Strategic Management 7e. - Sacramento State

Strategic Management 7e. - Sacramento State

CHAPTER 5 STRATEGIC ACTIONS: STRATEGY FORMULATION PowerPoint Presentation by Charlie Cook The University of West Alabama 2007 Thomson/South-Western. All rights reserved. Competitive Rivalry and Competitive Dynamics Strategic Management Seventh edition Competitiveness and Globalization:

Concepts Cases Michael A. Hitt and R. Duane Ireland Robert E. Hoskisson KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to: 1. Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. 2. Describe market commonality and resource similarity as the building blocks of a competitor analysis. 3. Explain awareness, motivation, and ability as drivers of competitive behavior. 4. Discuss factors affecting the likelihood a competitor will take competitive actions. 5. Discuss factors affecting the likelihood a competitor will respond to actions taken against it. 6. Explain competitive dynamics in slow-cycle, fast-cycle, and standardcycle markets. 2007 Thomson/South-Western. All rights reserved.

52 Definitions Competitors Firms operating in the same market, offering similar products and targeting similar customers. Competitive Rivalry The ongoing set of competitive actions and responses occurring between competitors. Competitive rivalry influences an individual firms ability to gain and sustain competitive advantages. 2007 Thomson/South-Western. All rights reserved. 53 Definitions Competitive Behavior The set of competitive actions and competitive

responses the firm takes to build or defend its competitive advantages and to improve its market position. Multimarket Competition Firms competing against each other in several product or geographic markets. Competitive Dynamics The total set of actions and responses taken by all firms competing within a market. 2007 Thomson/South-Western. All rights reserved. 54 From Competitors to Competitive Dynamics Why? Competitors Engage

in Competitive Rivalry How? What Results? To gain an advantageous market position Competitive Behavior Competitive actions Competitive responses What Results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market

2007 Thomson/South-Western. All rights reserved. 55 Figure 5.1 From Competitors to Competitive Dynamics Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100134. 2007 Thomson/South-Western. All rights reserved. 56 Competitive Rivalrys Effect on Strategy Success of a strategy is determined by: The firms initial competitive actions. How well it anticipates competitors responses to them. How well the firm anticipates and responds to its competitors initial actions.

Competitive rivalry: Affects all types of strategies. Has the strongest influence on the firms businesslevel strategy or strategies. 2007 Thomson/South-Western. All rights reserved. 57 A Model of Competitive Rivalry Firms are mutually interdependent A firms competitive actions have noticeable effects on its competitors. A firms competitive actions elicit competitive responses from its competitors. Competitors feel each others actions and responses. Marketplace success is a function of both individual strategies and the consequences of their use.

2007 Thomson/South-Western. All rights reserved. 58 A Model of Competitive Rivalry Competitive Analysis Market commonality Resource similarity Feedback Outcomes Market position Financial performance 2007 Thomson/South-Western. All rights reserved. Drivers of Competitive Behavior Awareness Motivation

Ability Interfirm Rivalry Likelihood of Attack First-mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence 59 FIGURE 5.2

A Model of Competitive Rivalry Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100134. 2007 Thomson/South-Western. All rights reserved. 510 Competitor Analysis Competitor analysis is used to help a firm understand its competitors. The firm studies competitors future objectives, current strategies, assumptions, and capabilities. With the analysis, a firm is better able to predict competitors behaviors when forming its competitive actions and responses. 2007 Thomson/South-Western. All rights reserved. 511

Market Commonality Market commonality is concerned with: The number of markets with which a firm and a competitor are jointly involved. The degree of importance of the individual markets to each competitor. Firms competing against one another in several or many markets engage in multimarket competition. A firm with greater multimarket contact is less likely to initiate an attack, but more likely to more respond aggressively when attacked. 2007 Thomson/South-Western. All rights reserved. 512 Resource Similarity Resource Similarity How comparable the firms tangible and intangible

resources are to a competitors in terms of both types and amounts. Firms with similar types and amounts of resources are likely to: Have similar strengths and weaknesses. Use similar strategies. Assessing resource similarity can be difficult if critical resources are intangible rather than tangible. 2007 Thomson/South-Western. All rights reserved. 513 FIGURE 5.3 A Framework of Competitor Analysis Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100134.

2007 Thomson/South-Western. All rights reserved. 514 Drivers of Competitive Behavior Awareness 2007 Thomson/South-Western. All rights reserved. Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from: Market commonality Resource similarity 515 Drivers of Competitive Behavior

(contd) Awareness Motivation 2007 Thomson/South-Western. All rights reserved. Motivation concerns the firms incentive to take action or to respond to a competitors attack and relates to perceived gains and losses 516 Drivers of Competitive Behavior (contd) Awareness Motivation Ability

Ability relates to each firms resources the flexibility these resources provide Without available resources the firm lacks the ability to attack a competitor respond to the competitors actions 2007 Thomson/South-Western. All rights reserved. 517 Drivers of Competitive Behavior (contd) Awareness

Motivation Ability Market Commonali ty 2007 Thomson/South-Western. All rights reserved. A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitors action in an effort to protect its position in one or more markets.

518 Drivers of Competitive Behavior (contd) Awareness Motivation Ability Market Commonali ty Resource Dissimilarit y 2007 Thomson/South-Western. All rights reserved. The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage.

When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response. 519 Competitive Rivalry Competitive Action A strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. Competitive Response A strategic or tactical action the firm takes to counter the effects of a competitors competitive action. 2007 Thomson/South-Western. All rights reserved. 520

Strategic and Tactical Actions Strategic Action (or Response) A market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. Tactical Action (or Response) A market-based move that is taken to fine-tune a strategy: Usually involves fewer resources. Is relatively easy to implement and reverse. 2007 Thomson/South-Western. All rights reserved. 521 Factors Affecting Likelihood of Attack First-Mover Incentives First Mover

A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. 2007 Thomson/South-Western. All rights reserved. First movers allocate funds for: Product innovation and development Aggressive advertising Advanced research and development First movers can gain: The loyalty of customers who may become committed to the firms goods or services.

Market share that can be difficult for competitors to take during future competitive rivalry. 522 Factors Affecting Likelihood of Attack (contd) First Mover Second Mover Incentives Second mover responds to the first movers competitive action, typically through imitation: Studies customers reactions to product innovations. Tries to find any mistakes the first mover made, and avoid them. Can avoid both the mistakes and the

huge spending of the first-movers. May develop more efficient processes and technologies. 2007 Thomson/South-Western. All rights reserved. 523 Factors Affecting Likelihood of Attack (contd) First Mover Second Mover Late Mover 2007 Thomson/South-Western. All rights reserved. Late mover responds to a competitive action only after considerable time has elapsed. Any success achieved will be slow

in coming and much less than that achieved by first and second movers. Late movers competitive action allows it to earn only average returns and delays its understanding of how to create value for customers. 524 Factors Affecting Likelihood of Attack (contd) First Mover Second Mover Late Mover Organization al SizeSmall 2007 Thomson/South-Western. All rights reserved.

Small firms are more likely: To launch competitive actions. To be quicker in doing so. Small firms are perceived as: Nimble and flexible competitors Relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive rivalry. Having the flexibility needed to launch a greater variety of competitive actions. 525 Factors Affecting Likelihood of Attack (contd) First Mover Second

Mover Late Mover Organization al Size Large Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period Large organizations commonly have the slack resources required to launch a larger number of total competitive actions Think and act big and well get smaller. Think and act small and well get bigger. Herb Kelleher Southwest Airlines 2007 Thomson/South-Western. All rights reserved.

Former CEO, 526 Factors Affecting Likelihood of Attack (contd) First Mover Second Mover Late Mover Organization al Size Quality (Product) 2007 Thomson/South-Western. All rights reserved. Quality exists when the firms goods or services meet or exceed customers expectations Product quality dimensions

include: Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality 527 Table 5.1 Quality Dimensions of Goods and Services Product Quality Dimensions 1. PerformanceOperating characteristics 2. FeaturesImportant special characteristics 3. FlexibilityMeeting operating specifications over some

period of time 4. DurabilityAmount of use before performance deteriorates 5. ConformanceMatch with preestablished standards 6. ServiceabilityEase and speed of repair 7. AestheticsHow a product looks and feels 8. Perceived qualitySubjective assessment of characteristics (product image) 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. 2007 Thomson/South-Western. All rights reserved. 528 Factors Affecting Likelihood of Attack (contd) First Mover Second Mover Late Mover

Service quality dimensions include: Timeliness Courtesy Organization al Size Consistency Convenience Quality (Service) Completeness Accuracy 2007 Thomson/South-Western. All rights reserved. 529

Table 5.1 Quality Dimensions of Goods and Services (contd) Service Quality Dimensions 1. TimelinessPerformed in the promised period of time 2. CourtesyPerformed cheerfully 3. ConsistencyGiving all customers similar experiences each time 4. ConvenienceAccessibility to customers 5. CompletenessFully serviced, as required 6. AccuracyPerformed 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. 2007 Thomson/South-Western. All rights reserved. 530 Likelihood of Response Responses to a competitors action are taken

when the action: Leads to better use of the competitors capabilities to gain or produce stronger competitive advantages or an improvement in its market position. Damages the firms ability to use its capabilities to create or maintain an advantage. Makes the firms market position becomes less defensible. 2007 Thomson/South-Western. All rights reserved. 531 Factors Affecting Likelihood of Response Firms study three other factors to predict how a competitor is likely to respond to competitive actions: Type of competitive action Reputation Market dependence

2007 Thomson/South-Western. All rights reserved. 532 Factors Affecting Strategic Response Type of Competitive Action Strategic actions receive strategic responses Strategic actions elicit fewer total competitive responses. The time needed to implement and assess a strategic action delays competitors responses. Tactical responses are taken to counter the effects of tactical actions A competitor likely will respond quickly

to a tactical actions 2007 Thomson/South-Western. All rights reserved. 533 Factors Affecting Strategic Response (contd) Type of Competitive Action Actors Reputation 2007 Thomson/South-Western. All rights reserved. An actor is the firm taking an action or response Reputation is the positive or negative attribute ascribed by one rival to another based on past

competitive behavior. The firm studies responses that a competitor has taken previously when attacked to predict likely responses. 534 Factors Affecting Strategic Response (contd) Type of Competitive Action Actors Reputation Dependence on the market 2007 Thomson/South-Western. All rights reserved.

Market dependence is the extent to which a firms revenues or profits are derived from a particular market. In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position. 535 Competitive Dynamics versus Rivalry Competitive Dynamics Ongoing actions and responses taking place between all firms competing within a market for advantageous positions. Competitive Rivalry Ongoing actions and responses taking place

between an individual firm and its competitors for advantageous market position. 2007 Thomson/South-Western. All rights reserved. 536 Competitive Dynamics versus Rivalry (contd) Competitive Rivalry Competitive Dynamics (Individual firms) Market commonality and resource similarity Awareness, motivation and ability First mover incentives, size and quality 2007 Thomson/South-Western. All rights reserved.

(All firms) Market speed (slowcycle, fast-cycle, and standard-cycle Effects of market speed on actions and responses of all competitors in the market 537 Competitive Dynamics Slow-Cycle Markets 2007 Thomson/South-Western. All rights reserved. Competitive advantages are shielded from imitation for long periods of time and imitation is

costly. Competitive advantages are sustainable in slow-cycle markets. All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage. 538 FIGURE 5.4 Gradual Erosion of a Sustained Competitive Advantage SOURCE: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by taking strategic initiative, Academy of Management Executive, 11(2): 111118. 2007 Thomson/South-Western. All rights reserved. 539

Competitive Dynamics (contd) Slow-Cycle Markets Fast-Cycle Markets The firms competitive advantages arent shielded from imitation. Imitation happens quickly and somewhat expensively Competitive advantages arent sustainable. Competitors use reverse engineering to quickly imitate or improve on the firms products Non-proprietary technology is diffused rapidly 2007 Thomson/South-Western. All rights reserved.

540 FIGURE 5.5 Developing Temporary Advantages to Create Sustained Advantage Source: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by taking strategic initiative, Academy of Management Executive, 11(2): 111118. 2007 Thomson/South-Western. All rights reserved. 541 Competitive Dynamics (contd) Slow-Cycle Markets Fast-Cycle Markets StandardCycle Markets

2007 Thomson/South-Western. All rights reserved. Moderate cost of imitation may shield competitive advantages. Competitive advantages are partially sustainable if their quality is continuously upgraded. Firms Seek large market shares Gain customer loyalty through brand names Carefully control operations 542

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