Slide 1Competition Between HP and Dell: The Battle Rages OnFrom Competitors to Competitive DynamicsModel of Competitive RivalrySlide 5Competition in the Pharmaceutical IndustryPrisoner’s DilemmaSlide 8Slide 9A Model of Competitive RivalrySlide 11A Framework of Competitor AnalysisDrivers of Competitive Actions/ResponsesInterfirm Rivalry: Likelihood of AttackFirst moversSecond and Late Movers)How Size Affects the Likelihood of AttackHow Quality Affects the Likelihood of AttackLikelihood of Gaining a ResponseSlide 20Competitive Dynamics: 3 Market CyclesGradual Erosion of a Sustained Competitive AdvantageCompetitive Dynamics: 3 Market Cycles (Cont’d)Developing Temporary Advantages to Create Sustained AdvantageCompetitive Dynamics: 3 Market Cycles (Cont’d)1Strategic Management: Concepts and CasesPart II: Strategic Actions: Strategy FormulationChapter 5: Competitive Rivalry and Competitive Dynamics2Competition Between HP and Dell: The Battle Rages OnDell lost position as global top-seller of PCs End of 2006: HP 18.1% vs. Dell’s 14.7% 2005 and 2006: 32% overall decline in stock valueDell way: bypass middle-man and sell custom-built computers directly to consumer This single business model lowered costs and hence prices of products, no longer created value to the degree it had historically ….… Why? Competitive actions/reactions HP: found ways to innovate and reinvent itself – since it couldn’t compete with Dell in the direct-sales battlefield they used their strength and developed personal relationships with retailers Dell decides to venture into retail sales – a reaction to HP!3From Competitors to Competitive Dynamics4Model of Competitive RivalryOver time firms take competitive actions/reactionsPattern shows firms are mutually interdependentFirm level rivalry is usually dynamic and complexStrategic and tactical action does not occur within a vacuumStrategic actions/responses: market-based moves that signify a significant commitment of resources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What industries have high competitive rivalry?What sort of actions/tactics are taken?5Competition in the Pharmaceutical IndustryReps have more than tripled since the 1990s – now over 100K12B on sales force, 4.5B on ads in 2006Managed care bet – Pfizer from 14th to 1st529 visits yearly, average length – 2.5 min8% rememberGlaxo can reach 80% of the Drs in a week“Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”Prisoner’s DilemmaSilent S = 6 monthsS = 6 monthsS = 10 yearsT = 0 yearsTestify S = 10 yearsT = 0 yearsT = 5 yearsT = 5 yearsSilent Testify7http://www.youtube.com/watch?v=p3Uos2fzIJ08What would happen to Coke and Pepsi’s profits if they BOTH stopped advertising?910A Model of Competitive Rivalry11Market Commonality Each industry composed of various markets which can be subdivided into segmentsTo what extent are the firms jointly involved and how important those segments are to each firm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 competitors12A Framework of Competitor Analysis13Drivers of Competitive Actions/Responses 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 responsiveness14Interfirm Rivalry: Likelihood of AttackFactors which may influence the ‘likelihood of response’ actionsFirst Mover IncentivesOrganizational SizeQuality15First movers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Often builds upon a strategic foundation of superior research and development skillsTends to be aggressive and willing to experiment with innovationBenefits can be substantial, but so can risks!16Second and Late Movers)Second MoverCautiously responds to first mover, typically through imitationTends to study customer reactions to product innovationsReduces risk by learning from the first moversDevelops process 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 returns17How Size Affects the Likelihood of Attack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 success18How Quality Affects the Likelihood of AttackCustomer perception that the firm's goods or services perform in ways that are important to customers, meeting or exceeding their expectationsFirms with lower quality have fewer competitive alternativesLikelihood of Gaining a ResponseTypes of Competitive ActionStrategic vs. Tactical movesStrategic moves elicit fewer responsesActor’s ReputationMarket leader vs. company seen as risky, a loose cannon, or