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
 - 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 Trucks Sports
cars
Hyundai Accent Sonata Azera Santa Fe
Elantra Tucson

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 Ioniq
Honda Civic Accord Pilot Ridgeline
Fit Clarity CRV
HRV
Toyota Corolla Camry Avalon C-HR Tacoma Toyota
Prius 4Runner Tundra 86
Yaris Highlander
Landcruiser
RAV4
Sequoia
Ford Fiesta Fusion Taurus Escape F-150 Mustang
Focus EcoSport
Edge
Expedition
Explorer
Flex
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 co-
operation
▪ Multiple competitive arenas (product-markets) may increase
scope for retaliation and hence scope for tacit co-operation

- Best strategy for both, always to betray

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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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