Competitive Dynamics

by Markus Schimmer | 19 Aug 2012

Event studies play an important role in the canon of methods used to investigate the causes and consequences of interfirm rivalry, a topic central to the academic field of strategic management. Since its inception as an own academic field in the late 20th century (Schendel and Hofer, 1979), strategic management has developed a particular interest in how individual firms can achieve and sustain superior performance. To trace this question, management scholars also turned to economic theories on competition and found that the rivalry between firms needs to be a key element in their answer (Thomas and Pollock, 1999; Young et al., 1996). Based on the theoretical legacy from economics and the various perspectives common to the strategic management discipline (Hambrick, 2004), strategy scholars advanced our understanding of competition and its outcomes at the firm- and industry-level. Figure 1 organizes the major theoretical lenses with which management scholars have studied competition along a scale that indicates the perspectives' levels of reasoning.

Figure 1: Theoretical Perspectives on Interfirm Rivalry

Source: Schimmer (2012: 12)

On the Study of Competitive Actions

Contrasting Industrial Organization's interest in structural industry characteristics, the competitive dynamics perspective focuses on the nature and consequences of competitive dynamics among firms (Ketchen et al., 2004). The perspective generally assumes a notion of competition matching the idea of Schumpeterian and Austrian economics (Kirzner, 1997; Mises, 1949) that "the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new customers' goods, the new methods of production of transportation, the new markets, the new forms of industrial organization that capitalist enterprises create" (Schumpeter, 1943: 83-85). It thus opens up the black box of firm behavior and considers firm performance levels resulting from an ongoing struggle among firms (Kirzner, 1973).

To better express the action and turbulence inherent in the competitive interplay between firms and to set their interpretation of competition apart from the static notion present in economics, competitive dynamics scholars have revitalized the term "interfirm rivalry" (Bettis and Weeks, 1987; Porter, 1979) and created certain useful metaphors that illustrate the personal, goal-driven and dynamic notion of rivalry they maintain (Chen, 2009). Scholars described rivalry as a boxing-fight (Ferrier and Lee, 2002), or, with a focus on a larger number of competitors, as a race where multiple rivals compete against each other, while accelerating from time to time to overtake a specific opponent (Zuchhini and Kretschmer, 2011).

The inception of the competitive dynamics perspective dates back to the early 1980s, when scholars initially put the dynamic, process-oriented notion of interfirm rivalry to an empirical test (Bettis and Weeks, 1987; MacMillan, McCaffrey and Van Wijk, 1985). They pioneered an empirical approach that studies the competitive actions and responses of firms as the central vehicles of rivalry. Fueled by the research program of Professor Chen (1988, 1996; Chen and Hambrick, 1995; Chen and MacMillan, 1992; Chen and Miller, 1994; Chen et al., 1992), this research strand soon gained momentum and became an established area of research named "competitive dynamics research".

Early competitive dynamics studies investigated the defining characteristics of competitive moves and how these relate to responses by competitors (Chen and MacMillan, 1992; Chen and Miller, 1994; Chen et al., 1992). Important findings suggest that a shared market interest and similar resource profiles raise competitive tension between firms and that action characteristics, such as irreversibility, visibility and competitor dependence on the challenged market, have predictive power for the competitor's response behavior (Chen, 1996; Chen and MacMillan, 1992; Chen and Miller, 1994). Scholars subsequently complemented the analysis of action-and-response combinations with the study of longer sequences of competitive moves (Chen and Hambrick, 1995; Ferrier, 2001; Gimeno and Woo, 1996; Hambrick, Cho and Chen, 1996; Miller and Chen, 1994, 1996b, 1996a; Rindova, Ferrier and Wiltbank, 2010). In comparison to the analysis of individual moves, which draws on the isolated characteristics of actions, the analysis of competitive action sequences sheds light on the effectiveness of competitive strategies as a whole. Ferrier, Smith and Grimm (1999), for example, find that challengers have better chances to dethrone their market's leading firm with sequences of aggressive actions if the leading firm fails to keep up with the challenger, applies narrower action repertoires, or responds in a less aggressive way.

Most recently, competitive dynamics research has taken a novel direction. It set out to expand its reach to market situations where the dyadic relationship between a focal firm and its main rival is not sufficiently instrumental for explaining the firm's competitive behavior (Hsieh and Chen, 2010; Zuchhini and Kretschmer, 2011). In other words, the most recent research efforts aim at developing an action-based theory of rivalry valid in competitive markets, where interfirm-relationships are numerous, and individually less relevant for the choice and timing of competitive actions than presumed by prior research (Chen, 1996; Chen and MacMillan, 1992). Hsieh and Chen (2010) have pioneered such an expansion of the field's theoretical fundament and identified the recent competitive activity of all rivals as the major antecedent of a firm's inclination to take competitive action.

Capturing Firms' Competitive Behaviors

One key challenge in competitive dynamics research is to capture the competitive behavior of firms. Besides of manually mapping competitive actions of firms throughout time, automated procedures may help getting hold of firms' strategic decisions and rivalrous actions. One option to collect and identify the competitive actions of firms based on the firms' online press release archives and a subsequent sequence of steps to systematically map the competitive actions of individual firms or whole industries. Figure 2, taken from Schimmer (2012), illustrates this approach. Please view this flash tutorial on how EST assists you in implementing these steps.

Figure 2: Capturing Competitive Behavior

Adapted from Schimmer (2012: 5)

Competitive Action Patterns and Stock Price Reactions

Firms and stock markets form an intimate relationship, also when it comes to the analysis of firm competitive behavior. One trending research theme is the analysis how capital markets respond to differing sequences of competitive actions. The underlying assumption of this research stream is that market participants are able to discriminate consistent from inconsistent competititve behaviors by observing the unfolding stream of competitive actions.

Video 1: Prof. Walter Ferrier Discussing Stock Market Responses to Gestalt Properties of Competitive Action Sequences

 

 

References

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Chen, M. J., Smith, K. D. and Grimm, C. M. 1992. 'Action characteristics as predictors of competitive responses'. Management Science, 38: 439-455.

Chen, M. J. and Miller, D. 1994. 'Competitive attack, retaliation and performance: An expectancy-valence framework'. Strategic Management Journal, 15: 85-102.

Chen, M. J. and Hambrick, D. C. 1995. 'Speed, stealth, and selective attack: How small firms differ from large firms in competitive behavior'. Academy of Management Journal, 38: 453-482.

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Ferrier, W. J. 2001. 'Navigating the competitive landscape: The drivers and consequences of competitive aggressiveness'. Academy of Management Journal, 44: 858-877.

Ferrier, W. J. and Lee, H. 2002. 'Strategic aggressiveness, variation, and surprise: How the sequential pattern of competitive rivalry influences stock market returns'. Journal of Managerial Issues, 14: 162-180.

Gimeno, J. and Woo, C. Y. 1996. 'Hypercompetition in a multimarket environment: The role of strategic similarity and multimarket contact in competitive de-escalation'. Organization Science, Vol. 7: 322-341.

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Ketchen, D. J., Snow, C. C. and Hoover, V. L. 2004. 'Research on competitive dynamics: Recent accomplishments and future challenges'. Journal of Management, 30(6): 779-804.

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Markus Schimmer

Markus Schimmer is a Postdoc at the Institute of Management of the University of St. Gallen, where he received his Ph.D. During his studies, Markus has been a visiting research scholar at Prof. Ming-Jer Chen at the University of Virginia's Darden School of Business. His research interests are directed towards firm and industry dynamics, with competitive dynamics and industrial organization being his preferred theoretical perspectives. Markus' work has appeared in various journals, such as Strategic Organization, The Journal of Strategy and Management, and The Harvard Kennedy School Review. It received further scholarly acknowledgements such as the Outstanding Paper Award at the Literati Network Awards for Excellence (2011), and a nomination for the William H. Newman Award (BPS division 2012).