What is Competitive Rivalry? Factors

What is Competitive Rivalry?

Competitive rivalry, also known as competitive rivalry among existing competitors or simply industry rivalry, refers to the level of competition and intensity of competition among companies operating within the same industry or market. It is one of the five forces in Michael Porter’s Five Forces framework, a strategic analysis tool used to assess the attractiveness and competitive dynamics of an industry.

Competitive rivalry exists when companies jockey with one another to pursue an advantageous market position. This means that, when one or more companies competing in an industry feel pressure to act or perceive an opportunity to improve their competitive position, competitive rivalry occurs as various companies initiate a series of actions and responses.

Competitive rivalry exists because of competitive asymmetry, which describes the fact that companies differ in terms of their resources, capabilities, and core competencies, and the opportunities and threats in their competitive environments and industries.

It also is important that companies recognize that competition results in mutual interdependence among companies in the industry as each company tries to establish a sustainable competitive advantage.

As companies strive to achieve strategic competitiveness and earn above-average returns, they must recognize that strategies are not implemented in isolation from competitors’ actions and responses. The strategic management process represents companies taking a series of actions, fending off counter-actions or responses, and developing responses of their own.

This is important because the pattern of competitive rivalry and competitive dynamics in the market(s) in which companies compete affects strategic competitiveness and returns.

Competitive rivalry or competitive dynamics begin with an assessment of competitors’ awareness and motivation to attack and/or respond to competitive moves. Market commonality and resource similarity are affected by a company’s awareness, and motivation affects the likelihood of an attack or response.

The likelihood of attack and response results in competitive outcomes, with outcomes moderated by a company’s ability to take strategic actions or responses. Feedback from competitive outcomes will affect future competitive dynamics by affecting the nature of a company’s awareness, motivation, and ability to action/respond.

If companies overlap in several markets, multipoint competition – a situation where companies compete against each other simultaneously in several geographic or product markets–generally results. Interestingly, a high level of commonality reduces the likelihood of competitive interaction. Since the major airlines are in so many common markets, there generally is competitive peace. However, when one company makes a competitive move, the others are compelled to respond rapidly.

The intensity of competitive rivalry in an industry often is based on the potential for response. As a result, attackers generally are not motivated to target a rival that is likely to retaliate. In other words, in most cases, dissimilar resources may increase the likelihood of an attack while companies with similar resources (overlap between their resource portfolios) will be less likely to attack because resource similarity increases the likelihood of retaliation.

As already defined, competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competing firms and an advantageous market position. Because the ongoing competitive action response sequence between a firm and a competitor affects the performance of both firms, it is important for companies to carefully study competitive rivalry to successfully use their strategies.

Understanding a competitor’s awareness, motivation, and ability helps the firm to predict the likelihood of an attack by that competitor and how likely it is that a competitor will respond to the actions taken against it.

As described above, the predictions drawn from the study of competitors in terms of awareness, motivation, and ability are grounded in market commonality and resource similarity. These predictions are fairly general. The value of the final set of predictions the firm develops about each of its competitor’s competitive actions and competitive responses is enhanced by studying the “Likelihood of Attack” factors (such as first mover incentives and organizational size) and the “Likelihood of Response” factors (such as the actor’s reputation).

Strategic and Tactical Actions

Firms use both strategic and tactical actions when forming their competitive actions and competitive responses in the course of engaging in competitive rivalry. A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. A tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse.

Likelihood of Attack

In addition to market commonality, resource similarity, and the drivers of awareness, motivation, and ability, other factors also affect the likelihood a competitor will use strategic actions and tactical actions to attack its competitors. Three of these factors are first-mover incentives, organizational size, and quality.

First-mover Incentives

A first mover is a firm that takes an initial competitive action to build or defend its competitive advantages or to improve its market position. Superior Research and Development skills are often the foundation of the first mover’s competitive success.

The first mover concept has been influenced by the work of the famous economist Joseph Schumpeter, who argued that firms achieve competitive advantage by taking innovative actions. In general, first movers “allocate funds for product innovation and development, aggressive advertising, and advanced research and development.”

The benefits of being a successful first mover can be substantial. Especially in fast-cycle markets where changes occur rapidly and where it is virtually impossible to sustain a competitive advantage for any period, “a first mover may experience five to ten times the valuation and revenue of a second mover.” This evidence suggests that although first-mover benefits are never absolute they are often critical to a firm’s success in industries experiencing rapid technological developments and relatively short product life cycles.

In addition to earning above-average returns until its competitors respond to its successful competitive action, the first mover can gain (a) the loyalty of customers who may become committed to the goods or services of the firm that first made them available and (b) market share that can be difficult for competitors to take during future competitive rivalry.

First movers tend to be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk. To be a first mover, the firm must have readily available the number of resources required to significantly invest in Research & Development as well as to rapidly and successfully produce and market a stream of innovative products. Organizational slack makes it possible for firms to have the ability (as measured by available resources) to be first movers.

Slack is the buffer or cushion provided by actual or obtainable resources that aren’t currently in use and are more than the minimum resources needed to produce a given level of organizational output. Thus, slack is liquid resources that the firm can quickly allocate to support the actions such as Research & Development investments and aggressive marketing campaigns that lead to first-mover benefits.

Slack allows a competitor to take aggressive competitive actions to continuously introduce innovative products. Furthermore, a first mover will try to rapidly gain market share and customer loyalty to earn above-average returns until its competitors can effectively respond to its first move.

Being a first mover also carries risk. For example, it is difficult to accurately estimate the returns that will be earned from introducing product innovations. Additionally, the first mover’s cost to develop a product innovation can be substantial, reducing the slack available to support further innovation. Also, research has shown that in some cases, a first mover is less likely to make the conversion to the product design that eventually becomes dominant in the industry.

In such cases, a first mover enjoys most of the benefits from its new product in the period before the adoption of a dominant design. These risks mean that a firm should carefully study the results a competitor achieves as a first mover. Continuous success by the competitor suggests additional product innovations, while a lack of product acceptance throughout the competitor’s innovations may indicate less willingness in the future to accept the risks of being a first mover.

Second Mover Incentives

A second mover is a firm that responds to the first mover’s competitive action, typically through imitation. More cautious than the first mover, the second mover studies customers’ reactions to product innovations. In the course of doing so, the second mover also tries to find any mistakes the first mover made so that it can avoid the problems resulting from them. Often, successful imitation of the first mover’s innovations allows the second mover “to avoid both the mistakes and the huge spending of the pioneers (first movers).”

Second movers also have the time to develop processes and technologies that are more efficient than those the first mover used. Greater efficiencies could result in lower costs for the second mover. Overall, the outcomes of the first mover’s competitive actions may provide an effective blueprint for second and even late movers as they determine the nature and timing of their competitive responses.

Determining that a competitor thinks of itself as an effective second mover allows the firm to predict that the competitor will tend to respond quickly to first movers’ successful, innovation-based market entries. If the firm itself is a first mover, then it can expect a successful second-mover competitor to study its market entries and respond to them quickly.

As a second mover, the competitor will try to respond with a product that creates customer value exceeding the value provided by the product that the firm introduced initially as a first mover. The most successful second movers can rapidly and meaningfully interpret market feedback to respond quickly, yet productively, to the first mover’s innovations.

Late Mover Incentives

A late mover is a firm that responds to competitive action, but only after considerable time has elapsed after the first mover’s action and the second mover’s response. Typically, a late response is better than no response at all, although any success achieved from the late competitive response tends to be slow in coming and considerably less than that achieved by first and second movers. Thus, the firm competing against a late mover can predict that the competitor will likely enter a particular market only after both the first and second movers have achieved success.

Moreover, on a relative basis, the firm can predict that the late mover’s competitive action will allow it to earn even average returns only when enough time has elapsed for it to understand how to create value that is more attractive to customers than is the value offered by the first and second mover’s products. Although exceptions do exist, the firm can predict that the late mover’s competitive actions will be relatively ineffective, certainly as compared with those initiated by first movers and second movers.

Organizational Size

An organization’s size affects the likelihood that it will take competitive actions as well as the types of actions it will take and their timing. In general, compared with large companies, small firms are nimble and flexible competitors who rely on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry, especially with large companies, to gain an advantageous market position.

Small firms’ flexibility and nimbleness allow them to develop greater variety in their competitive actions relative to larger firms. Nevertheless, because they tend to have more slack resources, large firms are likely to initiate more competitive and strategic actions during a given time. Thus, the competitive actions a firm likely will encounter from competitors larger than itself are different from the competitive actions it will encounter from smaller competitors.

Relying on a limited variety of competitive actions (which is the large firm’s tendency) can lead to reduced competitive success across time, partly because competitors learn how to effectively respond to a predictable set of competitive actions taken by a firm. In contrast, remaining flexible and nimble (which is the small firm’s tendency) to develop and use a wide variety of competitive actions contributes to success against rivals.

Likelihood of Response

So far in this chapter, we have examined how market commonality, resource similarity, awareness of mutual interdependence, motivation to act based on perceived gains and losses, and the ability of a firm to take action can influence competitive behavior. We have also described how first-mover incentives, organizational size, and a firm’s emphasis on quality can help a firm predict whether a competitor will pursue a competitive action. These same factors should also be evaluated to help a firm predict whether a competitor will respond to an action it is considering. In addition, this section describes other factors that a firm should consider when predicting competitive responses from one or more competitors.

The success of a firm’s competitive action is affected both by the likelihood that a competitor will respond to it and by the type (strategic or tactical) and effectiveness of that response. As noted earlier, a competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

In general, a firm is likely to respond to a competitor’s action if the action either significantly strengthens the position of the competitor or significantly weakens the competitive position of the firm. For instance, the actions of a competitor may lead to better use of its capabilities to create competitive advantages or an improved market position. Alternatively, the actions of a competitor could damage the firm’s ability to use its capabilities to create or maintain an advantage or could make its market position less defensible.

Factors on How a Competitor Responds to Competitor Actions

Three factors can help a firm predict how a competitor is likely to respond to competitive actions: the type of competitive action, reputation, and market dependence.

Type of Competitive Action

Competitive responses to strategic actions differ from responses to tactical actions. These differences allow the firm to predict a competitor’s likely response to a competitive action that has been launched against it. Of course, a general prediction is that strategic actions receive strategic responses while tactical responses are taken to counter the effects of tactical actions.

In general, strategic actions elicit fewer total competitive responses. The reason, in this case, is that strategic responses, such as market-based moves, involve a significant commitment of resources and are difficult to implement and reverse. Moreover, the time needed for a strategic action to be implemented and its effectiveness assessed delays the competitor’s response to that action.

In contrast to the time often required to respond to a strategic action, a competitor likely will respond quickly to a tactical action, such as when an airline company almost immediately matches a competitor’s tactical action of reducing prices in certain markets. Either strategic actions or tactical actions that target a large number of a rival’s customers are likely to be targeted with strong responses. If the effects of a competitor’s action on the local firms are significant (e.g., loss of market share, loss of major resources such as critical employees), a response is likely to be swift and strong.

Actor’s Reputation

In the context of competitive rivalry, an actor is the firm taking an action or response; reputation is “the positive or negative attribute ascribed by one rival to another based on past competitive behavior.” A positive reputation may be a source of competitive advantage and high returns, especially for producers of consumer goods. To predict the likelihood of a competitor’s response to a current or planned action, the firm studies the responses that the competitor has taken previously when attacked – past behavior is assumed to be a reasonable predictor of future behavior.

Competitors are more likely to respond to either strategic or tactical actions that are taken by a market leader. In particular, successful actions will be quickly imitated.

Dependence on the Market

Market dependence denotes the extent to which a firm’s revenues or profits are derived from a particular market. In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position. Interestingly, the threatened firm in these instances may not respond quickly, but rather take more of a calculated approach so that its response is more effective.