COMPETITION PERCEPTION INDEX The psychology of rivalry

1. COMPETITION PERCEPTION INDEXThe psychology of rivalry Ron Kemp (EIM / Universiteit Wageningen) & Arjen van Witteloostuijn (Rijksuniversiteit Groningen / University of Durham)

2. BACKGROUND • Contract research for the Dutch Ministry of Economic Affairs • Goal: development of a CPI (à la producer confidence) • Instrument: questionnaire • Approach: from broad to narrow • Later: short standard questionnaire • Committee of experts • Today: preliminary interim report

3. ECONOMICS AND PSYCHOLOGY • Experimental Economics • Behavioral Finance • Decision Theory • Consumer Behavior • Personnel Economics • …

4. PSYCHOLOGY OF RIVALRY • PD experiments • TMT studies • Managerial perceptions • Managerial economics • Delegation games • … Toward a ‘humanized’ Industrial Organization?

5. SIX LITERATURE EXAMPLES • Fornell, C., M.D. Johnson, E.W. Anderson, J. Cha & B.E. Bryant (1996) The American Customer Satisfaction Index: nature, purpose, and findings. Journal of Marketing60: 7-18. • Greve, H.R. (1998) Managerial cognition and the mimetic adoption of market positions: what you see is what you do. Strategic Management Journal19: 967-988. • Heijltjes, M. & A. van Witteloostuijn (2003) Configurations of market environments. competitive strategies. manufacturing technologies and human resource management policies: a two-industry and two-country analysis of fit. Scandinavian Journal of Management19: 31-62. • Pecotich, A., J. Hattie & L.P. Low (1999) Development of Industruct: a scale for the measurement of perceptions of industry structure. Marketing Letters10: 409-422. • Porac, J.F., H. Thomas, F. Wilson, D. Paton & A. Kanfer (1995) Rivalry and the industry model of Scottish knitwear producers. Administrative Science Quarterly40: 203-227. • Spanos, Y. & S. Lioukas (2001) An examination into the causal logic of rent generation: contrasting Porter’s competitive strategy framework and the resource-based perspective. Strategic Management Journal22: 907-934.

6. COMPETITION PERCEPTION INDEX(CPI) Industrial Organization (SCP paradigm) Competition perception index TMT perception studies (Questionnaire instrument) (Upper-echelonliterature) Strategic Management (Five-forces model)

7. SO WHAT? • Leading indicator • Policy effectiveness • Monitoring instrument • Intra-industry heterogeneity • Forces desaggregation • Rules-of-the-game indeterminism • Onobservable variables • Causality chain • Managerial psychology • Organizational features

8. RESEARCH DESIGN • Literature overview • Theoretical framework • Four industries • Questionnaire development • Questionnaire mail (± 4000) • Response increase (± 270 on April 2) • Simple preliminary analyses (today) • Advanced model estimations (later) • CPI proposal

9. Motivation • to react • Importance market • Exit costs • Price elasticities Expected competitive environment - Six forces Interpretation competitive environment - Six forces • Performance • Goal hierarchy • Return ratios • Profitability • Growth • Competitive • action • Instrument • Aggressiveness • Speed Perceived competitive environment - Six forces • Possibility • to respond • Competitive advantages • Resources • Capabilities • Control variables • Respondent features • Organizational features • Industry features

10. FOUR INDUSTRIES

11. A QUESTIONNAIRE • Large tryout: later selection on the basis of analyses • Steppingstone: Porterian five-forces framework • Extensions (from industrial and institutional economics) • Sixth force: institutional influence • Source of inspiration: management literature • Incorporation of validated questionnaire (sub)scales • Introduction of control variables • Revised after expert meetings and pilot interviews • Benchmarking: traditional competition measures

12. FIVE-FORCES FRAMEWORK Customer power Entry Incumbent rivalry Substitutes threat threat Supplier power

13. IMPORTANCE ITEM EXAMPLES(Five per force) • In our market, much competition evolves around price decreases • In our market, suppliers have much power, which they indeed use • In our market, newcomers have to invest much in advertising or R&D • In our market, we must deal with cheap substitutes • In our market, clients cannot switch easily to rival products or services • In our market, anti-trust law provides incentives to invest a lot (Scores from 1 to 7)

14. ITEM WEIGHTS(Scores from 1 to 7) How strongly does the following affect your profitability? • Entry by newcomers • Products/services from other industries • Bargaining power of suppliers • Bargaining power of clients • Extent of competition in your market • Law and regulation

15. SUBSCALES STRUCTURE(Factor analysis)

16. SUBSCALE RELIABILITY(Cronbach’s α)

17. INDUSTRY DIFFERENCES(ANOVA analyses)

18. FORCES WEIGHTS(On the basis of six direct questions)

19. RELATIVE WEIGHTS(Via division by sum score)

20. COMPETITION PERCEPTION(Weight * importance)

21. CPI FORMULA(cf. Fornell et al. 1996)

22. COMPETITION PERCEPTION INDEX(Weighed mean * 100)

23. CPI AND MARKET STRUCTURE(Example: entry threat)

24. FUTURE RESEARCH • Step 1: Response increase • Step 2: Scale analyses • Step 3: Multivariate regressions • Step 4: CPI proposal • Step 5: Longitudinal measures • Step 6: Time series estimations

25. FIVE EXAMPLARY QUESTIONS • How is CPI variation associated with market structure features? • Which competitive forces particularly influence profitability? • To what extent is the CPI determined by organizational and respondent features? • What is the (compensating or strengthening) interaction between different competitive forces? • Are CPI scores (or subscales) leading for market structure changes?