Lecture 10.pdf

Lecture 10: Competitive rivalry & dynamics Definitions - Competitors: Are firms operating in the same market, offering similar products, and targeting similar customers - Competitive rivalry: Is the ongoing set of competitive actions and responses occurring between competitors. Influences an individual firm’s ability to gain and sustain competitive advantages - Competitive behavior: Set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and improve its market position - Multimarket competition: Firms competing against each other in several product or geographic markets - Competitive dynamics: Total set of actions and responses taken by all firms competing within a market

From competitive rivalry to competitive dynamics

A model of competitive rivalry - Competitive rivalry exists when firms jockey with one another to pursue an advantageous market position

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When one or more firms competing in an industry feels pressure to act or perceives an opportunity to improve their competitive position, competitive rivalry occurs as various firms initiate a series of actions and responses Interfirm rivalry or competitive dynamics begins with competitive analysis in terms of market commonality and resource similarity Market commonality and resource similarity affect the drivers of competitive behavior – a firm’s awareness, motivation, and ability to attack or respond Attack and responses to attack result in competitive outcomes – market position and financial performance Feedback from competitive outcomes will affect future competitive dynamics

Competitor analysis - The first step to understanding competitive rivalry and identifying who your direct competitors are: o Involves collecting competitive intelligence o Focuses on trying to predict competitor’s behavior o Question: to what extent are firms competitors? - 2 components to assess ▪ Market commonality ▪ Resource similarity - Direct competitors have high market commonality & high resource similarity Market commonality - Market commonality is concerned with the: ▪ Number of markets with which a firm and a competitor are jointly involved ▪ Degree of importance of the indivudal markets to each competitor - Each industry composed of various markets which can be subdivided into segments ▪ Ex: automobile industry - Firms competing against one another in several or many markets engage in multimarket competition

Multi-market competition (automobile industry) Small Midsize Large SUV Hyundai

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Accent Elantra

Sonata

Azera

Santa Fe Tucson

Trucks

Sports cars

Honda

Ioniq Civic Fit

Accord Clarity

Toyota

Corolla Prius Yaris

Camry

Avalon

Ford

Fiesta Focus

Fusion

Taurus

Pilot CRV HRV C-HR 4Runner Highlander Landcruiser RAV4 Sequoia Escape EcoSport Edge Expedition Explorer Flex

Ridgeline Tacoma Tundra

Toyota 86

F-150

Mustang

Can see that some are bigger competitors Resource similarity - Resource similarity is: ▪ How comparable the firm’s tangible and intangible resources are to a competitor’s 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 is difficult if critical resources are intangible, rather than tangible

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High market commonality and high resource similarity = direct competitors Low / low = No competitors High market commonality and low resource similarity = indirect competitor Low market commonality and high resource similarity = Potential competitor McDonalds - Direct competitors = KFC, Burger King - No competitors = cafeteria - Indirect competitors = Tim Hortons - Potential competitors = Origins of game theory - Mathematical game theory: Originally zero-sum games – pure rivalry: what one player gains, another loses - Prisoners’ dilemma: Non-zero-sum game - Nash equilibrium: Games with potential mutual gain: set of strategies with property that no player can benefit by changing her strategy while other players’ strategies remain same - Evolutionary game theory: Deterrence, reputation, commitment, credible threats, signaling

Game theory - Simple payoff matrix used to represent games involving simultaneous moves with no communication ▪ Single-period simultaneous game ▪ Dominant strategy is one that is optimal regardless of what rival does - Repeated games may result in threat of future retaliation influencing current move ▪ In repeated games with indefinite future, tit for tat strategy (reciprocity) proves most effective, generated co-operation in prisoners’ dilemma pay-off matrix Rivalry – competitive moves Prisoners’ dilemma - Can arise between rivals, examples: ▪ Price war and ending price war ▪ Escalation of capacity in real estate: Building ever larger shopping centers or office buildings

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Capacity escalation in shipping: Building larger fleet ahead of forecast growth in demand ▪ Situations with high entry and high exit barriers Factors that reduce risk of destructive moves: ▪ Repeated interaction builds knowledge of rivals and trust (evolutionary model) ▪ Tit for tat retaliation – alternative method to promote cooperation ▪ Multiple competitive arenas (product-markets) may increase scope for retaliation and hence scope for tacit co-operation ▪

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Best strategy for both, always to betray

Tit-for-tat strategy

Competitive rivalry - Competitive action ▪ A strategic or tactical action the firms 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 competitor’s competitive action

1st mover, 2nd mover, last mover in emerging industry 1st mover advantage if - Reputation, pioneer image matter to buyer - Learning curve crucial & hard to imitate - High customer loyalty so first purchase key to dominance - Strategic access to raw materials, skilled people or marketing channels; early access to capital markets - Opportunity exists to shape industry structure, standards, rules of game - Proprietary technology (patents) 2nd mover advantage if - Basis of competition expected to change, early entrants may seek wrong advantage or skills - Technology obsolescence gives later entrants advantage

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High market opening costs (customer education, regulatory approval) cannot be made proprietary Costly competition by early rivals, followed by entry of large firms Multiple technologies, standards delay customer acceptance

Late mover usually disadvantage - Entry after considerable time has elapsed - Slow progress to success and less than achieved by 1 st and 2nd mover - Competitive actions earn only average returns and challenge to find ways to create value for customers

Factors affecting likelihood of attack with new products / services in existing or evolving industry

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Competitive dynamics

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Midterm - Chapter 1-5 + lecture slides - 19 MC - Case: Marvel, Amazon, Uber (review the discussion questions) ▪ How marvel turnaround, key strategy they exploited at the time - 4 fill-in-the-blank, 8 short answer

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