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk.68 To be a first mover, the firm must have readily available the resources to significantly invest in R&D as well as to rapidly and successfully produce and market a stream of innovative products.69 If the firm does not have the necessary resources or cannot establish the necessary legitimacy, being a first mover can lead to survival risks.70

Organizational slack makes it possible for firms to have the ability (as measured by available resources) to be first movers. Slack is the buffer or cushion provided by actual or obtainable resources that aren’t currently in use and are in excess of the minimum resources needed to produce a given level of organizational output.71 As a liquid resource, slack can quickly be allocated to support competitive actions, such as R&D investments and aggressive marketing campaigns that lead to first-mover advantages. This relation- ship between slack and the ability to be a first mover allows the firm to predict that a first-mover competitor likely has available slack and will probably take aggressive com- petitive actions to continuously introduce innovative products. Furthermore, the firm can predict that as a first mover, a competitor will try to rapidly gain market share and customer loyalty in order to earn above-average returns until its competitors are able to effectively respond to its first move.

Firms evaluating their competitors should realize that being a first mover carries risk. For example, it is difficult to accurately estimate the returns that will be earned from introducing product innovations to the marketplace.72 Additionally, the first mover’s cost to develop a product innovation can be substantial, reducing the slack available to support further innovation. Thus, the firm should carefully study the results a competi- tor achieves as a first mover. Continuous success by the competitor suggests additional product innovations, while lack of product acceptance over the course of the competi- tor’s innovations may indicate less willingness in the future to accept the risks of being a first mover.7

A second mover is a firm that responds to the first mover’s competitive action, typically through imitation. More cautious than the first mover, the second mover stud- ies customers’ reactions to product innovations. In the course of doing so, the second mover also tries to find any mistakes the first mover made so that it can avoid them and the problems they created. Often, successful imitation of the first mover’s innovations allows the second mover to avoid the mistakes and the major investments required of the pioneers (first movers).74

Second movers also have the time to develop processes and technologies that are more efficient than those used by the first mover or that create additional value for consum- ers.75 The most successful second movers rarely act too fast (so they can fully analyze the first mover’s actions) nor too slow (so they do not give the first mover time to correct its mistakes and “lock in” customer loyalty).76 Overall, the outcomes of the first mover’s com- petitive actions may provide an effective blueprint for second and even late movers (dis- cussed below) as they determine the nature and timing of their competitive responses.77 Determining whether a competitor is an effective second mover (based on its past actions) allows a first-mover firm to predict that the competitor will respond quickly to successful, innovation-based market entries. The first mover can expect a successful second-mover competitor to study its market entries and to respond with a new entry into the market within a short time period. As a second mover, the competitor will try to respond with a product that provides greater customer value than does the first mover’s product. The most successful second movers are able to rapidly and meaningfully interpret market feedback to respond quickly, yet successfully, to the first mover’s successful innovations.

For example, Hyundai has traditionally been a second mover in the automobile indus- try. However, it has decided that “playing follow the leader on R&D isn’t good enough anymore.”78 As illustrated in the Strategic Focus on the automobile industry, it is leading the way in a number of new features in its automobiles, such as an “onslaught of new drive train technologies” and a new hybrid drive that makes the transmission—and there- fore the car—efficient at higher speeds than traditional hybrids, such as the Toyota Prius.

A late mover is a firm that responds to a competitive action a significant amount of time after the first mover’s action and the second mover’s response. Typically, a late response is better than no response at all, although any success achieved from the late competitive response tends to be considerably less than that achieved by first and second movers. However, on occasion, late movers can be successful if they develop a unique way to enter the market and compete. For firms from emerging economies this often means a niche strategy with lower-cost production and manufacturing.79

The firm competing against a late mover can predict that the competitor will likely enter a particular market only after both the first and second movers have achieved success in that market. Moreover, on a relative basis, the firm can predict that the late mover’s competitive action will allow it to earn average returns only after the consider- able time required for it to understand how to create at least as much customer value as that offered by the first and second movers’ products.

Organizational Size

An organization’s size affects the likelihood it will take competitive actions as well as the types and timing of those actions.80 In general, small firms are more likely than large companies to launch competitive actions and tend to do it more quickly. Smaller firms are thus perceived as nimble and flexible competitors who rely on speed and surprise to defend their competitive advantages or develop new ones while engaged in competi- tive rivalry, especially with large companies, to gain an advantageous market position.81 Small firms’ flexibility and nimbleness allow them to develop variety in their competitive actions; large firms tend to limit the types of competitive actions used.

For example, large security firms like ADT serve only single-family homes with home security systems; they don’t service apartment dwellers. SimpliSafe, a small firm headquartered in Cambridge, Massachusetts, has a product focused on apartment cus- tomers and has entered the security market through this niche. Their product is battery- powered and is fixed to walls near doors and windows. It does not require a complicated installation. Furthermore, it works with cell phones while ADT’s products use landlines. Additionally, the system is portable if the customer moves to another apartment, and it is cheaper, costing $300 plus a $15 monthly service fee. It also does not require a contract and there are no added fees like those that larger companies tack on. Moreover, because it is a small firm, it does not have large marketing overhead. SimpliSafe expects sales in 2011 to be around $15 million, up from single-digit millions in 2010.83

Large firms, however, are likely to initi- ate more competitive actions along with more strategic actions during a given period.84 Thus, when studying its competitors in terms of orga- nizational size, the firm should use a measure- ment such as total sales revenue or total number of employees. The competitive actions the firm likely will encounter from competitors larger than it is will be different from the competitive actions it will encounter from smaller competitors.

The organizational size factor adds another layer of complexity. When engaging in competi- tive rivalry, the firm often prefers a large num- ber of unique competitive actions. Ideally, the organization has the amount of slack resources held by a large firm to launch a greater number of competitive actions and a small firm’s flexibility to launch a greater variety of competitive actions. Herb Kelleher, cofounder and former CEO of Southwest Airlines, addressed this matter: “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”85

In the context of competitive rivalry, Kelleher’s statement can be interpreted to mean that relying on a limited number or types of competitive actions (which is the large firm’s tendency) can lead to reduced competitive success across time, partly because competi- tors learn how to effectively respond to the predictable. In contrast, remaining flexible and nimble (which is the small firm’s tendency) in order to develop and use a wide vari- ety of competitive actions contributes to success against rivals.

Walmart is a huge firm and generates annual sales revenue that makes it the world’s largest company. Because of its size, scale, and resources, Walmart has the flexibility required to take many types of competitive actions that few—if any—of its competitors can undertake, and at reduced cost. Demonstrating this type of flexibility in terms of competitive actions has proven critical to Walmart’s entry into the grocery business and its competition with Albertson’s, Safeway, and Kroger as well as competitors such as Costco and Target, among others.86

Quality

Quality has many definitions, including well-established ones relating it to the production of goods or services with zero defects87 and as a cycle of continuous improvement.88 From a strategic perspective, we consider quality to be the outcome of how a firm competes through its primary and support activities (see Chapter 3). Thus, quality exists when the firm’s goods or services meet or exceed customers’ expectations. Some evidence suggests that quality may be the most critical component in satisfying the firm’s customers.89

In the eyes of customers, quality is about doing the right things relative to performance measures that are important to them.90 Customers may be interested in measuring the quality of a firm’s goods and services against a broad range of dimensions. Sample quality dimensions in which customers commonly express an interest are shown in Table 5.1. Quality is possible only when top-level managers support it and when its importance is institutionalized throughout the entire organization and its value chain.91 When quality is institutionalized and valued by all, employees and managers alike become vigilant about continuously finding ways to improve quality.92

Quality is a universal theme in the global economy and is a necessary but insufficient condition for competitive success.93 Without quality, a firm’s products lack credibility, meaning that customers don’t think of them as viable options. Indeed, customers won’t consider buying a product until they believe that it can satisfy at least their base-level expectations in terms of quality dimensions that are important to them.94 Boeing’s new 787 aircraft has been delayed due to quality concerns. Many of its problems have come from its numerous suppliers and supply chain subassemblies, but such media events make large airline customers nervous, and there have been some associated postpone- ments in orders.95

Quality affects competitive rivalry. The firm evaluating a competitor whose products suffer from poor quality can predict declines in the competitor’s sales revenue until the quality issues are resolved. In addition, the firm can predict that the competitor likely won’t be aggressive in its competitive actions until the quality problems are corrected in order to gain credibility with customers.96 However, after the problems are corrected, that competitor is likely to take more aggressive competitive actions.

Likelihood of Response

The success of a firm’s competitive action is affected by the likelihood that a competitor will respond to it as well as by the type (strategic or tactical) and effectiveness of that response. As noted earlier, a competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action. In general, a firm is likely to respond to a competitor’s action when (1) 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, (2) the action damages the firm’s ability to use its capabilities to create or maintain an advantage, or (3) the firm’s market position becomes less defensible.97

In addition to market commonality and resource similarity and awareness, motiva- tion, and ability, firms evaluate three other factors—type of competitive action, repu- tation, and market dependence—to predict how a competitor is likely to respond to competitive actions (see Figure 5.2 on 136).

Type of Competitive Action

Competitive responses to strategic actions differ from responses to tactical actions. These differences allow the firm to predict a competitor’s likely response to a competi- tive action that has been launched against it. Strategic actions commonly receive strate- gic responses and tactical actions receive tactical responses. In general, strategic actions elicit fewer total competitive responses because strategic responses, such as market- based moves, involve a significant commitment of resources and are difficult to imple- ment and reverse.

Another reason that strategic actions elicit fewer responses than do tactical actions is that the time needed to implement a strategic action and to assess its effectiveness can delay the competitor’s response to that action.99 In contrast, a competitor likely will respond quickly to a tactical action, such as when an airline company almost immedi- ately matches a competitor’s tactical action of reducing prices in certain markets. Either strategic actions or tactical actions that target a large number of a rival’s customers are likely to elicit strong responses.100 In fact, if the effects of a competitor’s strategic action on the focal firm are significant (e.g., loss of market share, loss of major resources such as critical employees), a response is likely to be swift and strong.

Actor’s Reputation

In the context of competitive rivalry, an actor is the firm taking an action or a response while reputation is “the positive or negative attribute ascribed by one rival to another based on past competitive behavior.”102 A positive reputation may be a source of above-average returns, espe- cially for consumer goods producers.103 Thus, a positive corporate reputation is of strategic value104 and affects competitive rivalry. To pre- dict the likelihood of a competitor’s response to a current or planned action, firms evaluate the responses that the competitor has taken previ- ously when attacked—past behavior is assumed to be a predictor of future behavior.

Competitors are more likely to respond to strategic or tactical actions when they are taken by a market leader.105 In particular, evidence sug- gests that commonly successful actions, especially strategic actions, will be quickly imi- tated. For example, although a second mover, IBM committed significant resources to enter the information service market. When IBM was immediately successful in this endeavor, competitors such as HP, Dell, and others responded with strategic actions to enter the market.106 IBM’s reputation as well as its successful strategic action strongly influenced entry by these competitors.

In contrast to a firm with a strong reputation such as IBM, competitors are less likely to take responses against a company with a reputation for competitive behavior that is risky, complex, and unpredictable. The firm with a reputation as a price predator (an actor that frequently reduces prices to gain or maintain market share) generates few responses to its pricing tactical actions because price predators, which typically increase prices once their market share objective is reached, lack credibility with their com- petitors.107 Occasionally, a firm with a minor reputation can sneak up on larger, more resourceful competitors and take market share from them. In recent years, for example, firms from emerging markets have taken market share from major competitors based in developed markets.108

Dependence on the Market

Market dependence denotes the extent to which a firm’s revenues or profits are derived from a particular market.109 In general, competitors with high market dependence are likely to respond strongly to attacks threatening their market position.110 Interestingly, the threatened firm in these instances may not always respond quickly, even though an effective response to an attack on the firm’s position in a critical market is important.

Akamai Technologies is the dominant player in a $2.5 billion market for content delivery network (CDN) services. If a person clicks on a Web site to download software or music, or to examine headlines or video clips, Akamai often provides these bigger files to the consumer through its servers rather than through the company computer system from which the download appears to be taking place. As such, Akamai has well-equipped servers to facilitate improved and more reliable download performance, as it handles billions of daily Web interactions for organizations like NBC, the NASDAQ market, and the U.S. Department of Defense. However, because Akamai is dependent on this market (it is not very diversified), rival CDN providers such as Limelight Networks and Level 3 Communications have forced Akamai to lower their basic CDN service prices. Because of this market dependence, the company responds quickly to both tactical and strategic entry moves and hopes to make up the difference through “volume.” However Akamai may have more competition in the future as telecom companies such as AT&T are adding content distribution capabilities to their phone networks. As such, Akamai’s competitive responses are likely to be more dramatic in the future.1

Whereas competitive rivalry concerns the ongoing actions and responses between a firm and its direct competitors for an advantageous market position, competitive dynamics concern the ongoing actions and responses among all firms competing within a market for advantageous positions. Building and sustaining competitive advantages are at the core of competitive rivalry, in that advantages are the key to creating value for shareholders.112

To explain competitive dynamics, we explore the effects of varying rates of com- petitive speed in different markets (called slow-cycle, fast-cycle, and standard-cycle mar- kets) on the behavior (actions and responses) of all competitors within a given market. Competitive behaviors as well as the reasons for taking them are similar within each mar- ket type, but differ across types of markets. Thus, competitive dynamics differ in slow- cycle, fast-cycle, and standard-cycle markets. The sustainability of the firm’s competitive advantages differs across the three market types. Research has also shown how firms go through life-cycle stages as markets evolve over time within which a firm is competing.113 However, understanding what happens within each type of market is more pertinent in knowing how to respond to the competition.

As noted in Chapter 1, firms want to sustain their competitive advantages for as long as possible, although no advantage is permanently sustainable. The degree of sustain- ability is affected by how quickly competitive advantages can be imitated and how costly it is to do so.

Slow-Cycle Markets

Slow-cycle markets are those in which the firm’s competitive advantages are shielded from imitation, commonly for long periods of time, and where imitation is costly.114 Thus, competitive advantages are sustainable over longer periods of time in slow-cycle markets.

Building a unique and proprietary capability produces a competitive advantage and success in a slow-cycle market. This type of advantage is difficult for competitors to understand. As discussed in Chapter 3, a difficult-to-understand and costly-to-imitate resource or capability usually results from unique historical conditions, causal ambi- guity, and/or social complexity. Copyrights, geography, patents, and ownership of an information resource are examples of resources.115 After a proprietary advantage is developed, the firm’s competitive behavior in a slow-cycle market is oriented to pro- tecting, maintaining, and extending that advantage. Thus, the competitive dynamics in slow-cycle markets usually concentrate on competitive actions and responses that enable firms to protect, maintain, and extend their competitive advantage. Major stra- tegic actions in these markets, such as acquisitions, usually carry less risk than in faster- cycle markets.116

Walt Disney Co. continues to extend its proprietary characters, such as Mickey Mouse, Minnie Mouse, and Goofy. These characters have a unique historical development as a result of Walt and Roy Disney’s creativity and vision for entertaining people. Products based on the characters seen in Disney’s animated films are sold through Disney’s theme park shops as well as freestanding retail outlets called Disney Stores. Because copyrights shield it, the proprietary nature of Disney’s advantage in terms of animated character trademarks protects the firm from imitation by competitors.

Consistent with another attribute of competition in a slow-cycle market, Disney protects its exclusive rights to its characters and their use. As with all firms competing in slow-cycle markets, Disney’s competitive actions (such as building theme parks in France, Japan, and China) and responses (such as lawsuits to protect its right to fully control use of its animated characters) maintain and extend its proprietary competitive advantage while protecting it.

Patent laws and regulatory requirements such as those in the United States requiring FDA (Food and Drug Administration) approval to launch new products shield pharma- ceutical companies’ positions. Competitors in this market try to extend patents on their drugs to maintain advantageous positions that the patents provide. However, after a pat- ent expires, the firm is no longer shielded from competition, allowing generic imitations and usually leading to a loss of sales.

The competitive dynamics generated by firms competing in slow-cycle markets are shown in Figure 5.4. In slow-cycle markets, firms launch a product (e.g., a new drug) that has been developed through a proprietary advantage (e.g., R&D) and then exploit it for as long as possible while the product is shielded from competition. Eventually, competitors respond to the action with a counterattack. In markets for drugs, this counterattack com- monly occurs as patents expire or are broken through legal means, creating the need for another product launch by the firm seeking a protected market position. It is becoming more difficult for firms like Merck to get drugs approved; patent protected drug approv- als are trending down, while risky research spending is rising.117

Fast-Cycle Markets

Fast-cycle markets are markets in which the firm’s capabilities that contribute to com- petitive advantages aren’t shielded from imitation and where imitation is often rapid and inexpensive.118 Thus, competitive advantages aren’t sustainable in fast-cycle mar- kets. Firms competing in fast-cycle markets recognize the importance of speed; these companies appreciate that “time is as precious a business resource as money or head count—and that the costs of hesitation and delay are just as steep as going over budget or missing a financial forecast.”119 Such high-velocity environments place consider- able pressures on top managers to quickly make strategic decisions that are also effec- tive.120 The often substantial competition and technology-based strategic focus make

the strategic decision complex, increasing the need for a comprehensive approach inte- grated with decision speed, two often-conflicting characteristics of the strategic decision process.121

Reverse engineering and the rate of technology diffusion in fast-cycle markets facilitate rapid imitation. A competitor uses reverse engineering to quickly gain the knowledge required to imitate or improve the firm’s products. Technology is diffused rapidly in fast-cycle markets, making it available to competitors in a short period. The technology often used by fast-cycle competitors isn’t proprietary, nor is it protected by patents as is the technology used by firms competing in slow-cycle markets. For example, only a few hundred parts, which are readily available on the open market, are required to build a PC. Patents protect only a few of these parts, such as microproces- sor chips. Interestingly, research also demonstrates that showing what an incumbent firm knows and its research capability can be a deterrent to other firms to enter the market.122

The reality of fast-cycle markets has led to the development of generational products; such products usually start with a substantial technical advance in the performance of a product category and are followed with additional regular, though incremental, tech- nological advances as new generations of products are introduced, as in Intel semicon- ductor logic chips or HP printer families.123 Fast-cycle markets are more volatile than slow-cycle and standard-cycle markets. Indeed, the pace of competition in fast-cycle markets is almost frenzied, as companies rely on innovations as the engines of their growth. Because prices often decline quickly in these markets, companies need to profit quickly from their product innovations. Cloud computing as discussed in the Strategic Focus is an example where change is happening rapidly as firms seek to establish space in the market as it evolves rapidly.

Fast-cycle market characteristics, such as cloud computing described in the Strategic Focus, make it virtually impossible for companies in this type of market to develop sustainable competitive advantages. Recognizing this reality, firms avoid “loy- alty” to any of their products, preferring to cannibalize their own before competitors learn how to do so through successful imitation. This emphasis creates competitive dynamics that differ substantially from those found in slow-cycle markets. Instead of concentrating on protecting, maintaining, and extending competitive advantages, as in slow-cycle markets, companies competing in fast-cycle markets focus on learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace. They commonly search for fast and effective means of developing new products. For example, it is common in some industries for firms to use strate- gic alliances to gain access to new technologies and thereby develop and introduce more new products into the market.125 In recent years, many of these alliances have been offshore (with partners in foreign countries) in order to access appropriate skills while maintaining lower costs to compete. However, getting the appropriate balance is important so that key capabilities are not lost in the offshoring and outsourcing process.126

The competitive behavior of firms competing in fast-cycle markets is shown in Figure 5.5. As suggested by the figure, competitive dynamics in this market type entail actions and responses that are oriented to rapid and continuous product introductions and the development of a stream of ever-changing competitive advantages. The firm launches a product to achieve a competitive advantage and then exploits the advantage for as long as possible. However, the firm also tries to develop another temporary competitive advan- tage before competitors can respond to the first one (see Figure 5.5). Thus, competitive dynamics in fast-cycle markets often result in rapid product upgrades as well as quick product innovations.127

As our discussion suggests, innovation plays a critical role in the competitive dynam- ics in fast-cycle markets. For individual firms, then, innovation is a key source of com- petitive advantage. Through innovation, the firm can cannibalize its own products before

competitive actions and responses in standard-cycle markets are designed to seek large market shares, to gain customer loyalty through brand names, and to carefully control a firm’s operations in order to consistently provide the same positive experience for customers.128

Standard-cycle companies serve many customers in competitive markets. Because the capabilities and core competencies on which their competitive advantages are based are less specialized, imitation is faster and less costly for standard-cycle firms than for those competing in slow-cycle markets. However, imitation is slower and more expensive in these markets than in fast-cycle markets. Thus, competitive dynamics in standard-cycle markets rest midway between the characteristics of dynamics in slow-cycle and fast-cycle markets. Imitation comes less quickly and is more expensive for standard-cycle competi- tors when a firm is able to develop economies of scale by combining coordinated and integrated design and manufacturing processes with a large sales volume for its products.

Because of large volumes, the size of mass markets, and the need to develop scale economies, the competition for market share is intense in standard-cycle markets. In some markets associated with consumer electronics, fast cycles occur, such as in smart- phones and tablet sales. However, in other consumer segments such as the television market, the cycles are more placid and closer to standard-cycle markets. Nonetheless, rivalry is intense as new technologies emerge. For example, prices are coming down in the flat-panel TV market as competition in this market has become relatively more stable. However, some firms are seeking to establish an uptick in the competition by moving towards 3D flat panel televisions. Samsung and LG Electronics were seeking to establish competing platform standards in a 3D format in 2010. These producers were disappointed “when they tried to bring Avatar-like theater experiences with 3D into the living room.”129 However, the demand did not materialize as they had hoped. LG uses a special film on their screens which works like typical 3D glasses. Alternatively, Samsung is trying to commit Sony and others to use battery-powered glasses to facilitate the 3D experience. The competition in this technology is relatively slower to take hold, even in advanced technology segments such as flat panel televisions.

This form of competition is readily evident in the battles among consumer foods’ producers, such as candy makers. Hershey competes in different market segments with Mars, Cadbury, Nestle, and Godiva. In addition, similar to other consumer food manu- facturers, some candy makers have kept prices constant, selling downsized packages (others, like Hershey, have increased their prices). However, this can change when there

is a supply disruption causing a significantly increased price in a commodity such as cocoa, a base ingredient for chocolate.130 Package design and ease of availability are the competitive dimensions on which these firms sometimes compete to outperform their rivals in this market.

Innovation can also drive competitive actions and responses in standard-cycle mar- kets, especially when rivalry is intense. Some innovations in standard-cycle markets are incremental rather than radical in nature (incremental and radical innovations are dis- cussed in Chapter 13). For example, consumer foods producers are innovating within their lines of healthy products. Overall, many firms are relying on innovation as a means of competing in standard-cycle markets and earning above-average returns.

Overall, innovation has a substantial influence on competitive dynamics as it affects the actions and responses of all companies competing within a slow-cycle, fast-cycle, or standard-cycle market. We have emphasized the importance of innovation to the firm’s strategic competitiveness in earlier chapters and do so again in Chapter 13. These discus- sions highlight the importance of innovation in most types of markets.