Competitive Rivalry and Competitive Dynamics 5 6 PDF

Competitive Rivalry and Chapter Competitive Dynamics 5 K NOWLEDGE O BJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to: 1. Define competitors, competitive rivalry, comp...

Competitive Rivalry and Chapter Competitive Dynamics 5 K NOWLEDGE O BJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to: 1. Define competitors, competitive rivalry, competitive 4. Discuss factors affecting the likelihood a competitor behavior, and competitive dynamics. will take competitive actions. 2. Describe market commonality and resource similarity 5. Discuss factors affecting the likelihood a competitor as the building blocks of a competitor analysis. will respond to actions taken against it. 3. Explain awareness, motivation, and ability as drivers of 6. Explain competitive dynamics in slow-cycle, fast-cycle, competitive behavior. and standard-cycle markets. ASSOCIATED PRESS, AP Southwest Airlines owes its success in part to its excellent customer service. Southwest Airlines: The King of the Hill That Is Changing an Industry M uch has been written about Southwest Airlines but more should be said. It is arguably the best airline in the United States and among the best in the world. Most competitors and analysts focus on Southwest’s low-cost strategy. However, as we rel. As a result, Southwest has negotiated hedging agreements that extend through 2009 to pay no more than $35 a barrel for at least 25 percent of its fuel needs. It holds options for approximately 85 percent of its oil for $26 a barrel. It has been explained in Chapter 4, Southwest follows an hedging the cost of its fuel since 2001, when the integrated cost leadership/differentiation strategy. price of a barrel of oil was only $17. In recent It differentiates its service with excellent human times, the cost for a barrel of oil has been greater capital.The firm has fewer customer complaints than $70.These types of decisions have helped than most competitors and has high “on-time” Southwest to achieve 57 straight profitable performance, among other distinctions. quarters and allow the executives the flexibility Southwest’s leadership in implementing the to never lay off employees (even following Sep- integrated strategy is changing the airline indus- tember 11, 2001, when many large companies try. Many of the “full service” airlines have tried and most other airlines experienced major to imitate Southwest’s strategy but have been employee layoffs). unable to manage costs effectively and/or offer Southwest has also become increasingly comparable levels of service. Southwest contin- aggressive in competitive actions. For example, it ues to best most of its competitors such that acquired an interest in AirTran Airways, thereby they will have to change or die. In other words, obtaining access to six additional gates at Mid- Southwest is literally killing its competition. In way Airport in Chicago. At a time when most of the second quarter of 2005, Southwest announced Southwest’s competitors are reducing capacity, a record increase in profits of 41 percent. Such Southwest plans to add 29 planes to its fleet, an increase would be impressive enough under bringing the total to 417, in order to increase its normal business conditions; coming at a time capacity for flights and passengers by 10 percent. when the price of fuel is at record levels, causing “I feel very good about our competitive position most other airlines to announce major net losses, as long as we continue to improve,” Southwest’s it is almost incredible. How was Southwest Air- CEO Kelly said, adding that if Southwest’s growth lines able to make such profits? It is effective in hurts a competitor, it is a byproduct of the growth. managing its costs, particularly through its hedg- Most of his competitors, Kelly suggested, will ing program. Gary Kelly, the CEO of Southwest have to manage their cost structure more effec- Airlines, has suggested that no airline can make tively or they will be unlikely to survive. a profit when the price of oil is above $50 a bar- Sources: S. Warren & E. Perez, 2005, Southwest’s net rises by 41%; Delta lifts cap on some fares, Wall Street Journal, July 15, www.wsj.com; 2005, South- west Airlines’ profits skyrocket 41%, Rednova News, July 15, www.rednova.com; S. Warren, 2005, Hedge hog Southwest Air sharpens its teeth, Wall Street Journal, May 19, www.wsj.com; B. Gimbel, 2005, Southwest charts its course, Fortune, May 2, www.fortune.com; W. Zellner, 2005, Southwest: Dressed to kill... competitors, Business Week, February 21, www.businessweek.com; M. Maynard, 2004, From aw-shucks to cutthroat: Southwest’s ascent, New York Times, December 26, www.nyt.com.  Firms operating in the same market, offering similar products, and targeting similar Competitors are firms oper- customers are competitors.1 Southwest Airlines, Delta, United, Continental, and JetBlue ating in the same market, are competitors, as are PepsiCo and Coca-Cola Company. Firms interact with their offering similar products, and competitors as part of the broad context within which they operate while attempting to targeting similar customers. earn above-average returns.2 The decisions firms make about their interactions with their competitors significantly affect their ability to earn above-average returns.3 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.4 Competitive rivalry is the Competitive rivalry is the ongoing set of competitive actions and competitive ongoing set of competitive responses that occur between competitors as they maneuver for an advantageous mar- actions and competitive ket position. Especially in highly competitive industries, firms constantly jockey for responses occurring between competitors as they compete advantage as they launch strategic actions and respond or react to rivals’ moves.5 It is against each other for an important for those leading organizations to understand competitive rivalry, in that advantageous market position. “the central, brute empirical fact in strategy is that some firms outperform others,”6 meaning that competitive rivalry influences an individual firm’s ability to gain and sus- tain competitive advantages.7 A sequence of firm-level moves, rivalry results from firms initiating their own Competitive behavior is the competitive actions and then responding to actions taken by competitors. Competitive set of competitive actions and behavior is the set of competitive actions and competitive responses the firm takes to competitive responses the firm build or defend its competitive advantages and to improve its market position.8 takes to build or defend its competitive advantages and to Through competitive behavior, the firm tries to successfully position itself relative to improve its market position. the five forces of competition (see Chapter 2) and to defend current competitive advan- tages while building advantages for the future (see Chapter 3). Increasingly, competitors engage in competitive actions and responses in more than one market.9 Firms compet- Multimarket competition ing against each other in several product or geographic markets are engaged in multi- occurs when firms compete market competition.10 All competitive behavior—that is, the total set of actions and against each other in several responses taken by all firms competing within a market—is called competitive dynam- product or geographic markets. ics. The relationships among these key concepts are shown in Figure 5.1. Competitive dynamics refer This chapter focuses on competitive rivalry and competitive dynamics. The essence to all competitive behaviors— of these important topics is that a firm’s strategies are dynamic in nature. Actions taken that is, the total set of actions by one firm elicit responses from competitors that, in turn, typically result in responses and responses taken by all firms from the firm that took the initial action.11 To the extent possible, other airlines will PART 2 / Strategic Actions: Strategy Formulation competing within a market. need to react to Southwest’s acquisition of additional gates in Chicago, as described in the Opening Case. In particular, America West and AirTran also wanted those gates. Southwest now controls 25 of the 43 gates at Chicago’s Midway airport.12 Another way of highlighting competitive rivalry’s effect on the firm’s strategies is to say 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).13 Although competitive rivalry affects all types of strategies (for example, corporate- level, acquisition, and international), its most 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 block of business-level strategies.14 Recall from Chapter 4 that business-level strategy is concerned with what the firm does to successfully use its com- petitive advantages in specific product markets. In the global economy, competitive 138 rivalry is intensifying,15 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.16 An expanding geographic scope contributes to the increasing intensity in the com- petitive rivalry between firms. Many firms from different parts of the world are begin- ning to emerge as formidable global competitors. Wipro, the Indian technology firm to which many activities have been outsourced in recent years, entered the global manage-  FIGURE 5.1 From Competitors to Competitive Dynamics Why? To gain an advantageous market position Engage in Competitive Competitors Rivalry Through Competitive Behavior How? What results? Competitive actions Competitive responses What results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134. Chapter 5 / Competitive Rivalry and Competitive Dynamics ment consulting market in competition with many major firms in this industry. Major Chinese firms made acquisition bids for large U.S. firms in 2005. For example, the Haier Group bid to acquire Maytag, and China’s state-owned oil company, CNOOC, made a bid to acquire Unocal.17 A Model of Competitive Rivalry Over time, firms take many competitive actions and responses.18 As noted earlier, com- petitive rivalry evolves from this pattern of actions and responses as one firm’s compet- itive actions have noticeable effects on competitors, eliciting competitive responses from them.19 This pattern shows that firms are mutually interdependent, that they feel each other’s actions and responses, and that marketplace success is a function of both 139 individual strategies and the consequences of their use.20 Increasingly, too, executives recognize that competitive rivalry can have a major and direct effect on the firm’s financial performance:21 Research shows that intensified rivalry within an industry results in decreased average profitability for the competing firms. 22 Figure 5.2 presents a straightforward model of competitive rivalry at the firm level but such rivalry is usually dynamic and complex.23 The competitive actions and responses the firm takes are the foundation for successfully building and using its capabilities and  FIGURE 5.2 A Model of Competitive Rivalry Interfirm Rivalry Likelihood of Attack Drivers of Competitive First-mover incentives Outcomes Competitive Analysis Behavior Organizational size Market position Market commonality Awareness Quality Financial Resource similarity Motivation Likelihood of Response performance Ability Type of competitive action Reputation Market dependence Feedback Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134. core competencies to gain an advantageous market position.24 The model in Figure 5.2 presents the sequence of activities commonly involved in competition between a partic- ular firm and each of its competitors. Companies can use it to predict competitors’ behavior (actions and responses) and reduce the uncertainty associated with competi- tors’ actions.25 Being able to predict competitors’ actions and responses has a positive effect on the firm’s market position and its subsequent financial performance.26 The sum of all the individual rivalries modeled in Figure 5.2 that occur in a particular mar- ket reflects 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 PART 2 / Strategic Actions: Strategy Formulation 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 examine 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 characteristics affect competitive rivalry in slow-cycle, fast-cycle, and standard- cycle markets. Competitor Analysis 140 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. Recall that a competi- tor is a firm operating in the same market, offering similar products, and targeting sim- ilar customers. The number of markets in which firms compete against each other (called market commonality, defined below) and the similarity in their resources (called resource similarity, also defined below) 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.”27 However, being direct com- petitors does not necessarily mean that the rivalry between the firms will be intense. The drivers of competitive behavior—as well as factors influencing the likelihood that a competitor will initiate competitive actions and will respond to its competitor’s com- petitive actions—influence the intensity of rivalry, even for direct competitors.28 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 this chapter, the discussion of competitor analysis is extended to describe what firms study to be able to predict competitors’ behavior in the form of their competitive actions and responses. The discussions of competitor 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). 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 generated by the Internet’s technology help to shape the nature of industries’ mar- kets along with the competition among firms operating in them.29 For example, widely available electronic news sources affect how traditional print news distributors such as Chapter 5 / Competitive Rivalry and Competitive Dynamics newspapers conduct their business. In general, competitors agree about the different characteristics of individual mar- kets that form an industry.30 For example, in the transportation industry, there is an understanding that the commercial air travel market differs from the ground trans- portation market, which is served by such firms as Yellow Freight System and J.B. Hunt Transport Services Inc. Although differences exist, most industries’ markets are some- what related in terms of technologies used or core competencies needed to develop a competitive advantage.31 For example, different types of transportation companies need to provide reliable and timely service. Commercial air carriers such as Southwest and JetBlue must therefore develop service competencies to satisfy their passengers, while Yellow Freight System and J.B. Hunt Transport Services Inc. must develop such compe- tencies to serve the needs of those using their fleets to ship goods. Firms competing in several markets, some of which may be in different industries, are likely to come into contact with a particular competitor several times,32 a situation that involves the concept of market commonality. Market commonality is concerned Market commonality is con- with the number of markets with which the firm and a competitor are jointly involved cerned with the number of and the degree of importance of the individual markets to each. 33 Firms competing markets with which the firm and a competitor are jointly 141 against one another in several or many markets engage in multimarket competition.34 involved and the degree of McDonald’s and Burger King compete against each other in multiple geographic mar- importance of the individual kets across the world,35 while Prudential and Cigna compete against each other in sev- markets to each. eral market segments (such as institutional and retail) as well as product markets (such as life insurance and health insurance).36 Airlines, chemicals, pharmaceuticals, and con- sumer foods are examples of other industries in which firms often simultaneously engage each other in competition 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 markets where they compete with the rival. This potential creates a complicated com- petitive 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.”38 Thus, in general, mul- timarket competition reduces competitive rivalry.39 Resource Similarity Resource similarity is the Resource similarity is the extent to which the firm’s tangible and intangible resources extent to which the firm’s tan- are comparable to a competitor’s in terms of both type and amount. 40 Firms with simi- gible and intangible resources lar types and amounts of resources are likely to have similar strengths and weaknesses are comparable to a competi- tor’s in terms of both type and and use similar strategies.41 The competition between Sony and Toshiba to establish the amount. standard format for high-definition DVDs demonstrates these expectations. It is similar to the original battle they fought in the 1990s on DVDs, which ended in a draw with each firm sharing in the royalties from DVD sales. In the current battle, Sony has con- siderable support from major consumer electronics firms such as Matsushita, Samsung, Apple, Dell, and entertainment giant Walt Disney. Toshiba has powerful support from Intel, NEC, and many of the movie studios such as Paramount and Warner Bros. Pic- tures. They could compromise and pool their patents, but each firm would prefer to win the battle because of the significant returns a victory would provide.42 Sony and Toshiba each serve only part of the market; yet establishing one standard requires that one firm wins and one firm loses. In other words, with one standard, one of the firms would serve the whole market. Additionally, they each have strong technological capa- bilities and the financial resources to develop the technology further as needed. In this case, intangible resources such as firm reputation could play a significant role in decid- ing the outcome of the competition between these companies.43 When performing a competitor analysis, a firm analyzes each of its competitors in PART 2 / Strategic Actions: Strategy Formulation 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 inter- sections between the firm and individual competitors in terms of market commonality and resource similarity. These intersections indicate the extent to which the firm and those with which it is compared are competitors.44 For example, the firm and its com- petitor displayed in quadrant I of Figure 5.3 have similar types and amounts of resources (that is, 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 competitors (e.g., Sony and Toshiba). 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. The firm’s mapping of its competitive relationship with rivals is fluid as firms enter and exit markets and as 142 companies’ resources change in type and amount. Thus, the companies with which the firm is a direct competitor change across time. Toyota Motor Corp. and General Motors (GM) have high market commonality, as they compete in many of the same global markets. In years past, the companies also had similar types and quantities of resources. This is changing, though, in that the compa- nies’ resources are becoming dissimilar, especially in terms of profitability and sales rev- enue. In fact, the companies are moving in opposite directions—Toyota’s sales and  FIGURE 5.3 A Framework of Competitor Analysis High Market II I Commonality III IV Low Low Resource High Similarity The shaded area represents the degree of market commonality between two firms. Portfolio of resources A Portfolio of resources B Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Acad- emy of Management Review, 21: 100–134. profits are increasing while GM’s sales and profits are decreasing. Thus, quadrant II in Figure 5.3 captures the degree to which Toyota and GM are direct competitors. In the Strategic Focus, we suggest the possibility that some of Toyota’s recent competitive actions, such as moving into new international markets, are likely to increase the com- Chapter 5 / Competitive Rivalry and Competitive Dynamics petition between Toyota and GM hastening GM’s decline. How will GM respond to the possibility of increased competition from Toyota in the global market? The challenge is daunting, in that it is difficult if not impossible to “out-Toyota Toyota.”45 Yet Toyota’s chairman, Hiroshi Okuda, is worried about GM’s weakness. While Toyota has targeted becoming the world’s leading auto manufacturer, its managers are concerned that if GM is hurt too badly, there could be a public and political backlash in the United States, leading to restrictions on Toyota’s actions in the U.S. market. Most analysts argue, however, that protectionism will only make firms weaker; market competition forces them to strengthen their capabilities. In so doing they will become more competitive over time. 46 Drivers of Competitive Actions and Responses 143 As shown in Figure 5.2, market commonality and resource similarity influence the driv- ers (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.47 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 com- monality and resource similarity.48 Awareness tends to be greatest when firms have highly sim- ilar resources (in terms of types and amounts) to use while competing against each other in multiple markets. All U.S. airlines are aware of Southwest as a competitor, and certainly Wal- FREDERIC MAIGROT/BLOOMBERG NEWS/LANDOV Mart and France’s Carrefour, the two largest supermarket groups in the world, are aware of each other as a primary competitor. The last two firms’ joint awareness has increased as they use similar resources to compete against each other for dominant positions in multiple Euro- pean and South American markets.49 Awareness affects the extent to which the firm understands the consequences of its competitive actions and French supermarket chain Carrefour is aware of Wal-Mart as a primary responses. A lack of awareness can lead to exces- competitor. sive competition, resulting in a negative effect on all competitors’ performance.50 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.51 Market commonality affects the firm’s perceptions and resulting motivation. For example, all else being equal, the 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. The primary reason is that there are high stakes involved in trying to gain a more advanta- geous position over a rival with whom the firm shares many markets. As we 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 PART 2 / Strategic Actions: Strategy Formulation each other with resources that had been allocated for other purposes. Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets.52 In some instances, the firm may be aware of the large number of markets it shares with a competitor and may be motivated to respond to an attack by that competitor, but it lacks the ability to do so. Ability relates to each firm’s resources and the flexibility they provide. Without available resources (such as financial capital and people), the firm lacks the ability to attack a competitor or respond to its actions. However, similar resources suggest similar abilities to attack and respond. When a firm faces a competi- tor with similar resources, careful study of a possible attack before initiating it is essen- tial because the similarly resourced competitor is likely to respond to that action.53 Resource dissimilarity also influences competitive actions and responses between 144 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, Wal-Mart initially used a focused cost lead- ership 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 as advantages, among others, Wal-Mart created what was at that time a new type of value (primarily in the form of wide selections of products at the lowest com- petitive prices) for customers in small retail markets. Local competitors lacked the ability Is General Motors Stuck in the 1970s? At times it seems that General Motors (GM) operates as if it is still in the 1970s, when its market share was over 50 percent. In 2005 GM remained the largest auto manufacturer in Strategic the world, but second-place Toyota is gaining fast. Its competitive actions in recent years to produce exceptionally high quality and differentiated automobiles, sell them in multi- ple product segments (e.g., luxury, small fuel efficient, and moderate cost) and expand Focus sales all over the world (e.g., Europe, China) have increased its growth and enhanced its market share. GM’s annual sales are the fifth largest in the world across all industries, but the company is faltering. In 2005, its market share was only slightly above 25 percent and it was on track to have a net loss of billions of dollars. GM’s problems are many. Importantly, managerial hubris led the firm to use tunnel vision in formulating its strategies, and the firm did not respond effectively (or at all) to major changes in the auto industry. One analyst commented that “GM has found itself stuck in second gear for a quarter of a century.” It did not respond quickly or effectively to the earlier popularity of compact cars or to the more recent trend toward hybrid vehicles. It has negotiated poorly with unions, incurring massive costs and future liabilities. Because of these contractual cost requirements, it has accepted compromises in car design and engineering.The result has been automobiles with outdated designs for the marketplace, unable to compete with more attractive designs from competitors. According to one ana- lyst,“The bedrock principle upon which GM was built—offering a car to feed every market segment—has degraded into a series of contrived brands, most with little identity, and bland, overlapping product lines.” GM has two major assets at present, a well-known brand name and cash. Unfortu- nately, the brand name has begun to suffer because of poor designs and weak quality rel- ative to competitors and cash must be invested wisely if it is to be of value other than keeping a firm out of bankruptcy court. While the decline in sales and profits show the need to shut down plants and reduce production, GM cannot do so. Its union contracts Chapter 5 / Competitive Rivalry and Competitive Dynamics require that all plants be operated at no less than 80 percent capacity. GM’s executives have also shown a penchant for poor strategic decisions and an inability to capitalize on opportunities. For example, GM was an early mover into China. It has invested more than $1 billion in China since 1998, but due to intense competition in 2005, it experienced a 35 percent decline in sales in Shanghai, the largest auto market in the country. In contrast, Hyundai and a local company, Chery, had substantial sales increases in this market. Simply put, these competitors have done a bet- ter job of designing and manufacturing cars that Chinese consumers desire. Addressing the continuing reduc- tions in performance, GM’s CEO, Rick EPA/QILAI SHEN/LANDOV Wagoner, implied that the company was not making the progress needed, partly because of the “intense competitive con- ditions and pricing pressures.” Further, he suggests that GM must increase its Although GM entered China early, it saw sales drop 145 efficiency and productivity. by 35 percent in 2005. Sources: J. B. White, 2005, General Motors swings to loss on weakness in North America, Wall Street Journal, July 20, www.wsj.com; M. Ihlwan & J. B. Bush, 2005, Hyundai: Crowding into the fast lane, Business Week, June 20, www.businessweek.com; D. Welch & D. Beucke, 2005, Why GM’s plan won’t work, Business Week, May 9, www.businessweek.com; D. Roberts, 2005, First-mover disadvantage, Business Week, May 9, www.businessweek.com; J.W. Peters, 2005, Ford and G.M. suffer as buyers shun S.U.V.’s, New York Times, May 4, www.nytimes.com; P. Hjelt, 2005, World’s most admired companies, Fortune, March 1, www.fortune.com.  to marshal needed resources at the pace required to respond quickly and effectively. However, even when facing competitors with greater resources (greater ability) or more attractive market positions, firms should eventually respond, no matter how daunting the task seems.55 Choosing not to respond can ultimately result in failure, as happened with at least some local retailers who didn’t respond to Wal-Mart’s competitive actions. As explained in the Strategic Focus, GM was once the market leader but now is having trouble competing in the global auto market. In the near future, Toyota is likely to exceed GM as the largest auto maker in the world. Some speculate whether GM can survive and compete effectively over time. In a disadvantageous competitive position, firms might best try to serve a special niche in the market to avoid direct competition.56 Those serving market niches effectively often enjoy positive performance outcomes. Unfortunately, GM attempts to serve the broader market. and so is unlikely to have a positive future unless major changes are made. Competitive Rivalry The ongoing competitive action/response sequence between a firm and a competitor affects the performance of both firms;57 thus it is important for companies to carefully study competitive rivalry to select and implement successful strategies. Understanding a competitor’s awareness, motivation, 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 A competitive action is a predictions the firm develops about each of its competitors’ competitive actions and strategic or tactical action the responses is enhanced by studying the “Likelihood of Attack” factors (such as first- PART 2 / Strategic Actions: Strategy Formulation firm takes to build or defend its mover incentives and organizational size) and the “Likelihood of Response” factors competitive advantages or (such as the actor’s reputation) that are shown in Figure 5.2. Evaluating and under- improve its market position. standing these factors allows the firm to refine the predictions it makes about its com- A competitive response is a petitors’ actions and responses. strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action. Strategic and Tactical Actions Firms use both strategic and tactical actions when forming their competitive actions A strategic action or a strategic response is a and competitive responses in the course of engaging in competitive rivalry.58 A compet- market-based move that itive action is a strategic or tactical action the firm takes to build or defend its compet- involves a significant commit- itive advantages or improve its market position. A competitive response is a strategic ment of organizational or tactical action the firm takes to counter the effects of a competitor’s competitive resources and is difficult to action. A strategic action or a strategic response is a market-based move that involves 146 implement and reverse. a significant commitment of organizational resources and is difficult to implement and A tactical action or a tacti- reverse. A tactical action or a tactical response is a market-based move that is taken to cal response is a market- fine-tune a strategy; it involves fewer resources and is relatively easy to implement and based move that is taken to reverse. Hyundai Motor Co.’s expenditures on research and development and plant fine-tune a strategy; it involves expansion to support the firm’s desire to be one of the world’s largest carmakers by fewer resources and is rela- tively easy to implement and 2010, selling at least one million units annually in the United States,59 are strategic reverse. actions. Likewise, Boeing Corp.’s decision to commit the resources required to build the super-efficient 787 midsized jetliner for delivery in 200860 demonstrates a strategic action. Changes in airfares are somewhat frequently announced by airlines. As tactical actions that are easily reversed, pricing decisions are often taken by these firms to increase demand in certain markets during certain periods. Coca-Cola Company, PepsiCo Inc., and Nestlé SA are aware of one another as they compete in the bottled water market. Moreover, this awareness influences the competi- tive actions and responses these firms initiate as they engage in competitive rivalry. Of course, bottled water isn’t the only product category (outside of soft drinks) in which multimarket competitors Coca-Cola and PepsiCo compete against each other. Because of the degree of their market commonality and resource similarity and the fact that they engage in multimarket competition, Coca-Cola and PepsiCo will continue to care- fully monitor each other’s competitive actions and responses in multiple product areas as part of their competitive rivalry. 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 A first mover is a firm that Chapter 5 / Competitive Rivalry and Competitive Dynamics defend its competitive advantages or to improve its market position. The first-mover takes an initial competitive concept has been influenced by the work of the famous economist Joseph Schumpeter, action in order to build or defend its competitive advan- who argued that firms achieve competitive advantage by taking innovative actions61 tages or to improve its market (innovation is defined and described in detail in Chapter 13). In general, first movers position. “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. 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 may experience five to ten times the valuation and revenue of a second mover.” 63 This evidence suggests that although first-mover benefits are never absolute, they are often critical to firm success in industries experiencing rapid technological develop- ments and relatively short product life cycles.64 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.65 The general evi- 147 dence that first movers have greater survival rates than later market entrants66 is per- haps 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, while a firm’s competitors might be motivated to be first movers, they may lack the ability to do so. First movers tend to be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk.67 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 success- fully produce and market a stream of innovative products.68 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. 69 In 2005, many of the large oil companies, such as ExxonMobil, had considerable slack resources: With oil prices in excess of $70 per barrel, they had significant amounts of cash on hand. As a liquid resource, slack can quickly be allocated to support the competitive actions, such as R&D investments and aggressive marketing campaigns that lead to first-mover benefits. This relationship between slack and the ability to be a first mover allows the firm to predict that a competitor who is a first mover likely has available slack and will probably take aggressive competitive actions to continuously introduce innovative products. Furthermore, the firm can predict that as a first mover, a competi- tor 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.70 Additionally, the first mover’s cost to develop a product innovation can be substantial, reducing the slack available to it to support further innovation. Thus, the firm should carefully study the results a competitor achieves as a first mover. Continuous success by the competitor suggests additional product innovations, while lack of product acceptance over the course of the competitor’s innovations may indicate less willingness in the future to accept the risks of being a first mover. A second mover is a firm A second mover is a firm that responds to the first mover’s competitive action, that responds to the first typically through imitation. More cautious than the first mover, the second mover stud- mover’s competitive action, ies customers’ reactions to product innovations. In the course of doing so, the second typically through imitation. 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 both the mistakes and the huge spending of the pio- neers [first movers].”71 PART 2 / Strategic Actions: Strategy Formulation Second movers also have the time to develop processes and technologies that are more efficient than those used by the first mover.72 Greater efficiencies could result in lower costs for the second mover. American Home Mortgage Holdings Inc. (AHMH) is a second mover with its Internet-based offering, MortgageSelect.com. In the words of the firm’s CEO, being the second mover allowed it “to see where other firms had failed.” Based on its observations of earlier Internet mortgage market entrants, AHMH decided not to brand its own services (instead providing mortgages for other companies) and has fine-tuned the offering of a “high-touch” call center to support its Web site.73 Over- all, the outcomes of the first mover’s competitive actions may provide an effective blue- print for second and even late movers as they determine the nature and timing of their competitive responses.74 Determining that 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 148 successful, innovation-based market entries. The first mover can expect a successful second-mover competitor to study its market entries and to respond with its own 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 mean- ingfully interpret market feedback to respond quickly, yet successfully, to the first mover’s successful innovations.  A late mover is a firm that responds to a competitive action a significant amount A late mover is a firm that of time after the first mover’s action and the second mover’s response. Typically, a late responds to a competitive response is better than no response at all, although any success achieved from the late action, but only after consider- able time has elapsed after the competitive response tends to be considerably less than that achieved by first and sec- first mover’s action and the ond movers. Thus, the firm competing against a late mover can predict that the com- second mover’s response. petitor 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 considerable time required for it to understand how to create at least as much cus- tomer value as that offered by the first and second movers’ products. Although excep- tions exist, most of the late mover’s competitive actions will be ineffective relative to those initiated by first and second movers. Organizational Size An organization’s size affects the likelihood that it will take competitive actions as well as the types of actions it will take and their timing.75 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 competitive rivalry, especially with large companies, to gain an advanta- geous market position.76 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.77 Large firms, however, are likely to initiate more competitive actions along with more strategic actions during a given period.78 Thus, when studying its competitors in terms of organizational size, the firm should use a measurement such as total sales rev- enue or total number of employees. The competitive actions the Chapter 5 / Competitive Rivalry and Competitive Dynamics firm likely will encounter from competitors larger than it is will be different than the competitive actions it will encounter from competitors that are smaller. The organizational-size factor adds another layer of complex- ity. When engaging in competitive rivalry, the firm often prefers a large number of unique competitive actions. Ideally, the organiza- tion 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.”79 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 competitors learn how to effectively respond to the predictable. In 149 ASSOCIATED PRESS, AP contrast, remaining flexible and nimble (which is the small firm’s tendency) in order to develop and use a wide variety of competi- tive actions contributes to success against rivals. Wal-Mart is a large firm that has the flexibility required to take many types of competitive actions. With almost $288 billion Herb Kelleher, cofounder and former CEO of Southwest in sales revenue in 2004, Wal-Mart is the world’s largest company. Airlines.  In less than a decade, Wal-Mart has become one of the largest grocery retailers in the United States. This accomplishment demonstrates Wal-Mart’s ability to successfully com- pete against its various rivals, even long-established grocers. Not far behind Wal-Mart in 2004 sales revenue were British Petroleum ($285 billion in sales), ExxonMobil ($271 billion in sales), and Royal Dutch Shell ($269 billion in sales), all large oil companies. 80 Analysts believe that Wal-Mart’s tactical actions are as critical to its success as its strategic actions and that its tactical actions demonstrate a great deal of flexibility. For example, “every humble store worker has the power to lower the price on any Wal-Mart product if he spots it cheaper elsewhere.”81 Decision-making responsibility and author- ity have been delegated to the level of the individual worker to make certain that the firm’s cost leadership business-level strategy always results in the lowest prices for cus- tomers. Managers and employees both spend a good deal of time thinking about addi- tional strategic and tactical actions, respectively, that might enhance the firm’s perfor- mance. Wal-Mart has met the expectation suggested by Kelleher’s statement, in that it is a large firm that “remains stuck to its small-town roots” in order to think and act like the small firm capable of using a wide variety of competitive actions. Wal-Mart is con- tinuing to apply this type of thinking to its major expansion in China. In 2005, China is building 15 new stores, including supercenters in Beijing and Shanghai.82 Wal-Mart’s competitors might feel confident in predicting that the firm’s competitive actions will be a combination of the tendencies shown by small and large companies. Quality Quality has many definitions, including well-established ones relating it to the produc- tion of goods or services with zero defects83 and seeing it as a never-ending cycle of continuous improvement.84 From a strategic perspective, we consider quality to be an outcome of how the firm completes primary and support activities (see Chapter 3). Quality exists when the firm’s Thus, quality exists when the firm’s goods or services meet or exceed customers’ expec- goods or services meet or tations. Some evidence suggests that quality may be the most critical component in sat- exceed customers’ expectations. isfying the firm’s customers.85 In the eyes of customers, quality is about doing the right things relative to perfor- PART 2 / Strategic Actions: Strategy Formulation mance measures that are important to them.86 Customers may be interested in measur- ing the quality of a firm’s goods and services against a broad range of dimensions. Sam- ple 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. 87 When quality is institutionalized and valued by all, employees and managers alike become vigilant about continuously finding ways to improve quality.88 Quality is a universal theme in the global economy and is a necessary but not suffi- cient condition for competitive success.89 Without quality, a firm’s products lack credi- bility, 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. Quality is important for firm performance. For example, innovative new products lead to higher firm performance only when they are of high quality.90 150 Quality affects competitive rivalry. The firm evaluating a competitor whose prod- ucts suffer from poor quality can predict that the competitor’s sales revenue will likely decline 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 prob- lems are corrected in order to gain credibility with customers. However, after the prob- lems are corrected, that competitor is likely to take more aggressive competitive actions. Hyundai Motor Co.’s experiences illustrate these expectations.  Quality Dimensions of Goods and Services TABLE 5.1 Product Quality Dimensions 1. Performance—Operating characteristics 2. Features—Important special characteristics 3. Flexibility—Meeting operating specifications over some period of time 4. Durability—Amount of use before performance deteriorates 5. Conformance—Match with preestablished standards 6. Serviceability—Ease and speed of repair 7. Aesthetics—How a product looks and feels 8. Perceived quality—Subjective assessment of characteristics (product image) Service Quality Dimensions 1. Timeliness—Performed in the promised period of time 2. Courtesy—Performed cheerfully 3. Consistency—Giving all customers similar experiences each time 4. Convenience—Accessibility to customers 5. Completeness—Fully serviced, as required 6. Accuracy—Performed correctly each time Sources: Adapted from J. W. Dean, Jr., & J. R. Evans, 1994, Total Quality: Management, Organization and Society, St. Paul, MN: West Publishing Company; H. V. Roberts & B. F. Sergesketter, 1993, Quality Is Personal, New York: The Free Press; D. Garvin, 1988, Managed Quality: The Strategic and Competitive Edge, New York: The Free Press. Chapter 5 / Competitive Rivalry and Competitive Dynamics Immediately upon becoming CEO of Hyundai Motor Co. in March 1999, Mong Koo Chung started touring the firm’s manufacturing facilities. Appalled at what he saw, he told workers and managers alike, “The only way we can survive is to raise our quality to Toyota’s level.”91 To dramatically improve quality, a quality-control unit was established, and significant resources (over $1 bil- lion annually) were allocated to research and develop- ment (R&D) in order to build cars that could compete on price and deliver on quality. Today, quality is still viewed as the firm’s number one priority.92 In 2003, the director of automotive quality research at J.D. Power observed, “Since 1998, Hyundai is the most improved car in the initial quality survey. They have REUTERS/HENNY RAY ABRAMS/LANDOV dropped their number of quality problems by 50 per- cent.”93 Signaling a strong belief in its products’ qual- 151 ity, Hyundai offers a 10-year drive-train warranty in the United States, which the firm has selected as a key market. As noted in the earlier Strategic Focus, Hyundai is taking market share from GM in the Chi- nese market.94 Improvements to the quality of Hyundai’s products helped the firm to become a more Thanks to its focus on quality, Hyundai is considered the most aggressive competitor. improved car since 1998.  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.95 In addition to market commonality and resource similarity and awareness, motiva- tion, and ability, firms evaluate three other factors—type of competitive action, reputa- tion, and market dependence—to predict how a competitor is likely to respond to com- petitive actions (see Figure 5.2). 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. In general, strategic actions receive strate- gic responses and tactical actions receive tactical responses. In general, strategic actions elicit fewer total competitive responses because strate- gic responses, such as market-based moves, involve a significant commitment of resources and are difficult to implement and reverse.96 Moreover, the time needed for a strategic action to be implemented and its effectiveness assessed delays the competitor’s response to that action.97 In contrast, a competitor likely will respond quickly to a tacti- cal action, such as when an airline company almost immediately matches a competitor’s tactical action of reducing prices in certain markets. Either strategic actions or tactical PART 2 / Strategic Actions: Strategy Formulation actions that target a large number of a rival’s customers are likely to elicit strong responses.98 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 employ- ees), a response is likely to be swift and strong.99 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