Understanding competitive

rivalry
Session 5

1
Air Deccan vs others in the airlines
sector

2
 JIO vs others
• Are dynamics different in markets with
network externalities- winner takes all?

3
I phone ios and touchscreen vs
nokia and android/samsung

4
5
 Strategic groups
• Strategic Groups
– Set of firms emphasizing similar strategic dimensions to
use a similar strategy-Organizations within an industry
with similar strategic characteristics, following similar
strategies or competing on similar bases
– Implications
• Because firms within a group compete (offer similar
products) rivalry can be intense – the greater the rivalry the
greater the threat to each firm’s profitability
• Strengths of the 5 forces differs across strategic groups
• The closer the strategic groups, in terms of strategy, the
greater the likelihood of rivalry
6
 Strategic groups
• Use of the concept
– To understand who are the most direct
competitors, on what basis rivalry is likely to take
place and how one group differs from another
– How its likely for one firm to move from one
strategic group to another

7
 Some characteristics for identifying strategic groups
• Extent of product or service diversity
• Extent of geographical coverage
• Number of market segments served
• Distribution channels used
• Extent (number) of branding
• Marketing effort (- advertising spread, size of salesforce)
• Extent of vertical integration
• Product or service quality
• Technological leadership (a leader or follower)
• Relationship to influence groups (e.g government)
• Size of organization

8
Some bases of segmentation/groups

9
 Market segmentation
• Means of understanding consumers better
• Different bases of segmentation- using the
most appropriate
• Relative market share- within market segment
• How market segments can be identified and
serviced

10
 Competitor analysis and organization
response:
• What drives competitors
• Shown by organization's future objectives
– What the competitor is doing and can do
• Revealed in organization's current strategy
– What the competitor believes about the industry
• Shown in organization's assumptions
– What the competitor’s capabilities are
• Shown by organization's strengths and weaknesses
• Competitor intelligence-Set of data and information the firm
gathers to better understand and anticipate competitors'
objectives, strategies, assumptions, and capabilities

11
Identifying organization’s competitive
positions
• Attractiveness of different segments
• Relative market share
• Identifying strategic competences
• Focusing

12
 Strategic gaps
• Opportunities in substitute industries
• Opportunities in other strategic groups or
strategic spaces
• Opportunities in the chain of buyers
• Opportunities for complementary products
and services
• Opportunities in new market segments
• Opportunities over time
13
• Competitors
– Firms operating in the same market, offering similar
products and targeting similar customers
• Competitive Rivalry
– Ongoing set of competitive actions and competitive
responses occurring between competitors as they contend
with each other for an advantageous market position
• Competitive Behavior
– Set of competitive actions and competitive responses the
firm takes to build or defend its competitive advantages
and to improve its market position

14
• Multimarket Competition
– Firms competing against one another in several product or
geographic markets
• Competitive Dynamics
– Total set of actions and responses of all firms competing
within a market

15
• Model of Competitive Rivalry
– Over time firms take competitive actions/reactions
– Pattern shows firms are mutually interdependent
– Firm level rivalry is usually dynamic and complex
– Foundation for successfully building and using capabilities
and core competencies to gain an advantageous market
position

16
 Competitor analysis
– 2 components to assess: Market Commonality and
Resource Similarity
– The question: ‘To what extent are firms competitors’?
• Number of markets in which firms compete against each other
• Competitor: High market commonality & resource similarity
• I.e., Dell and HP are direct competitors
– Direct competition does not always imply intense rivalry

17
• Market Commonality
– Each industry composed of various markets which can be
subdivided into (segments)
– I.e., Financial industry
• Resource Similarity
– Extent to which firm’s tangible/intangible resources are
comparable to competitor’s in type and amount
• I.e., FedEx and UPS – both have efficient operations and focus on
cost reduction
• Combination of market commonality & resource
similarity indicate a firm’s direct competitors
18
 Industry Market Market Product Geographic
Segment Segment Market
Financial Insurance Commercial, Health, life East, west
Consumer
Brokerage
svcs
Banks
Transportation Commercial
Ground

19
• Market commonality & resource similarity
influence three drivers (awareness, motivation
and ability) of competitive behavior
– Awareness
• Prerequisite to any competitive action
• Extent competitors recognize degree of mutual interdependence that
results from market commonality and resource similarity
– Motivation
• Firm's incentive to take action, or to respond to a competitor's
attack, as it relates to perceived gains and losses
– Ability
• Firm's resources that allow competitive action and flexibility
responsiveness

20
• Other influences include resource dissimilarity
– The greater the resource imbalance between
acting firm and competitors or potential
responders, the greater will be the delay in
response
• I.e., Wal-Mart initially used cost leadership strategy to
compete only in small communities
• Created a logistics systems and extremely efficient
purchasing practices as competitive advantages

21
• Important to understand competitor’s
awareness, motivation and ability in order to
predict the likelihood of an attack – study
‘likelihood of attack’ factors
• What are the strategic and tactical actions?
– Strategic actions/responses: market-based moves that
signify a significant commitment of organizational
resources to pursue a specific strategy
• Difficult to implement and reverse
– Tactical actions/responses: market-based moves that
involve fewer resources to fine-tune a strategy that is
already in place
• Easy to implement and reverse

22
• What are the strategic and tactical actions?
(Cont’d)

– Competitive Action
• Strategic or tactical action firm takes to build or defend its
competitive advantages or improve its market position
– Competitive Response
• Strategic or tactical action the firm takes to counter effects of a
competitor's action
– Tactical Action (or Response)
• Market-based move the firm takes in order to fine-tune a strategy

23
 Likelihood of attack
• Three possible ‘likelihood of attack’ actions
– 1. First Mover Incentives
– 2. Organizational Size
– 3. Quality

24
• Three possible ‘likelihood of response’ actions
(Cont’d)

– 1. First Mover Incentives

• Firm that takes an initial competitive action to build or to defend
its competitive advantages or to improve its market position
• Must have readily available resources
– Slack – buffer or cushion provided by actual or obtainable resources
not currently used by an organization, resources in excess of the
minimum needed to produce a given level of output

25
• Three possible ‘likelihood of response’ actions
(Cont’d)
– 1. First Mover Incentives (Cont’d)
• Often builds upon a strategic foundation of superior
research and development skills
• Tends to be aggressive and willing to experiment with
innovation
• Tends to take higher, yet reasonable, risks
• Needs to have liquid resources (slack) that can be quickly
allocated to support actions
• Benefits can be substantial, but remember the learning
curve!

26
• Three possible ‘likelihood of response’ actions (Cont’d)

– 1. First Mover Incentives: Responses to

• Second Mover
– Responds to first mover, typically through imitation
– Is more cautious than first movers
– Tends to study customer reactions to product innovations
– Tends to learn from the mistakes of first movers, reducing its risks
– Takes advantage of time to develop processes and technologies that are
more efficient than first movers, reducing its costs
– Will not benefit from first mover advantages, lowering potential returns
• Late Mover
– Responds to market opportunities only after considerable time has elapsed
since first and second movers have taken action
– Has substantially reduced risks and returns
27
• Three possible ‘likelihood of response’ actions
(Cont’d)

– 2. Organizational Size
• Small firms
– Act as nimble and flexible competitors
– Rely on speed and surprise to defend their competitive advantage
– Have greater variety of competitive behavior options available
• Large firms
– Often have greater slack
– Have greater likelihood to initiate competitive and strategic actions over
time
– Tend to rely on a limited variety of competitive actions, which can
ultimately reduce their competitive success
28
• Three possible ‘likelihood of response’ actions
(Cont’d)

– 3. Quality
• Customer perception that the firm's goods or services perform in
ways that are important to customers, meeting or exceeding their
expectations

29
• Additional factors affect the likelihood a firm will
competitively respond to a competitor’s actions:
– 1. Types and effectiveness of the competitive action
– 2. Actor’s Reputation
• Actor: Firm taking an action or response (in the context of competitive
rivalry)
• Reputation: positive or negative attribute ascribed by one rival to
another based on past competitive behavior
– 3. Dependence on the Market
• Extent to which a firm's revenues or profits are derived from a particular
market
• Finally, if the action significantly strengthens or weakens the
firm's competitive position
30
• . Slow-Cycle Markets
– Markets in which the firm's competitive advantages are
shielded from imitation for long periods of time, and in
which imitation is costly
– Build a one-of-a-kind competitive advantage which creates
sustainability (I.e., proprietary and difficult for competitors
to understand)
– Once a proprietary advantage is developed, competitive
behavior should be oriented to protecting, maintaining,
and extending that advantage
– Organizational structure should be used to effectively
support strategic efforts
31
• Fast-Cycle Markets
– Markets in which the firm's capabilities that contribute to
competitive advantages are not shielded from imitation and
where imitation is often rapid and inexpensive
– Focus: learning how to rapidly and continuously develop new
competitive advantages that are superior to those they
replace (creating innovation)
– Avoid loyalty to any one product, possibly cannibalizing their
own current products to launch new ones before competitors
learn how to do so through successful imitation
– Continually try to move on to another temporary competitive
advantage before competitors can respond to the first one

32
 Fast cycle- leading to
hypercompetition
• Action- response gaps reducing continuously
• Very less focus on consolidation
• This chain of events- termed as ‘Hyper-
competition’ by D’Aveni

33
• Standard-Cycle Markets
– Markets where firm’s competitive advantages are
moderately shielded from imitation and where
imitation is moderately costly
– Competitive advantages partially sustained as
quality is continuously upgraded
– Seek to serve many customers and gain a large
market share
– Gain brand loyalty through brand names
– Careful operational control / manage a consistent
experience for the customer
34
Competitor mapping: dangers of becoming
too much competitor focused

35
Using game theoretical models

36
 Basic Concepts
• Any situation in which individuals must make
strategic choices and in which the final
outcome will depend on what each person
chooses to do can be viewed as a game.
• Game theory models seek to portray complex
strategic situations in a highly simplified
setting.

37
 Basic Concepts
• All games have three basic elements:
– Players
– Strategies
– Payoffs
• Players can make binding agreements in
cooperative games, but can not in
noncooperative games, which are studied in
this chapter.

38
 Players
• A player is a decision maker and can be
anything from individuals to entire nations.
• Players have the ability to choose among a
set of possible actions.
• Games are often characterized by the fixed
number of players.
• Generally, the specific identity of a play is
not important to the game.

39
 Strategies
• A strategy is a course of action available to a
player (Hence meaning of strategy in game
theory is different from strategy in SM).
• Strategies may be simple or complex.
• In noncooperative games each player is
uncertain about what the other will do since
players can not reach agreements among
themselves.

40
 Payoffs
• Payoffs are the final returns to the players at
the conclusion of the game.
• Payoffs are usually measure in utility although
sometimes measure monetarily.
• In general, players are able to rank the payoffs
from most preferred to least preferred.
• Players seek the highest payoff available.

41
 Equilibrium Concepts
• In the theory of markets an equilibrium
occurred when all parties to the market had
no incentive to change his or her behavior.
• When strategies are chosen, an equilibrium
would also provide no incentives for the
players to alter their behavior further.
• The most frequently used equilibrium concept
is a Nash equilibrium.

42
 Nash Equilibrium
• A Nash equilibrium is a pair of strategies
(a*,b*) in a two-player game such that a* is an
optimal strategy for A against b* and b* is an
optimal strategy for B against A*.
– Players can not benefit from knowing the
equilibrium strategy of their opponents.
• Not every game has a Nash equilibrium, and
some games may have several.

43
 An Illustrative Advertising Game
• Two firms (A and B) must decide how much to
spend on advertising
• Each firm may adopt either a higher (H)
budget or a low (L) budget.

44
 An Illustrative Advertising Game
• A makes the first move by choosing either H
or L at the first decision “node.”
• Next, B chooses either H or L, but the large
oval surrounding B’s two decision nodes
indicates that B does not know what choice A
made.
• The game is shown in extensive (tree) form

45
The Advertising Game in Extensive Form

7,5

H 5,4
L

A L 6,4
B
H

H 6,3
46
 An Illustrative Advertising Game
• The numbers at the end of each branch,
measured in thousand or millions of dollars,
are the payoffs.
– For example, if A chooses H and B chooses L,
profits will be 6 for firm A and 4 for firm B.
• The game in normal (tabular) form is shown in
Table 12.1 where A’s strategies are the rows
and B’s strategies are the columns.

47
 The Advertising Game in Normal Form

B’s Strategies
L H
L 7, 5 5, 4
A’s Strategies H 6, 4 6, 3

48
 Dominant Strategies and Nash
Equilibria
• A dominant strategy is optimal regardless of
the strategy adopted by an opponent.
– As shown, the dominant strategy for B is L since
this yields a larger payoff regardless of A’s
choice.
• If A chooses H, B’s choice of L yields 5, one better
than if the choice of H was made.
• If A chooses L, B’s choice of L yields 4 which is also
one better than the choice of H.

49
 Dominant Strategies and Nash
Equilibria
• A will recognize that B has a dominant
strategy and choose the strategy which will
yield the highest payoff, given B’s choice of L.
– A will also choose L since the payoff of 7 is one
better than the payoff from choosing H.
• The strategy choice will be (A: L, B: L) with
payoffs of 7 to A and 5 to B.

50
 Dominant Strategies and Nash
Equilibria
• Since A knows B will play L, A’s best play is
also L.
• If B knows A will play L, B’s best play is also
L.
• Thus, the (A: L, B: L) strategy is a Nash
equilibrium: it meets the symmetry
required of the Nash criterion.
• No other strategy is a Nash equilibrium.

51
An Example of a Two-Player
Sequential
Player B Game

L R

U
(3,9) (1,8)

Player A
D (0,0)
(2,1)
(U,L) and (D,R) are both Nash equilibria for
the game.
An Example of a Two-Player Sequential Game
Player B
L R

U
(3,9) (1,8)
Player A
D (0,0)
(2,1)
(U,L) and (D,R) are both Nash equilibria for
the game. But which will we see? Notice
that (U,L) is preferred to (D,R) by both
players. Must we then see (U,L) only?
 The Prisoner’s Dilemma
• The Prisoner’s Dilemma is a game in which
the optimal outcome for the players is
unstable.
• The name comes from the following situation.
– Two people are arrested for a crime.
– The district attorney has little evidence but is
anxious to extract a confession.

54
 The Prisoner’s Dilemma
– The DA separates the suspects and tells each, “If
you confess and your companion doesn’t, I can
promise you a six-month sentence, whereas your
companion will get ten years. If you both confess,
you will each get a three year sentence.”
– Each suspect knows that if neither confess, they
will be tried for a lesser crime and will receive
two-year sentences.

55
 The Prisoner’s Dilemma

– The confess strategy dominates for both players

so it is a Nash equilibria.
– However, an agreement not to confess would
reduce their prison terms by one year each.
– This agreement would appear to be the rational
solution.

56
 The Prisoner’s Dilemma
B
Confess Not confess
A: 3 years A: 6 months
Confess
B: 3 years B: 10 years
A A: 10 years A: 2 years
Not confess
B: 6 months B: 2 years

57
 The Prisoner’s Dilemma
• The “rational” solution is not stable, however,
since each player has an incentive to cheat.
• Hence the dilemma:
– Outcomes that appear to be optimal are not
stable and cheating will usually prevail.

58
 Coke vs Pepsi
• Why is this industry so profitable?

59
 Compare the profitability of the concentrate business to the
bottling business, why is the profitability so different

• 5 force analysis in concentrates

60
Five force analysis in bottling

61
How has competition between coke and pepsi
affected their profits

62
 How has competition between coke and pepsi affected their profits
High level of market commonality and resource similarity

• Competition is based on things like shelf space, advertising and brand

name, selective discounting on the downstream product (not on the upstream
product), not on concentrate prices

63
• How can they maintain their profits in the context of the flattening demand and
the increased demand for non csds

64