session 9 © furrer 2002-20081 corporate strategy fall 2008 session 9 rivalry and multipoint...

Session 9 © Furrer 2002-2008 1

Corporate StrategyFall 2008

Session 9

Rivalry and Multipoint Competition

Dr. Olivier Furrer

Office: TvA 1-1-11, Phone: 361 30 79e-mail: [email protected]

Office Hours: only by appointment


In July 1969, Michelin announced plans to establish a plant in Canada which would give a foothold in the North American market, attacking market leader Goodyear. As a countermove, Goodyear entered the European market. Michelin continued to increase its market share in North America and attacked Goodyear in Brazil

(Karnani and Wernerfelt, 1985).

Example


Competitive Dynamics

Results from a series of competitive actions and competitive responses among firms competing within a particular industry

Competitive Rivalry

Exists when two or more firms jockey with one another in the pursuit of better market position

Definitions


Multipoint Competition

A situation where firms compete against each other simultaneously in several markets

Definitions (cont’d)


Focus of this Session

• The process by which multimarket (or multibusiness) affects interfirm rivalry

• The factors that moderate the impact of multimarket (multipoint)) competition on interfirm rivalry

• The implications of multimarket (multipoint) competition for corporate- and business-level strategy


Factors Leading to More Complex Rivalry

Declining emphasis on single, domestic markets and increasing emphasis on global and multiple markets

Advances in communication technology make coordination easier across multiple markets

Advances in technology and innovation have increased competitiveness of small and medium sized firms

National barriers are falling due to the number and scope of trade agreements (WTO, NAFTA, EU)


The Rivalry Matrix

Game TheoryWarfare Models,

Multipoint Competition

Scenarios, Simulation, and

Systems DynamicsFrameworks

Decision Variables

Few Many

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Reference.: Furrer, Olivier and Howard Thomas (2000), “The Rivalry Matrix: Understanding Rivalry and Competitive Dynamics,” European Management Journal, 18 (6), 619-637.


Relative Size

SpeedInnovation

Quality

Ability for Action and Response

OutcomesDrivers of

Competitive Behavior

AwarenessMotivationCapability

Competitor Analysis

MarketCommonality

ResourceSimilarity

Interfirm Rivalry:Attack & Response

Likelihood of AttackFirst Mover Incentives

Likelihood of ResponseType of Competitive

Action

Dependence on theMarket

Resource Availability

Actor’s Reputation

Competitive

Slow, Standardor Fast Cycle

Market Types

Competitive

SustainedOutcomes

CompetitiveAdvantage

TemporaryAdvantage

EvolutionaryOutcomes

Entrepreneurial

or Market-PowerGrowth-Oriented

ActionsFeedback

Model of Interfirm Rivalry:Likelihood of Attack and Response

Ref.: Chen, 1996


Multimarket Competition andInterfirm Rivalry:

The Mutual Forbearance Hypothesis

• Mutual forbearance is tacit collusion as a consequence of firms competing in many markets and the resulting increase in their interdependence.

• Tacit collusion, as opposed to direct collusion, which is illegal, is a situation in which two firms understand each other’s motives and strategies and implicitly coordinate to avoid competing intensely.

• Extent theory suggests that two different processes may be responsible for mutual forbearance as a result of higher degree of multimarket contact: familiarity (Baum and Korn, 1999) and deterrence (Bernstein and Whinston, 1990; Edwards, 1955; Porter, 1980).


Multimarket contactBetween focal firm and

rivals

Ability to hurtLarger revenue exposure

to rivals’ actions

Opportunity to hurtRivals’ opportunity to

retaliate in multiple markets

Larger number ofinteractions with rivals

Better understanding ofinterdependence and overlapping marketfortunes with rivals

Greater attention to rivalsin market scanning andcompetitor information

acquisition

Lower expected payofffrom rivalry

Increased deterrenceIncreased familiarity

MUTUAL FOREARANCE

Lower intensity ofcompetition Ref.: Jayachandran et al.,

1999


Relative Size

SpeedInnovation

Quality


OutcomesDrivers of

Competitive Behavior

AwarenessMotivationCapability

Competitor Analysis

MarketCommonality

ResourceSimilarity



Likelihood of ResponseType of Competitive

Action

Dependence on theMarket



Competitive

Slow, Standardor Fast Cycle

Market Types

Competitive

SustainedOutcomes

CompetitiveAdvantage

TemporaryAdvantage

EvolutionaryOutcomes

Entrepreneurial

or Market-PowerGrowth-Oriented

ActionsFeedback


Ref.: Chen, 1996



Drivers of Competitive

Behavior

Motivation

Capability

Do managers understand the key characteristics of competitors?

Awareness

Does the firm have appropriate incentives to attack or respond?

Does the firm have the necessary resources to attack or respond?


Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs

Competitor Analysis Do firms compete with each

other in multiple markets?Market Commonality

For example, airlines price flights similarly, but respond quickly when competitors introduce promotional prices



Competitor Analysis

Resource Similarity

Do competitors possess similar types or amounts of resources?

Firms are less inclined to attack a firm that is likely to retaliate

Firms with dissimilar resources are more likely to attack

Firms with similar resources are more likely to be aware of each other’s competitive moves



Market Commonality andResource Similarity


Multimarket Contact and Intensity of Competition: A Contingency Model

Intensity ofcompetition

Degree ofmultimarket

contact

Sellerconcentration

Organizationalstructure of

competing firms

Resourcesimilarity

Spheres ofinfluence

Ref.: Jayachandran et al., 1999




Likelihood of ResponseType of Competitive Action

Dependence on the Market



Firm Mover advantage can be

substantial



Firms that take an initial competitive action

Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies

Can earn above average profits until competitors respond

Gain customer loyalty, helping to create a barrier to entry by competitors

Advantage depends upon difficulty of imitation

First Mover

Ref.: Lieberman and Montgomery, 1988


Second Mover

Firms that respond to a First Mover’s actions

Second Movers frequently imitate First Movers

Speed of response often dictates success

Should evaluate customers’ response before moving

“Fast” Second Movers can capture some of initial customers and develop some brand loyalty

Avoid some of the risks associated with First Move

Must possess necessary capabilities to imitate

Ref.: Lieberman and Montgomery, 1988




Likelihood of ResponseType of Competitive Action

Dependence on the Market



Whether a Whether a competitor is competitor is

likely to respond likely to respond depends on several depends on several

key factorskey factors



Types of Competitive Actions

TacticalActions Relatively easy to implement

Relatively easy to reverse

Undertaken to “fine tune” strategy

Price cutExample

Strategic Actions

Significant commitments of specific & distinctive organizational resourcesDifficult to implement

Difficult to reverse

Major AcquisitionExample


Gauging the Likelihood of Response

Easier to respond to

Require fewer resources to mount a response


Market leaders are more likely to be copied

“Risk taking” firms are less likely to be copied

“Price Predators” are less likely to be copied

Type of Competitive Action -Tactical or Strategic


Firms that are more dependent on a single industry are more likely to respond than are multimarket firms

Industry dependent firms will likely respond to either strategic or tactical actions

Competitor Resources

Smaller firms are more likely to respond to tactical actionsLimited resources may lead to alternatives such as Strategic Alliances

Gauging the Likelihood of Response

Market Dependence


Relative Size

Quality

Innovation

Speed

Firm size can have opposing effects on competitive dynamics


Large firms may exert market power over rivals and erect barriers to entry against smaller competitors

However, smaller competitors may be more nimble and innovative


session 9 © furrer 2002-20081 corporate strategy fall 2008 session 9 rivalry and multipoint...

Documents

competitive responses

european market

market share

multimarket competition

olivier furrer office

eu slide

appointment slide

competitive dynamics