Competitive Dynamics

Competitive Dynamics is concerned with the causes and consequences of inter-firm rivalry (Thomas and Pollock, 1999; Young et al., 1996). To investigate the performance effects of competitive dynamics, competitive dynamics scholars have turned to economic competition theories and identified the dynamic exchange of competitive actions between firms as their object of interest. This contrasts with other more structural approaches to competition research, such as industrial organization. Figure 1 illustrates how competitive dynamics compares with other related theoretical perspectives.

Figure 1: Theoretical Perspectives on Interfirm Rivalry


Source: Schimmer (2012: 12) 

On the Study of Competitive Actions

Contrasting the 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 less aggressively. 

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 to get 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.

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 of how capital markets respond to different sequences of competitive actions. The underlying assumption of this research stream is that market participants can discriminate consistently from inconsistent competitive 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

For more details on this approach and how it can be used to publish innovative research, please refer to Schimmer (2012).


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