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Chapter Three: The External Environment

0. Chapter Six: Competitive Rivalry and Competitive Dynamics. Chapter Three: The External Environment. Chapter Three: The External Environment. Hitt, Ireland, Hoskission, Rowe & Sheppard. Strategic Management. N o t e s. Competitiveness & Globalization.

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Chapter Three: The External Environment

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  1. 0 Chapter Six: Competitive Rivalry and Competitive Dynamics Chapter Three: The External Environment Chapter Three: The External Environment Hitt, Ireland, Hoskission, Rowe & Sheppard Strategic Management N o t e s Competitiveness & Globalization

  2. The Strategic Management Process Strategic Objectives & Inputs Ch. 1: Strat. Mgmt. & Com-petitiveness Chapter 3: The External Environment Strategic Competitiveness Strategic Mission & Strategic Intent Chapter 4: The Internal Environment Ch. 2: Strat. Mgmt . & Performance Strategy Implementation Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Formulation Ch. 12: Org. Structure & Controls Chapter 6: Competitive Dynamics Chapter 5: Bus.-Level Strategy Chapter 11: Corporate Governance Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategic Actions Chapter 6: Competitive Dynamics

  3. 0 Competitive Rivalry & Competitive Dynamics Knowledge Objectives • Describe market commonality & resource similarity as the building blocks of a competitor analysis. • Explain awareness, motivation, and ability as drivers of competitive behaviour. • Discuss factors affecting the likelihood a competitor will take competitive actions. • Discuss factors affecting the likelihood a competitor will respond to actions taken against it. • Explain competitive dynamics in slow-cycle, fast-cycle, and standard-cycle markets.

  4. Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Why? Why? Competitive rivalry Competitive rivalry Competitive rivalry For advantageous market position For advantageous market position How? How? Competitors Competitors Via competitive – Actions & – Responses Via competitive – Actions & – Responses • Competitive Dynamics • Competitive actions & responses taken by all firms competing in a market. Feedback From Competitors to Competitive Dynamics Engage in Engage in Creates Creates A Model of Competitive Rivalry A Competitive Rivalry Model

  5. Competitor Analysis Drivers of Competitive Behaviour Competitor Analysis Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Resource Resource Similarity Similarity Market Market Feedback Commonality Commonality Resource Similarity • The extent to which a firm’s tangible & intangible resources are comparable to a competitors in terms of type & amount. Market Commonality • The number of markets which the firm & a rival are jointly involved & the importance of each market. • Multipoint competition tends to reduce competitive interactions, but increases response likelihood where interaction occurs. • The possibility of cross subsidizing markets. • E.g., airlines price flights alike, but respond quickly when competitors introduce promotional prices. Competitor Analysis

  6. Drivers of Competitor Behaviour Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Awareness Motivation Do managers understand key characteristics of competitors? Awareness Does the firm have appropriate incentives to attack or respond? Motivation Market Commonality Resource Feedback Similarity Behaviour Drivers

  7. Factors Affecting Attack Likelihood: Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Attack Likelihood Awareness First Mover Incentives Quality Size Motivation Market Commonality Resource Feedback Similarity Interfirm Rivalry Attack Likelihood

  8. First mover incentives Factors Affecting Attack Likelihood: First Mover Incentives • First movers allocate funds for • product innovation & development. • aggressive advertising. • advanced research & development. • First movers can gain • the loyalty of customers who may become committed to the firm’s goods or services. • market share that can be difficult for competitors to take during future competitive rivalry. Attack Likelihood

  9. First mover incentives Size “Think and act big & we’ll get smaller. Think & act small & we’ll get bigger.” - Herb Kelleher, Former CEO, Southwest Air. Factors Affecting Attack Likelihood: Size • Small firms are more likely • to launch competitive actions • to be quicker in doing so. • Small firms are perceived as: • nimble and flexible competitors; • rely on speed & surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry. • Small firms have the flexibility needed to launch a greater variety of competitive actions. Attack Likelihood

  10. First mover incentives Size Quality Factors Affecting Attack Likelihood: Quality • Quality exists when the firm’s goods or services meet or exceed customers’ expectations. • Quality dimensions include: • For Products: • Performance • Features • Flexibility • Durability • Serviceability • Aesthetics • For Services: • Timeliness • Courtesy • Consistency • Convenience • Completeness • Accuracy Attack Likelihood

  11. Factors of Response Likelihood: In the Model of Competitive Rivalry Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Attack Likelihood Awareness First Mover Incentives Quality Size Motivation Response Likelihood Competitive Action Type Actor’s Reputation Dependence on Market Resource Availability Market Commonality Resource Feedback Similarity Response Likelihood

  12. Competitive Action Type Factors of Response Likelihood: Competitive Action Type • Strategic actions receive strategic responses. • Strategic actions elicit fewer total competitive responses. • Tactical responses are taken to counter the effects of tactical actions. • A competitor likely will respond quickly to a tactical action. • The time needed to implement and assess a strategic action delays competitors’ responses. Response Likelihood

  13. Competitive Action Type Reputation Factors of Response Likelihood: Reputation • 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. Response Likelihood

  14. Competitive Action Type Reputation Market dependence Factors of Response Likelihood: Market Dependence • Market dependence is: • the extent to which a firm’s revenues or profits are derived from a particular market. • Firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position. Response Likelihood

  15. Desired Outcomes Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Attack Likelihood Awareness First Mover Incentives Quality Size Motivation Response Likelihood Competitive Action Type Actor’s Reputation Dependence on Market Resource Availability Market Commonality Resource Feedback Similarity Market Position Financial Position • Is a sustained competitive advantage being created? • Better financial position should lead to better financial performance. Outcome & Feedback

  16. Feedback: Competitive Dynamics Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Attack Likelihood Awareness First Mover Incentives Quality Size Motivation Response Likelihood Competitive Action Type Actor’s Reputation Dependence on Market Resource Availability Market Commonality Resource Feedback Similarity Market Position Financial Position Competitive Dynamics: Slow, Standard & Fast Cycle Markets Outcome & Feedback

  17. Feedback: Competitive Dynamics Feedback Slow cycle markets are frequently shielded by monopoly power or very strong brand loyalties. Competitive Market Types Slow, Standard, Fast Cycle Slow,Standard, Fast,Cycle A lack of interfirm rivalry may lead to sustained competitive advantage. Outcome & Feedback

  18. Feedback: Competitive Dynamics Feedback Standard cycle markets often lead to highly com-petitive pressures despite world class products. Competitive Market Types Slow, Standard, Fast Cycle Slow,Standard,FastCycle Firms with multi-market competition may dampen rivalry somewhat. Sustained competitive advantage is a possible outcome in this instance. Outcome & Feedback

  19. Feedback: Competitive Dynamics Feedback Fast cycle markets are intensely dynamic and a 1st mover advantage is often unsustainable. Competitive Market Types Slow, Standard, Fast Cycle Slow, Standard,Fast Cycle Firms may cannibalize older generation product while introducing new innovative premium ones. Sustainable competitive advantage is unlikely. Outcome & Feedback

  20. Temporary Advantages that create a Sustained Advantage Extended Growth Curves The Sigmoid Growth Curve The Sigmoid Growth Curve Competitive advantage eventually erodes Competitive advantage eventually erodes The firm moves from one temporary advantage to the next. Maturity Maturity Decline Decline B O N U S Returns from a sustained competitive advantage Growth Growth Sales Sales In doing so, it creates a sustained advantage  Intro. Intro. 0 Time 0 0 Time Time Counterattack Launch Exploitation Sustained Temp. Advantages

  21. Temporary Advantages that create a Sustained Advantage: an Example Extended Growth Curves at Apple Extended Growth Curves at Apple The Sigmoid Growth Curve Extended Growth Curves at Apple Extended Growth Curves at Apple Extended Growth Curves at Apple Extended Growth Curves at Apple Α. Computing power to the people. Α. Computing power to the people. B. Advancing friendly computing. Α. Computing power to the people. Α. Computing power to the people. Α. Computing power to the people. Α. Computing power to the people. E E B. Advancing friendly computing. B. Advancing friendly computing. B. Advancing friendly computing. B. Advancing friendly computing. Maturity   C. Providing portable high tech. C. Providing portable high tech. C. Providing portable high tech. C. Providing portable high tech. Decline  iPad  iPad D.Marrying hi-tech hardware D.Marrying hi-tech hardware D.Marrying hi-tech hardware D D D B O N U S with user-friendly software with user-friendly software with user-friendly software    E. Continual cutting edge E. Continual cutting edge  iPhone  iPhone  iPhone C C C C Sales Sales Growth     Sales B Sales Sales Sales Sales Time of Confusion  iPod  iPod  iPod  iPod  B B B B  GUI Time of Confusion Time of Confusion Time of Confusion Time of Confusion A A      GUI  GUI  GUI  GUI   A C E B B D A A A A  PC  PC      PC  PC  PC  PC Intro. 0 0 Time Time 0 0 0 0 0 Time Time Time Time Time 1980 1983 2001 2007 2010 Sustained Temp. Advantages

  22. Rejuvenation Demise Renewal Decline Maturity Sales Growth Recovery Start Repeat as often as needed 0 Time 1976 1983 1989 – 1991 1992 – 1995 1996 – 1997 2001 Began GUI Golden Age Time of Confusion Losses iPod Temporary Advantages that create a Sustained Advantage: an Example B O N U S Sustained Temp. Advantages

  23. The Life Cycle & Nessie Curve Apple’s log of 3 yr. rolling average inflation adj. sales $156 Bil. in 2012 B O N U S $1 $2 $6 $11 $8 $14 $62 Billion in Sales IPO GUIMac No Steve JobsiMaciPodiPhoneiPad Sustained Temp. Advantages

  24. The Model of Competitive Rivalry: Drivers of Competitive Behaviour Competitor Analysis Outcomes Interfirm Rivalry: Attack & Response Attack Likelihood Awareness First Mover Incentives Quality Size Motivation Response Likelihood Competitive Action Type Actor’s Reputation Dependence on Market Resource Availability Resource Similarity Market Feedback Commonality A Detailed Model Market Position Financial Position Competitive Dynamics: Slow, Standard & Fast Cycle Markets A Detailed Model

  25. The Strategic Management Process Strategic Objectives & Inputs Ch. 1: Strat. Mgmt. & Com-petitiveness Chapter 3: The External Environment Strategic Competitiveness Strategic Mission & Strategic Intent Chapter 4: The Internal Environment Ch. 2: Strat. Mgmt . & Performance Strategy Implementation Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Formulation Ch. 12: Org. Structure & Controls Chapter 6: Competitive Dynamics Chapter 5: Bus.-Level Strategy Chapter 11: Corporate Governance Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategic Actions Chapter 6: Competitive Dynamics

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