Ch. 5 Reading

Competitor Analysis

• A competitor analysis is the first step the firm takes to be able to predict its competitors' actions and responses. • In Chapter 2, we discussed what firms do to understand competitors. • This discussion was extended in this chapter to describe what the firm does to predict competitors' market-based actions. • Thus, understanding precedes prediction. • Market commonality (the number of markets with which competitors are jointly involved and their importance to each) and resource similarity (how comparable competitors' resources are in terms of type and amount) are studied to complete a competitor analysis. • In general, the greater the market commonality and resource similarity, the more firms acknowledge that they are direct competitors.

Competitive Rivalry

• Competitors are firms competing in the same market, offering similar products, and targeting similar customers. • Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competitors as they compete against each other for an advantageous market position. • The outcomes of competitive rivalry influence the firm's ability to sustain its competitive advantages as well as the level (average below average, or above average) of its financial returns.

Competitive Actions

• Firms study competitive rivalry in order to predict the competitive actions and responses that each of their competitors likely will take. • Competitive actions are either strategic or tactical in nature. • The firm takes competitive actions to defend or build its competitive advantages or to improve its market position. • Competitive responses are taken to counter the effects of a competitor's competitive action. • A strategic action or a strategic response requires a significant commitment of organizational resources, is difficult to successfully implement, and is difficult to reverse. • In contrast, a tactical action or a tactical response requires fewer organizational resources and is easier to implement and reverse. • For example, for an airline company, entering major new markets is an example of a strategic action or a strategic response; changing its prices in a particular market is an example of a tactical action or a tactical response.

Competitive Actions

• In addition to market commonality and resource similarity and awareness, motivation, and ability, three more specific factors affect the likelihood a competitor will take competitive actions. • The first of these concerns first-mover incentives. • First movers, those taking an initial competitive action, often gain loyal customers and earn above-average returns until competitors can successfully respond to their action. • Not all firms can be first movers in that they may lack the awareness, motivation, or ability required to engage in this type of competitive behavior. • Moreover, some firms prefer to be a second mover (the firm responding to the first mover's action). • One reason for this is that second movers, especially those acting quickly, can successfully compete against the first mover. • By evaluating the first mover's product, customers' reactions to it, and the responses of other competitors to the first mover, the second mover can avoid the early entrant's mistakes and find ways to improve upon the value created for customers by the first mover's good or service. • Late movers (those that respond a long time after the original action was taken) commonly are lower performers and are much less competitive.

Slow vs. Fast Cycle

• In slow-cycle markets, where competitive advantages can be maintained for at least a period of time, the competitive dynamics often include firms taking actions and responses intended to protect, maintain, and extend their proprietary advantages. • In fast-cycle markets, competition is substantial as firms concentrate on developing a series of temporary competitive advantages. • This emphasis is necessary because firms' advantages in fast-cycle markets aren't proprietary and, as such, are subject to rapid and relatively inexpensive imitation. • Standard-cycle markets have a level of competition between that in slow-cycle and fast-cycle markets; firms are moderately shielded from competition in these markets as they use capabilities that produce competitive advantages that are moderately sustainable. • Competitors in standard-cycle markets serve mass markets and try to develop economies of scale to enhance their profitability. • Innovation is vital to competitive success in each of the three types of markets. • Companies should recognize that the set of competitive actions and responses taken by all firms differs by type of market.

Firm Awareness

• Market commonality and resource similarity shape the firm's awareness (the degree to which it and its competitors understand their mutual interdependence), motivation (the firm's incentive to attack or respond), and ability (the quality of the resources available to the firm to attack and respond). • Having knowledge of these characteristics of a competitor increases the quality of the firm's predictions about that competitor's actions and responses.

Factors effecting Action

• Organizational size, the second factor, tends to reduce the variety of competitive actions that large firms launch while it increases the variety of actions undertaken by smaller competitors. • Ideally, the firm would prefer to initiate a large number of diverse actions when engaged in competitive rivalry. • The third factor, quality, is a base denominator to competing successfully in the global economy. • It is a necessary prerequisite to achieve competitive parity. • It is a necessary but insufficient condition for gaining an advantage.

Competitive Dynamics

• The set of competitive actions and responses that an individual firm takes while engaged in competitive rivalry is called competitive behavior. • Competitive dynamics is the set of actions and responses taken by all firms that are competitors within a particular market.

Type of Action

• The type of action (strategic or tactical) the firm took, the competitor's reputation for the nature of its competitor behavior, and that competitor's dependence on the market in which the action was taken are studied to predict a competitor's response to the firm's action. • In general, the number of tactical responses taken exceeds the number of strategic responses. • Competitors respond more frequently to the actions taken by the firm with a reputation for predictable and understandable competitive behavior, especially if that firm is a market leader. • In general, the firm can predict that when its competitor is highly dependent for its revenue and profitability in the market in which the firm took a competitive action, that competitor is likely to launch a strong response. • However, firms that are more diversified across markets are less likely to respond to a particular action that affects only one of the markets in which they compete.