Competitive rivalry model
- Competitive analysis: direct and indirect competitors
- Competitive behavior: intensity of competition
- Rivalry: attacks and responses we are likely to see in the market
This model helps us to predict what competitors will do.
Identify competitors
-direct and indirect competitors
Direct competitor
Part of the same strategic group
Set of firms that use similar strategy to target the same customers
Indirect Competitor
From outside the strategic group
They are still competing in the same industry but with different strategies.
If not from the same industry ⇒ Substitutes, these also compete but even less directly
Identify competitors
-framework
Market Commonality: Number of markets in which the firm and its competitors meet each other and the degree of importance of the individual markets to each.
Resource Similarity: Extent to which the firm’s tangible/intangible resources are comparable to competitors in type and amount.
Types of competitive actions/responses
* Strategic actions/responses: significant commitments of specific and distinctive organizational resources, difficult to implement and to reverse
* Tactical actions/responses: undertaken to ‘fine tune’ strategy, relatively easy to implement and reverse
Drivers of competitive behavior
- Awareness
Prerequisite to any competitive action. The extent to which competitors recognize the degree of mutual interdependence that results from market commonality and resource similarity. Market commonality and resource similarity ⟹ ↑ Awareness. - Motivation
Firm’s incentive to take action/ respond to a competitor. It relates to perceived gains and losses. Market commonality generally reduces the likelihood of actions and increases the likelihood of responses. Many markets are at stake: high potential for losses ⟶ retaliate - Capability
Firm’s resources that allow competitive action and responsiveness. Similar resources ⇒ Similar ability to take actions/ respond
Likelihood of attack
- First mover incentives
a. Firms can gain loyalty of customers by moving first
b. Gain market share that is hard for competitors to take during rivalry
c. The first mover:
i. Often has superior R&D skills
ii. Tends to be aggressive and willing to experiment with innovation
iii. Tends to take higher, yet reasonable, risks
iv. Needs to have available/slack resources
d. Benefits can be substantial
e. Progress along the learning curve alone (cannot learn from others) - Organizational size
a. Small firms:
i. Act as agile and flexible competitors
ii. Rely on speed and surprise to defend their competitive advantage
iii. Have greater variety of competitive behavioral options available
b. Large firms:
i. Often have greater slack
ii. Have greater likelihood to initiate competitive and strategic actions overtime
iii. Launch greater number of actions
iv. Tend to rely on a limited variety of competitive actions - Quality
a. Customer perception that the firm’s goods or services perform in ways that are important to customers, meeting or exceeding their expectatons
b. Solve quality problems first before taking competitive actions (broad sense)
c. Once quality issues are resolved competitor will take more aggressive actions
Likelihood of response
Besides the 3 drivers of behavior, depends on:
* Types and effectiveness of action: strategic vs tactical
* Actors’ reputation: positive/negative. Is it a market leader or a smaller firm?
* Dependence on the market
- Market cycle
Slow Cycle
The competitive advantage is shielded from imitation for a long period of time .
o Markets in which the firm’s competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly
o Firms build a unique competitive advantage that creates sustainability (i.e. proprietary and difficult for competitors to understand)
o Once a proprietary advantage is developed, competitive behavior should be oriented towards protecting, maintaining, and extending that advantage
- Market cycle
Fast Cycle
The competitive advantage is not protected and competitors will catch up with us. It is all about having a stream of new products and competitive advantages coming out one after another. We don’t want customer loyalty for that specific advantage
o Markets in which the firm’s capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive
o Focus is on learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation)
o Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation
o Continually try to move on to another temporary competitive advantage before competitors can respond to the firs one
- Market cycle
Standard Cycle
Moderately shielded from imitation. We must seek to serve many customer and gain market share. Gain brand loyalty, having a careful operational control and manage a consistent experience from the customer.
* Markets where firms’ competitive advantages are moderately shielded from imitation and where imitation is moderately costly
* Competitive advantages partially sustained as quality is continuously upgraded
* Seek to serve many customers and gain a large market share
* Gain brand loyalty through brand names
* Careful operational control/manage a consistent experience for the customer
MMC
Firms compete against each other in various geographical markets, product categories, and/or market segments
* Multimarket competition
* Increases interdependences
MMC often leads to mutual forbearance
* Less propensity to attack competitors (e.g., through aggressive pricing, innovation etc.) due to fear of counterattacks in other important markets
But
* MMC increases likelihood of responses to competitive actions
Five important points on MMC
- Some competitive actions may be curbed/controlled more by MMC than others
E.g. promotions vs. Ground-breaking innovation - MMC may lead to worse service quality
Few investments in quality with high MMC as these may induce rivals to respond with price cuts or service improvements in other markets. E.g. airlines - Mutual forbearance depends on full observability and effective internal coordination
* Violations need to be detected and punished, if violations can go unnoticed mutual forbearance won’t be attractive: awareness
* Lack of internal coordination between subsidiaries/units may lead to competition on country-by-country or market-by-market basis, hindering mutual forbearance - Reduction of MMC effect on mutual forbearance in international settings
* Presence of domestic competitors
* Presence of single market competitors
* Government regulations
* Cultural diversity across markets - The desire to maintain competitive parity and ensure mutual forbearance has caused MNCs to pursue similar international expansion patterns.
-There is a link between corporate level strategy (diversification) and MMC.
