If an industry has a level of market commonality

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.