Corporate Strategy
Session 9
Rivalry and Multipoint Competition
Dr. Olivier Furrer
e-mail: [email protected]
1
Example
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)
2
Example: Microsoft’s Xbox
In the late 1990s, Microsoft recognized that Sony could emerge as an
important rival. Although Sony functioned in a different industry (i.e.,
consumer electronics rather than software), Microsoft noted that the Sony
PlayStation was, in essence, nothing more than a specialized computer and,
even worse, one that did not use a Microsoft operating system. Microsoft thus
worried that Sony might use the PlayStation II, which came equipped with
Web browsing potential, as a “Trojan horse” that would gain control of
consumers’ Web browsing and computing habits from their living rooms,
ultimately taking those customers away from PCs with Microsoft operating
systems. The desire to keep Sony’s ambitions in check was a significant part
of the rationale for Microsoft’s diversification into the video game industry,
with the launch of its Xbox.
3
Example:
Disney and AOL–Time Warner
Multipoint competition between The Walt Disney Company and AOL–Time
Warner in the early 1990s. Disney operates in the theme park, movie and television
production, and television broadcasting industries; AOL–Time Warner operates in
the theme park and movie and television production industries, while also operating
a significant magazine business (publishing Time, People, Sports Illustrated, and
others). Disney spends millions of dollars to advertise its theme parks in AOL–
Time Warner magazines. Despite this substantial revenue, AOL–Time Warner
initiated an aggressive advertising campaign, aimed at wooing customers away from
Disney theme parks to its own. Disney retaliated by canceling all of its advertising
in AOL–Time Warner magazines. AOL–Time Warner responded by canceling a
corporate meeting that was to be held at Disney World. Disney in turn responded to
AOL–Time Warner’s meeting cancellation by refusing to broadcast AOL–Time
Warner theme park advertisements on its Los Angeles television station.
4
Definitions
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
5
Definitions (cont’d)
Multipoint Competition
A situation where firms compete against each other
simultaneously in several markets
6
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
7
Multipoint Competition
Firm A
I
II
III
IV
III
IV
Businesses
I
II
Firm B
8
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)
9
The Rivalry Matrix
Few
Many
Predictable
Game Theory
Warfare Models,
Multipoint
Competition
Uncertain
Nature of the Environment
Decision Variables
Scenarios,
Simulation, and
Systems Dynamics
Frameworks
Source.: Furrer, Olivier and Howard Thomas (2000), “The Rivalry
Matrix: Understanding Rivalry and Competitive Dynamics,” European
Management Journal, 18 (6), 619–637.
10
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Outcomes
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Resource
Similarity
Feedback
Session 7 © Furrer 2002-2012
Source: Chen, 1996
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
11
Multimarket Competition and
Interfirm 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).
12
Multimarket contact
Between focal firm and
rivals
Larger number of
interactions with rivals
Better understanding of
interdependence and
overlapping market
fortunes with rivals
Ability to hurt
Larger revenue exposure
to rivals’ actions
Greater attention to rivals
in market scanning and
competitor information
acquisition
Increased familiarity
Opportunity to hurt
Rivals’ opportunity to
retaliate in multiple markets
Lower expected payoff
from rivalry
Increased deterrence
MUTUAL FORBEARANCE
Lower intensity of
competition
Source: Jayachandran et al.,
1999
13
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Outcomes
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Resource
Similarity
Feedback
Session 7 © Furrer 2002-2012
Source: Chen, 1996
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
14
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behavior
Awareness
Motivation
Capability
Do managers understand the key
characteristics of competitors?
Does the firm have appropriate
incentives to attack or respond?
Does the firm have the necessary
resources to attack or respond?
15
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Competitor
Analysis
Market
Commonality
Do firms compete with each
other in multiple markets?
Multipoint competition tends to reduce
competitive interactions, but increases
the likelihood of response where
interaction occurs
For example, airlines price flights
similarly, but respond quickly when
competitors introduce promotional
prices
16
Model of Interfirm Rivalry:
Likelihood of Attack and Response
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 similar resources are
more likely to be aware of each
other’s competitive moves
Firms with dissimilar resources are
more likely to attack
17
Market Commonality and
Resource Similarity
Source: Chen, 1996
18
Intensity of competition
Multimarket Contact and
Intensity of Competition
Low contact
Medium contact
High contact
Degree of multimarket contact
19
Multimarket Contact and Intensity of
Competition: A Contingency Model
Organizational
structure of
competing firms
Seller
concentration
Opportunities for
scope economies
Degree of
multimarket
contact
Intensity of
competition
CEO’s
tenure
Spheres of
influence
Resource
similarity
Source: Furrer, 2010; Jayachandran et al., 1999
20
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Firm Mover
advantage can be
substantial
Likelihood of Response
Type of Competitive Action
Actor’s Reputation
Dependence on the Market
Resource Availability
21
First Mover
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
Source: Lieberman and Montgomery, 1988
22
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
Source: Lieberman and Montgomery, 1988
23
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive Action
Actor’s Reputation
Dependence on the Market
Resource Availability
Whether a
competitor is
likely to respond
depends on several
key factors
24
Types of Competitive Actions
Strategic
Actions
Significant commitments of specific &
distinctive organizational resources
Difficult to implement
Difficult to reverse
Example
Tactical
Actions
Major Acquisition
Undertaken to “fine tune” strategy
Relatively easy to implement
Relatively easy to reverse
Example
Price cut
25
Source: Karnani and Wernerfelt, 1985
26
Source.: Smith and Wilson, 1995
27
Gauging the Likelihood of
Response
Type of Competitive Action: Tactical or Strategic
Easier to respond to
Require fewer resources to mount a response
Actor’s Reputation
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
28
Gauging the Likelihood of
Response
Market Dependence
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
actions
Limited resources may lead to alternatives such as
Strategic Alliances
29
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Ability for
Action and
Response
Relative Size
Firm size can have opposing
effects on competitive dynamics
Speed
Innovation
Quality
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
30