STRATEGY

 
ACTIONS:  
STRATEGY  
FORMULATION  
Business  Level  
Strategy  
A  business-­‐level  strategy  is  
an  integrated  and  coordinated  set  
of  commitments  and  acFons  the  
firm  uses  to  gain  a  compeFFve  
advantage  by  exploiFng  core  
competencies  in  specific  product  
markets.  
 ü  how  it  intends  to  compete  in  
individual  product  markets  
 
ü  choices  are  important  because  
long-­‐term  performance  is  linked  
to  a  firm’s  strategies  
Choices  
ü  the  choices  about  how  the  firm  
will  compete  can  be  difficult  
given  the  complexity  of  
successfully  compeFng  in  the  
global  economy    
 Every  firm  must  form  and  use  a  
business-­‐level  strategy  

Other  strategies  
•  corporate-­‐level,     every  firm  
•  merger  and   may  not  use  
acquisi5on,     all  the  
•  interna5onal,  and     strategies  
•  coopera5ve  
 Customers  are  the  
founda5on  of  successful  
business-­‐level  strategies  

When  considering  customers,  a  firm  

simultaneously  examines  three  issues:  
1.   who  will  be  served,    
2.   what  needs  those  target  customers  
have  that  it  will  sa5sfy,  and    
3.   how  those  needs  will  be  sa5sfied  
Customers:  Their  RelaFonship  with  
Business-­‐Level  Strategies  

Returns  earned  
from  relaFonships  
Strategic  
saFsfied  a  
group  of  
compeFFveness  
=
customers  

compeFFve   compeFFve   compeFFve  

advantage   advantage   advantage  
Three  dimension  of  firms’  relaFonships  with  
customers  
1.  Reach  -­‐  concerned  with  the  firm’s  access  and  
connec5on  to  customers.  

2.  Richness  -­‐  concerned  with  the  depth  and  

detail  of  the  two-­‐way  flow  of  informa5on  
between  the  firm  and  the  customer.  (e.g.  
internet  technology  and  e-­‐commerce  
transac5ons)    

3.  AffiliaFon  -­‐  concerned  with  facilita5ng  useful  

interac5ons  with  customers.  
Who:  Determining  the  Customers  to  Serve  

Companies  divide  customers  into  groups  

based  on  differences  in  the  customers’  needs  
to  make  this  decision.    

Market  SegmentaFon  

is  a  process  that  clusters  

people  with  similar  needs  into  
individual  and  idenFfiable  
groups.  
Basis  for  Customer  SegmentaFon  
Consumer  Markets  
1.  Demographic  factors  (age,  income,  sex,  etc.)  
2.  Socioeconomic  factors  (social  class,  stage  in  the  
family  life  cycle)  
3.  Geographic  factors  (cultural,  regional,  and  naFonal  
differences)  
4.  Psychological  factors  (lifestyle,  personality  traits)  
5.  ConsumpFon  pa]erns  (heavy,  moderate,  and  light  
users)  
6.  Perceptual  factors  (benefit  segmentaFon,  
perceptual  mapping)  
 Basis  for  Customer  SegmentaFon  

Industrial  Markets  
1.  End-­‐use  segments  (idenFfied  by  SIC  code)  
2.  Product  segments  (based  on  technological  differences  
or  producFon  economics)  
3.  Geographic  segments  (defined  by  boundaries  between  
countries  or  by  regional  differences  within  them)  
4.  Common  buying  factor  segments  (cut  across  product  
market  and  geographic  segments)  
5.  Customer  size  segments  
What:  Determining  Which  Customer  Needs  to  
SaFsfy  

Needs  (what)  are  related  to  a  product’s  

benefits  and  features.  
A  basic  need  of  all  customers  is  to  buy  products  
that  create  value  for  them  
Value  that  goods  or  services  provide  are  either  
low  cost  with  acceptable  features  or  highly  
differenFated  features  with  acceptable  cost.  

“AnFcipate  changes  in  customers’  needs”  

How:  Determining  Core  Competencies  
Necessary  to  SaFsfy  Customer  Needs  

Firms  use  core  competencies  

(how)  to  implement  value-­‐
creaFng  strategies  and  thereby  
saFsfy  customers’  needs.  

Only  those  firms  with  the  capacity  to  

conFnuously  improve,  innovate,  and  upgrade  
their  competencies  can  expect  to  meet  and  
hopefully  exceed  customers’  expectaFons  across  
Fme.  
All  organizaFons  must  use  their  
capabiliFes  and  core  competencies  
(the  how)  to  saFsfy  the  needs  (the  
what)  of  the  target  group  
of  customers  (the  who)  the  firm  has  
chosen  to  serve.  
The  Purpose  of  a  Business-­‐
Level  Strategy  
To  create  differences  between  the  firm’s  
posiFon  and  those  of  its  compeFtors.  

A  firm  must  decide  whether  it  intends  to  

perform  ac2vi2es  differently  or  to  perform  
different  ac2vi2es.  
 Successful  use  of  a  business-­‐level  
strategy  results  only  when  the  firm  
learns  how  to  integrate  the  acFviFes  
it  performs  in  ways  that  create  
superior  value  for  customers.  

•  Firms  develop  an  acFvity  map  to  show  how  they  integrate  
the  ac5vi5es  they  perform.  
 
•  Firms  using  the  cost  leadership  strategy  must  understand  that  
in  terms  of  sources  of  differenFaFon  that  accompany  the  
cost  leader’s  product,  the  customer  defines  acceptable.  
 
•  Fit  among  acFviFes  is  a  key  to  the  sustainability  of  
compe55ve  advantage  for  all  firms  
“Strategic  fit  among  many  acFviFes  is  
fundamental  not  only  to  compeFFve  
advantage  but  also  to  the  sustainability  of  that  
advantage.    It  is  harder  for  a  rival  to  match  an  
array  of  interlocked  acFviFes  than  it  is  merely  
to  imitate  a  parFcular  sales-­‐force  approach,  
match  a  process  technology,  or  replicate  a  set  
of  product  features.  PosiFons  built  on  systems  
of  acFviFes  are  far  more  sustainable  than  
those  built  on  individual  acFviFes.”  

-­‐  Michael  Porter    

 Types  of  Business-­‐Level  Strategies  
Five  business-­‐level  strategies  to  establish  and  
defend  their  desired  strategic  posiFon  against  
compeFtors:  
1. cost  leadership,    
2. differen2a2on,    
3. Focused  cost  leadership,    
4. focused  differen2a2on,  and    
5. integrated  cost  leadership/  
differen2a2on  
Five  Business-­‐Level  Strategies  
When  selecFng  a  business-­‐level  strategy,  firms  
evaluate  two  types  of  potenFal  compeFFve  
advantages:    
 
“lower  cost  than  rivals,  or  the  ability  to  
differenFate  and  command  a  premium  price  
that  exceeds  the  extra  cost  of  doing  so.”  
Two  types  of  compeFFve  scopes:  

1.   Broad  target  market  seek  to  use  their  

compeFFve  advantage  on  an  industry-­‐wide  
basis.  
2.  A  narrow  compeFFve  scope  means  that  the  
firm  intends  to  serve  the  needs  of  a  narrow  
target  customer  group.  
The  effecFveness  of  each  strategy  is  
con5ngent  both  on  the  opportuni5es  and  
threats  in  a  firm’s  external  environment  and  
on  the  strengths  and  weaknesses  derived  
from  the  firm’s  resource  porHolio.  
Cost  Leadership  Strategy  

is  an  integrated  set  of  acFons  

taken  to  produce  goods  or  services  
with  features  that  are  acceptable  
to  customers  at  the  lowest  cost,  
relaFve  to  that  of  compeFtors.  

Firms  using  the  cost  leadership  strategy  

commonly  sell  standardized  goods  or  services  
(but  with  compeFFve  levels  of  differenFaFon)  
to  the  industry’s  most  typical  customers.  
 CriFcal  for  success  
 
Process  innovaFons  
•  newly  designed  producFon    
•  distribuFon  methods  and  
techniques    

Cost  leaders  concentrate  on  finding  ways  to  lower  

their  costs  relaFve  to  compeFtors  by  constantly  
rethinking  how  to  complete  their  primary  and  
support  acFviFes  to  reduce  costs  sFll  further  while  
maintaining  compeFFve  levels  of  differenFaFon.  
Cost  leaders  also  carefully  examine  all  
support  acFviFes  to  find  addiFonal  
sources  of  potenFal  cost  reducFons.    
 
Developing  new  systems  for  finding  the  
opFmal  combinaFon  of  low  cost  and  
acceptable  levels  of  differenFaFon  in  
the  raw  materials  required  to  produce  
the  firm’s  goods  or  services  is  an  
example  of  how  the  procurement  
support  acFvity  can  facilitate  successful  
use  of  the  cost  leadership  strategy.  
Examples  of  
Value-­‐CreaFng  
AcFviFes  
Associated  with  
the  Cost  
Leadership  
Strategy  
 Finance  
Manage  financial  resources  to  ensure  
posiFve  cash  flow  and  low  debt  costs  

Human  Resources  
Develop  policies  to  ensure  efficient  hiring  
Support   and  retenFon  to  keep  costs  low.  
FuncFons   Implement  training  to  ensure  high  
employee  efficiency  

Management  InformaFon  System  

Develop  and  maintain  cost-­‐effecFve  MIS  
operaFons  

Examples  of  Value-­‐CreaFng  AcFviFes  Associated  

with  the  Cost  Leadership  Strategy  
 Customers  
Value  Chain  AcFviFes  
Supply-­‐Chain   OperaFons   DistribuFon   MarkeFng   Follow-­‐up  
Mgt.         (Including   Service  
  Build   Use  of  low-­‐ Sales)    
EffecFve   economies   cost  modes     Efficient  
relaFonships   of  scale  and   of   Targeted   follow-­‐up  
with   efficient   transporFng   adverFsing   to  reduce  
suppliers  to   operaFons   goods  and   and  low   returns  
maintain   (e.g.   delivery   prices  for  
efficient  flow   producFon   Fmes  that   high  sales  
of  goods   processes).   produce  low   volumes  
(suppliers  for   costs  
operaFons  
 Cost  leadership  strategy  using  the  Five  Forces  

Rivalry  with  ExisFng  CompeFtors  

Rivals  hesitate  to  compete  on  the  basis  of  price,  
especially  before  evaluaFng  the  potenFal  
outcomes  of  such  compeFFon.  

Bargaining  Power  of  Buyers  (Customers)  

Powerful  customers  can  force  a  cost  leader  to  
reduce  its  prices,  but  not  below  the  level  at  which  
the  cost  leader’s  next-­‐most-­‐efficient  industry  
compeFtor  can  earn  average  returns.  
Bargaining  Power  of  Suppliers  
•  Cost  leaders  want  to  constantly  increase  their  
margins  by  driving  their  costs  lower.  
•  Higher  gross  margins  relaFve  to  those  of  
compeFtors  make  it  possible  for  the  cost  
leader  to  absorb  its  suppliers’  price  increases.  

PotenFal  Entrants  
New  entrants  must  be  willing  and  able  to  accept  
no-­‐be]er-­‐than  average  returns  unFl  they  gain  
the  experience  required  to  approach  the  cost  
leader’s  efficiency.  
Product  SubsFtutes  

A  product  subsFtute  becomes  an  issue  for  the  

cost  leader  when  its  features  and  characterisFcs,  
in  terms  of  cost  and  differenFated  features,  are  
potenFally  a]racFve  to  the  firm’s  customers.    
 
To  retain  customers,  it  can  reduce  the  price  of  its  
good  or  service.  
CompeFFve  Risks  of  the  Cost  Leadership  Strategy  
1. The  processes  used  by  the  cost  leader  to  
produce  and  distribute  its  good  or  service  could  
become  obsolete  because  of  compeFtors’  
innovaFons.  

2. Too  much  focus  by  the  cost  leader  on  cost  

reducFons  may  occur  at  the  expense  of  trying  
to  understand  customers’  percepFons  of  
“compeFFve  levels  of  differenFaFon.”  
3. ImitaFon  is  a  final  risk  of  the  cost  leadership  
strategy.  
DifferenFaFon  Strategy  
-­‐  an  integrated  set  of  acFons  taken  to  produce  
goods  or  services  (at  an  acceptable  cost)  that  
customers  perceive  as  being  different  in  ways  
that  are  important  to  them.  

DifferenFators  target  customers  

for  whom  value  is  created  by  the  
manner  in  which  the  firm’s  
products  differ  from  those  
produced  and  marketed  by  
compe5tors.  
Through  the  differenFaFon  strategy,  the  firm  
produces  non  standardized  (that  is,  unique)  
products  for  customers  who  value  differenFated  
features  more  than  they  value  low  cost.  

E.g.  Superior  product  

reliability  and  durability  and  
high-­‐performance  sound  
systems  are  among  the  
differenFated  features  of  
Toyota  Motor  CorporaFon’s  
Lexus  products.  

The  Lexus  promoFonal  statement  —  

“We  pursue  perfecFon,  so  you  can  pursue  living”  
ConFnuous  success  with  the  differenFaFon  
strategy  results  when  the  firm  consistently  
upgrades  differenFated  features  that  
customers  value  and/or  creates  new  valuable  
features  (innovates)  without  significant  cost  
increases.  
Factors  for  success  
 
ü constantly  change  their  product  lines  
ü offer  a  porholio  of  products  that  
complement  each  other  
ü consider  product  design  
ü concentrates  on  invesFng  in  and  
developing  features  that  differenFate  a  
product  in  ways  that  create  value  for  
customers.  
Examples  of  
Value-­‐CreaFng  
AcFviFes  
Associated  
with  the  
DifferenFaFon  
Strategy  
 Finance  
Make  long-­‐term  investments  in  development  of  new  
technology  and  innovaFve  products  in  markeFng  and  
adverFsing,  and  in  ability  to  provide  excepFonal  service.  
Support  FuncFons  

Human  Resources  
Recruit  highly  qualified  employees  and  invest  in  training  
that  provides  them  with  the  latest  technological  
knowledge  and  the  capabiliFes  to  provide  breakthrough  
services.  

Management  InformaFon  System  

Acquire  and  develop  excellent  informaFon  systems  that  
provide  up-­‐to-­‐date  market  intelligence  and  real-­‐Fme  
informaFon  in  all  areas  for  strategic  and  major  
operaFonal  decisions.  
Examples  of  Value-­‐CreaFng  AcFviFes  Associated  with  the  
DifferenFaFon  Strategy  
 Customers  
Value  Chain  AcFviFes  
Supply-­‐Chain   OperaFons   DistribuFon   MarkeFng   Follow-­‐up  
Mgt.         (Including   Service  
  Manufacture   Provide   Sales)    
Develop  and   high-­‐quality   accurate     Have  
maintain   goods.   and  Fmely   Build  strong   specially  
posiFve   Develop   delivery  of   posiFve   trained  unit  
relaFon  with   flexible   goods  to   relaFonships   to  provide  
major   systems  that   customers.   with   aker  sales  
suppliers.   allow  rapid   customers.   service.  
Ensure  the   response  to   Invest  in   Ensure  high  
receipt  of   customers’   effecFve   customer  
high  quality   changing   promoFon  &   saFsfacFon.  
supplies.     needs.   adverFsing  
programs.  
 DifferenFaFon  strategy  using  the  Five  Forces  

Rivalry  with  ExisFng  CompeFtors  

Customers  tend  to  be  loyal  purchasers  of  products  

differenFated  in  ways  that  are  meaningful  to  them.  

Bargaining  Power  of  Buyers  (Customers)  

•  The  uniqueness  of  differenFated  goods  or  services  

reduces  customers’  sensiFvity  to  price  increases.    
•  Customers  are  willing  to  accept  a  price  increase  when  a  
product  sFll  saFsfies  their  perceived  unique  needs  be]er  
than  does  a  compeFtor’s  offering.  
Bargaining  Power  of  Suppliers  

•  The  differenFaFon  strategy  charges  a  

premium  price  for  its  products,  suppliers  must  
provide  high-­‐quality  components,  driving  up  
the  firm’s  costs.  
•  Because  of  buyers’  relaFve  insensiFvity  to  
price  increases,  the  differenFated  firm  might  
choose  to  pass  the  addiFonal  cost  of  supplies  
on  to  the  customer  by  increasing  the  price  of  
its  unique  product.  
PotenFal  Entrants  

Customer  loyalty  and  the  need  to  overcome  the  

uniqueness  of  a  differenFated  product  present  
substanFal  barriers  to  potenFal  entrants.  
Entering  an  industry  under  these  
condiFons  typically  demands  significant  
investments  of  resources  and  paFence  while  
seeking  customers’  loyalty.  
Product  SubsFtutes  

•  Firms  selling  brand-­‐name  goods  and  services  to  

loyal  customers  are  posiFoned  effecFvely  
against  product  subsFtutes.  

•  Without  brand  loyalty  face  a  higher  probability  

of  their  customers  switching  either  to  products  
that  offer  differenFated  features  that  serve  the  
same  funcFon.  
 CompeFFve  Risks  of  the  DifferenFaFon  Strategy  
1.  Customers  might  decide  that  the  price  differenFal  
between  the  differenFator’s  product  and  the  cost  leader’s  
product  is  too  large.  

2.  A  firm’s  means  of  differenFaFon  may  cease  to  provide  

value  for  which  customers  are  willing  to  pay.  

3.  Experience  can  narrow  customers’  percepFons  of  the  

value  of  a  product’s  differenFated  features.  

4.  Counterfeits  are  those  products  bearing  a  trademark  that  

is  idenFcal  to  or  indisFnguishable  from  a  trademark  
registered  to  another  party,  thus  infringing  the  rights  of  
the  older  of  the  trademark  
Focus  Strategies  

-­‐  is  an  integrated  set  of  acFons  taken  to  produce  
goods  or  services  that  serve  the  needs  of  a  parFcular  
compeFFve  segment.  

Examples  of  specific  market  segments  that  can  be  targeted  

by  a  focus  strategy  include:    
 
(1)   a  parFcular  buyer  group  (e.g.,  youths  or  senior  ciFzens),    
(2)   a  different  segment  of  a  product  line  (e.g.,  products  for  
professional  painters  or  the  do-­‐it-­‐yourself  group),  or    
(3)   a  different  geographic  market  (e.g.,  northern  
or  southern  Italy).  
The  essence  of  the  focus  strategy    

“is  the  exploitaFon  of  a  narrow  

target’s  differences  from  the  
balance  of  the  industry.”  
Focused  Cost  Leadership  Strategy  

The  acFviFes  required  to  use  the  focused  cost  leadership  

strategy  are  virtually  idenFcal  to  those  of  the  industry-­‐
wide  cost  leadership  strategy.  

Focused  DifferenFaFon  Strategy  

The  acFviFes  required  to  use  the  focused  differenFaFon  

strategy  are  largely  idenFcal  to  those  of  the  industry-­‐
wide  differenFaFon  strategy  

The  only  difference  is  in  the  firm’s  

compeFFve  scope;  the  firm  focuses  on  a  
narrow  industry  segment.  
 CompeFFve  Risks  of  the  Focus  Strategy  
1.  A  compeFtor  may  be  able  to  focus  on  a  more  narrowly  
defined  compeFFve  segment  and  “ouhocus”  the  focuser.  
(e.g.  Ikea)  

2.  A  company  compeFng  on  an  industry-­‐wide  basis  may  

decide  that  the  market  segment  served  by  the  firm  using  a  
focus  strategy  is  a]racFve  and  worthy  of  compeFFve  
pursuit.  (e.g.  Ann  Taylor,  Liz  Claiborne)  

3.  The  needs  of  customers  within  a  narrow  compeFFve  

segment  may  become  more  similar  to  those  of  industry-­‐
wide  customers  as  a  whole  over  Fme.  (e.g.  Body  Shop)  
Integrated  Cost  Leadership/  DifferenFaFon  Strategy  

-­‐  a  number  of  firms  engage  in  primary  and  support  

acFviFes  that  allow  them  to  simultaneously  pursue  
low  cost  and  differenFaFon.  

-­‐  The  objecFve  of  using  this  strategy  is  to  efficiently  
produce  products  with  some  differenFated  
features.  

-­‐  The  integrated  cost  leadership/differenFaFon  

strategy  usually  adapt  quickly  to  new  technologies  
and  rapid  changes  in  their  external  environments.  
Flexibility  is  required  for  firms  to  complete  primary  and  
support  acFviFes  in  ways  that  allow  them  to  use  the  
integrated  cost  leadership/differenFaFon  strategy  in  order  
to  produce  somewhat  differenFated  products  at  relaFvely  
low  costs.    
 
Flexible  manufacturing  systems,  informaFon  networks,  and  
total  quality  management  systems  are  three  sources  of  
flexibility  that  are  parFcularly  useful  for  firms  trying  to  
balance  the  objecFves  of  conFnuous  cost  reducFons  and  
conFnuous  enhancements  to  sources  of  differenFaFon  as  
called  for  by  the  integrated  strategy.  
A  flexible  manufacturing  system  (FMS)  increases  the  
“flexibili5es  of  human,  physical,  and  informa5on  resources”  
 
InformaFon  Networks  -­‐  By  linking  companies  with  their  
suppliers,  distributors,  and  customers,  informa5on  networks  
provide  another  source  of  flexibility.  
 
Total  quality  management  (TQM)  is  a  “managerial  innova5on  
that  emphasizes  an  organiza5on’s  total  commitment  to  the  
customer  and  to  con5nuous  improvement  of  every  process  
through  the  use  of  data-­‐driven,  problem-­‐solving  approaches  
based  on  empowerment  of  employee  groups  and  teams.”  
 (1)  increase  customer  sa5sfac5on,    
 (2)  cut  costs,  and    
 (3)  reduce  the  amount  of  5me  required  to  introduce  
   innova5ve  products  to  the  marketplace  
CompeFFve  Risks  of  the  Integrated  Cost  
Leadership/  DifferenFaFon  Strategy  

1.  The  primary  risk  of  this  strategy  is  that  a  firm  might  
produce  products  that  do  not  offer  sufficient  value  in  
terms  of  either  low  cost  or  differenFaFon.  

2.  In  such  cases,  the  company  is  “stuck  in  the  middle.”  Firms  
stuck  in  the  middle  compete  at  a  disadvantage  and  are  
unable  to  earn  more  than  average  returns.  
CompeFve  Rivalry  and  
CompeFFve  Dynamics  
CompeFFve  rivalry  oken  increases  significantly  during  
recessions,  and  some  selected  businesses  in  parFcular  
industries  actually  experience  heightened  demand.    
 
When  economic  Fmes  are  bad,  many  people  change  their  
shopping  behavior.    In  parFcular,  people  buy  what  they  
need  in  goods  but  also  search  for  ways  to  escape  their  
daily  negaFve  environment  (e.g.,  through  
entertainment)  and  find  ways  to  experience  some  form  of  
enjoyment  (e.g.,  eat  sweets).  
 
People  frequently  will  reduce  major  expenses  where  
possible  (e.g.,  increase  carpooling  to  work,  use  coupons  
for  purchases)  but  will  also  spend  extra  money  for  some  
enjoyment,  such  as  candy.  
We  can  conclude  that  compeFFve  dynamics  
within  industries  vary  considerably  and  not  
all  are  affected  negaFvely  by  economic  
recessions.  Yet,  changes  in  the  market  can  
be  quite  challenging  as  markets  are  complex
—new  compeFtors  enter  and  consumer  
tastes  change,  with  some  of  the  changes  
likely  to  be  long  term,  conFnuing  even  aker  
good  economic  Fmes  return.  
CompeFtors    

 -­‐  are  firms  opera5ng  in  the  same  market,  

offering  similar  products,  and  targe5ng  
similar  customers.  
 
-­‐  learning  how  to  select  the  markets  in  
which  to  compete  and  how  to  best  
compete  within  them  is  highly  important  
CompeFFve  rivalry    

-­‐  is  the  ongoing  set  of  compeFFve  acFons  and  compeFFve  
responses  that  occur  among  firms  as  they  maneuver  for  an  
advantageous  market  posiFon.  

It  is  important  for  those  leading  

organizaFons  to  understand  
compeFFve  rivalry,  in  that  “the  
central,  brute  empirical  fact  in  
strategy  is  that  some  firms  
outperform  others,”  meaning  that  
compeFFve  rivalry  influences  an  
individual  firm’s  ability  to  gain  and  
sustain  compeFFve  advantages.  
CompeFFve  behavior    

is  the  set  of  compeFFve  acFons  and  responses  the  firm  

takes  to  build  or  defend  its  compeFFve  advantages  and  
to  improve  its  market  posiFon.  

The  firm  tries  to  successfully  posi5on  

itself  rela5ve  to  the  five  forces  of  
compe55on  and  to  defend  current  
compe55ve  advantages  while  
building  advantages  for  the  future.  
Increasingly,  compe5tors  engage  in  
compe55ve  ac5ons  and  responses  in  
more  than  one  market.  
MulFmarket  compeFFon  

-­‐  occurs  when  firms  compete  against  each  other  in  several  
product  or  geographic  markets.  

CompeFFve  dynamics    

Refer  to  all  compeFFve  behaviors—that  is,  the  total  set  of  
acFons  and  responses  taken  by  all  firms  compeFng  within  
a  market.  
From  CompeFtors  to  CompeFFve  Dynamics  
A  Model  of  CompeFFve  Rivalry  
CompeFtor  Analysis  

The  first  step  the  firm  takes  to  be  able  to  predict  the  extent  
and  nature  of  its  rivalry  with  each  compeFtor.  

Market  commonality  is  concerned  with  the  number  of  

markets  with  which  the  firm  and  a  compe5tor  are  jointly  
involved  and  the  degree  of  importance  of  the  individual  
markets  to  each.  
 
Resource  similarity  is  the  extent  to  which  the  firm’s  tangible  
and  intangible  resources  are  comparable  to  a  compe5tor’s  in  
terms  of  both  type  and  amount.  
When  performing  a  compeFtor  analysis,  a  firm  analyzes  
each  of  its  compeFtors  in  terms  of  market  commonality  
and  resource  similarity.    
 
The  results  of  these  analyses  can  be  mapped  for  visual  
comparisons.    
 
We  show  different  hypotheFcal  intersecFons  between  the  
firm  and  individual  compeFtors  in  terms  of  market  
commonality  and  resource  similarity.    
 
These  intersecFons  indicate  the  extent  to  which  the  firm  
and  those  with  which  it  is  compared  are  compeFtors.  
Drivers  of  CompeFFve  AcFons  and  Responses  

Awareness  refers  to  the  extent  to  which  compe5tors  

recognize  the  degree  of  their  mutual  interdependence  that  
results  from  market  commonality  and  resource  similarity.    
 
Awareness  tends  to  be  greatest  when  firms  have  highly  similar  
resources  (in  terms  of  types  and  amounts)  to  use  while  
compe5ng  against  each  other  in  mul5ple  markets.  
 
A  lack  of  awareness  can  lead  to  excessive  compe55on,  
resul5ng  in  a  nega5ve  effect  on  all  compe5tors’  performance.  
Mo#va#on,  which  concerns  the  firm’s  incen5ve  to  take  
ac5on  or  to  respond  to  a  compe5tor’s  aQack,  relates  to  
perceived  gains  and  losses.    
 
A  firm  may  be  aware  of  compe5tors  but  may  not  be  
mo5vated  to  engage  in  rivalry  with  them  if  it  perceives  
that  its  posi5on  will  not  improve  or  that  its  market  
posi5on  won’t  be  damaged  if  it  doesn’t  respond.    
 
In  some  cases,  firms  may  locate  near  compe5tors  in  order  
to  more  easily  access  suppliers  and  customers.  
Ability  relates  to  each  firm’s  resources  and  the  flexibility  
they  provide.  Without  available  resources  (such  as  
financial  capital  and  people),  the  firm  lacks  the  ability  to  
a]ack  a  compeFtor  or  respond  to  its  acFons.  
CompeFFve  Rivalry  

The  ongoing  compe55ve  ac5on/response  sequence  

between  a  firm  and  a  compe5tor  affects  the  
performance  of  both  firms;  thus  it  is  important  for  
companies  to  carefully  analyze  and  understand  the  
compe55ve  rivalry  present  in  the  markets  they  serve  to  
select  and  implement  successful  strategies.  
Strategic  and  TacFcal  AcFons  

Firms  use  both  strategic  and  tacFcal  acFons  when  forming  

their  compeFFve  acFons  and  compeFFve  responses  in  the  
course  of  engaging  in  compeFFve  rivalry.  

A  compeFFve  acFon  is  a  strategic  or  tac5cal  ac5on  the  firm  takes  to  build  
or  defend  its  compe55ve  Advantages  or  improve  its  market  posi5on.    
 
A  compeFFve  response  is  a  strategic  or  tac5cal  ac5on  the  firm  takes  to  
counter  the  effects  of  a  compe5tor’s  compe55ve  ac5on.  
 
A  strategic  acFon  or  a  strategic  response  is  a  market-­‐based  move  that  
involve  a  significant  commitment  of  organiza5onal  resources  and  is  
difficult  to  implement  and  reverse.  
 
A  tacFcal  acFon  or  a  tacFcal  response  is  a  market-­‐based  move  that  is  
taken  to  fine-­‐tune  a  strategy;  it  involves  fewer  resources  and  is  rela5vely  
easy  to  implement  and  reverse.  
Likelihood  of  A]ack  

First-­‐Mover  IncenFves  

A  first  mover  is  a  firm  that  takes  an  ini5al  compe55ve  ac5on  
in  order  to  build  or  defend  its  compe55ve  advantages  or  to  
improve  its  market  posi5on.    
 
The  first-­‐mover  concept  has  been  influenced  by  the  work  of  
the  famous  economist  Joseph  Schumpeter,  who  argued  that  
firms  achieve  compe55ve  advantage  by  taking  innova5ve  
ac5ons.    
 
In  general,  first  movers  “allocate  funds  for  product  innova5on  
and  development,  aggressive  adver5sing,  and  advanced  
research  and  development.”  
The  first  mover  can  gain…  
 
(1)   The  loyalty  of  customers  who  may  
become  commi]ed  to  the  goods  or  
services  of  the  firm  that  first  made  them  
available,  and    

(2) Market  share  that  can  be  difficult  for  

compeFtors  to  take  during  future  
compeFFve  rivalry.  
A  second  mover  is  a  firm  that  responds  to  the  first  
mover’s  compe55ve  ac5on,  typically  through  imita5on.  
 
 
A  late  mover  is  a  firm  that  responds  to  a  compe55ve  
ac5on  a  significant  amount  of  5me  aWer  the  first    
mover’s  ac5on  and  the  second  mover’s  response.  
OrganizaFonal  Size  

An  organiza5on’s  size  affects  the  

likelihood  it  will  take  compe55ve  
ac5ons  as  well  as  the  types  and  5ming  
of  those  ac5ons.  

Small  firms  are  more  likely  than  large  

companies  to  launch  compe55ve  ac5ons  
and  tend  to  do  it  more  quickly.  

Large  firms,  however,  are  likely  to  ini5ate  

more  compe55ve  ac5ons  along  with  more  
strategic  ac5ons  during  a  given  period.  
The  organiza5onal  size  factor  adds  another  layer  of  
complexity.  When  engaging  in  compe55ve  rivalry,  the  firm  
oWen  prefers  a  large  number  of  unique  compe55ve  
ac5ons.  Ideally,  the  organiza5on  has  the  amount  of  slack  
resources  held  by  a  large  firm  to  launch  a  greater  number  
of  compe55ve  ac5ons  and  a  small  firm’s  flexibility  to  
launch  a  greater  variety  of  compe55ve  ac5ons.    
 
Herb  Kelleher,  cofounder  and  former  CEO  of  Southwest  
Airlines,  addressed  this  maQer:    
 
“Think  and  act  big  and  we’ll  get  smaller.  Think  and  act  
small  and  we’ll  get  bigger.”  
Quality  

-­‐  Exists  when  the  firm’s  goods  or  services  

meet  or  exceed  customers’  expecta5ons.    

-­‐  Some  evidence  suggests  that  quality  may  

be  the  most  cri5cal  component  in  sa5sfying  
the  firm’s  customers.  

Quality  affects  compe55ve  rivalry.  The  firm  evalua5ng  a  

compe5tor  whose  products  suffer  from  poor  quality  can  
predict  declines  in  the  compe5tor’s  sales  revenue  un5l  
the  quality  issues  are  resolved.  
Quality  Dimensions  of  Goods  and  Services  
Likelihood  of  Response  

A  firm  is  likely  to  respond  to  a  compeFtor’s  acFon  when…  

   
(1) the  acFon  leads  to  be]er  use  of  the  compeFtor’s  
capabiliFes  to  gain  or  produce  stronger  compeFFve  
advantages  or  an  improvement  in  its  market  posiFon,    

(2) the  acFon  damages  the  firm’s  ability  to  use  its  

capabiliFes  to  create  or  maintain  an  advantage,  or    

(3) the  firm’s  market  posiFon  becomes  less  defensible.  

Type  of  CompeFFve  AcFon  

Actor’s  ReputaFon  

In  the  context  of  compe55ve  rivalry,  an  actor  is  the  firm  taking  an  
ac5on  or  a  response  while  reputa#on  is  “the  posi5ve  or  nega5ve  
aQribute  ascribed  by  one  rival  to  another  based  on  past  compe55ve  
behavior.”    
 
A  posi5ve  reputa5on  may  be  a  source  of  above-­‐average  returns,  
especially  for  consumer  goods  producers.  
 
Thus,  a  posi5ve  corporate  reputa5on  is  of  strategic  value    and  affects  
compe55ve  rivalry.    
 
To  predict  the  likelihood  of  a  compe5tor’s  response  to  a  current  or  
planned  ac5on,  firms  evaluate  the  responses  that  the  compe5tor  has  
taken  previously  when  aQacked—past  behavior  is  assumed  to  be  a  
predictor  of  future  behavior.  
Dependence  on  the  Market  

Market  dependence  denotes  the  extent  to  which  a  firm’s  

revenues  or  profits  are  derived  from  a  parFcular  market.  
 
In  general,  compe2tors  with  high  market  dependence  
are  likely  to  respond  strongly  to  a]acks  threatening  
their  market  posiFon.  
 
InteresFngly,  the  threatened  firm  in  these  instances  may  
not  always  respond  quickly,  even  though  an  effecFve  
response  to  an  a]ack  on  the  firm’s  posiFon  in  a  criFcal  
market  is  important.  
 CompeFFve  Dynamics  

CompeFFve  dynamics  concern  the  ongoing  acFons  and  

responses  among  all  firms  compeFng  within  a  market  
for  advantageous  posiFons.  

Slow-­‐cycle  markets  are  those  in  which  the  firm’s  compeFFve  

advantages  are  shielded  from  imitaFon  commonly  for  long  
periods  of  Fme  and  where  imitaFon  is  
costly.  
•  CompeFFve  advantages  are  sustainable  over  longer  
periods  of  Fme  in  slow-­‐cycle  markets.  
•  Building  a  unique  and  proprietary  capability  produces  a  
compeFFve  advantage  and  success  in  a  slow-­‐cycle  market.  
Fast-­‐cycle  markets  are  markets  in  which  the  firm’s  
capabiliFes  that  contribute  to  compeFFve  advantages  aren’t  
shielded  from  imitaFon  and  where  imitaFon  is  oken  rapid  
and  inexpensive.    
 
CompeFFve  advantages  aren’t  sustainable  in  fast-­‐cycle  
markets.    
 
Firms  compeFng  in  fast-­‐cycle  markets  recognize  the  
importance  of  speed;  these  companies  appreciate  that  “Fme  
is  as  precious  a  business  resource  as  money  or  head  count—
and  that  the  costs  of  hesitaFon  and  delay  are  just  as  steep  as  
going  over  budget  or  missing  a  financial  forecast.”  
 
Reverse  engineering  and  the  rate  of  technology  diffusion  in  
fast-­‐cycle  markets  facilitate  rapid  imitaFon.  
Standard-­‐cycle  markets  are  markets  in  which  the  firm’s  
compeFFve  advantages  are  parFally  shielded  from  imitaFon  
and  imitaFon  is  moderately  costly.    
 
CompeFFve  advantages  are  parFally  sustainable  in  standard-­‐
cycle  markets,  but  only  when  the  firm  is  able  to  conFnuously  
upgrade  the  quality  of  its  capabiliFes  to  stay  ahead  of  
compeFtors.  
 
The  compeFFve  acFons  and  responses  in  standard-­‐cycle  
markets  are  designed  to  seek  large  market  shares,  to  gain  
customer  loyalty  through  brand  names,  and  to  carefully  
control  a  firm’s  operaFons  in  order  to  consistently  provide  
the  same  posiFve  experience  for  customers.