Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

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Part 2: Strategic Actions: Strategy Formulation

Competitive Rivalry

The ongoing competitive action/response sequence between a firm and a competitor affects

the performance of both firms;

thus it is important for companies to carefully analyze

and understand the competitive rivalry present in the markets they serve to select and

implement successful strategies.

Understanding a

competitor’s awareness, motivation, and ability helps

the firm to predict the likelihood of an attack by that

competitor and the probability that a competitor will

respond to actions taken against it.

As we described earlier, the predictions drawn from

studying 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 devel-

ops about each of its competitors’ competitive actions

and 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) that are shown

in Figure 5.2. Evaluating and understanding these factors allow the firm to refine the predic-

tions it makes about its competitors’ actions and responses.

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 involve a signifi-

cant 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.

The decision a few years ago by newly installed leaders at Guess Inc. to take their

firm’s brand of denims and related products upscale rather than dilute the brand more

by lowering prices when Guess was losing market share is an example of a strategic

response.

And Boeing’s decision to commit the resources required to build the super-

efficient 787 midsized jetliner with its first deliveries in 2007 and 2008

demonstrates a

strategic action. Changes in airfares are somewhat frequently announced by airlines. As

tactical actions that are easily reversed, pricing decisions are often taken by these firms

to increase demand in certain markets during certain periods.

As discussed in the Strategic Focus, Wal-Mart prices aggressively as a means of increas-

ing revenues and gaining market share at the expense of competitors. But discounted

prices with high expenses (as implemented by Carrefour) weigh on margins and slow

profit growth (or possibly even produce losses). Although pricing aggressively is at the

core of what Wal-Mart is and how it competes, can the tactical action of aggressive pricing

continue to lead to the competitive success the firm has enjoyed historically? Is Wal-Mart

achieving the type of balance between strategic and tactical competitive actions and com-

petitive responses that is a foundation for all firms’ success in marketplace competitions?

When engaging rivals in competition, firms must recognize the differences between

strategic and tactical actions and responses and should develop an effective balance

between the two types of competitive actions and responses. Airbus, Boeing’s major

competitor in commercial airliners, is aware that Boeing is strongly committed to taking

A competitive action is a

strategic or tactical action

the ﬁ rm takes to build or

defend its competitive

advantages or improve its

market position.

A competitive response

is a strategic or tactical

action the ﬁ rm 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

signiﬁ cant commitment of

organizational resources

and is difﬁ cult to implement

and reverse.

A tactical action or a

tactical response is a

market-based move that

is taken to ﬁ ne-tune a

strategy; it involves fewer

resources and is relatively

easy to implement and

reverse.

Image courtesy of the Advertising Archives

In response to shrinking

market share, executives

at Guess, Inc. made the

decision to take the brand

upscale rather than cut

prices and potentially see

their brand equity decline.

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Chapter 5: Competitive Rivalry and Competitive Dynamics

actions it believes are necessary to successfully launch the 787 jetliner, because deciding

to design, build, and launch the 787 is a major strategic action. In fact, many analysts

believe that Boeing’s development of the 787 airliner was a strategic response to Airbus’s

new A380 aircraft.

Likelihood of Attack

In addition to market commonality, resource similarity, and the drivers of awareness,

motivation, and ability, other factors affect the likelihood a competitor will use strategic

actions and tactical actions to attack its competitors. Three of these factors—first-mover

incentives, organizational size, and quality—are discussed next.

First-Mover Incentives

A first mover is a firm that takes an initial competitive action in order to build or defend its

competitive advantages or to improve its market position. 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

(innovation is defined and

described in detail in Chapter 13). In general, first movers “allocate funds for product innova-

tion 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 (discussed later in the chapter), where changes occur rapidly and where it is

virtually impossible to sustain a competitive advantage for any length of time, a first mover

can experience many 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 competi-

tors respond to its successful competitive action, the first mover can gain (1) the loyalty of

customers who may become committed to the goods or services of the firm that first made

them available, and (2) market share that can be difficult for competitors to take during

future competitive rivalry.

The general evidence that first movers have greater survival

rates than later market entrants

is perhaps the culmination of first-mover benefits.

The firm trying to predict its competitors’ competitive actions might conclude that

they will take aggressive strategic actions to gain first movers’ benefits. However, even

though a firm’s competitors might be motivated to be first movers, they may lack the

ability to do so. First movers tend to be aggressive and willing to experiment with inno-

vation and take higher, yet reasonable, levels of risk.

To be a first mover, the firm must

have readily available the resources to significantly invest in R&D 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 in excess of the minimum

resources needed to produce a given level of organizational output.

As a liquid resource,

slack can quickly be allocated to support competitive actions, such as R&D investments

and aggressive marketing campaigns that lead to first-mover advantages. This relation-

ship between slack and the ability to be a first mover allows the firm to predict that a first

mover competitor likely has available slack and will probably take aggressive competitive

actions to continuously introduce innovative products. Furthermore, the firm can pre-

dict that as a first mover, a competitor will try to rapidly gain market share and customer

loyalty in order to earn above-average returns until its competitors are able to effectively

respond to its first move.

Firms evaluating their competitors should realize that being a first mover carries risk.

For example, it is difficult to accurately estimate the returns that will be earned from

introducing product innovations to the marketplace.

Additionally, the first mover’s

A ﬁ rst mover is a ﬁ rm

that takes an initial

competitive action

in order to build or

defend its competitive

advantages or to

improve its market

position.

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Part 2: Strategic Actions: Strategy Formulation

cost to develop a product innovation can be substantial, reducing the slack available to

support further innovation. Thus, the firm should carefully study the results a competi-

tor achieves as a first mover. Continuous success by the competitor suggests additional

product innovations, while lack of product acceptance over the course of the competi-

tor’s innovations may indicate less willingness in the future to accept the risks of being

a first mover.

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 stud-

ies 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 them and

the problems they created. Often, successful imitation of the first mover’s innovations

allows the second mover to avoid the mistakes and the major investments required of

the pioneers (first movers).

Second movers also have the time to develop processes and technologies that are

more efficient than those used by the first mover or that create additional value for

consumers.

The most successful second movers rarely act too fast (so they can fully

analyze the first mover’s actions) nor too slow (so they do not give the first mover time

to correct its mistakes and “lock in” customer loyalty).

Overall, the outcomes of the

first mover’s competitive actions may provide an effective blueprint for second and

even late movers (discussed below) as they determine the nature and timing of their

competitive responses.

Determining whether a competitor is an effective second mover

(based on its past actions) allows a first-mover firm to predict that the competitor will

respond quickly to successful, innovation-based market entries. The first mover can

expect a successful second-mover competitor to study its market entries and to respond

with a new entry into the market within a short time period. As a second mover, the

competitor will try to respond with a product that provides greater customer value than

does the first mover’s product. The most successful second movers are able to rapidly and

meaningfully interpret market feedback to respond quickly, yet successfully, to the first

mover’s successful innovations.

A late mover is a firm that responds to a competitive action a significant amount

of time 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 considerably less than that achieved by first and second

movers. However, on occasion, late movers can be successful if they develop a unique

way to enter the market and compete.

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 in that market. Moreover, on a relative basis, the firm can predict that the late

mover’s competitive action will allow it to earn average returns only after the consider-

able time required for it to understand how to create at least as much customer value as

that offered by the first and second movers’ products.

Organizational Size

An organization’s size affects the likelihood it will take competitive actions as well as

the types and timing of those actions.

In general, small firms are more likely than large

companies to launch competitive actions and tend to do it more quickly. Smaller firms

are thus perceived as nimble and flexible competitors who rely on speed and surprise

to defend their competitive advantages or develop new ones while engaged in competi-

tive rivalry, especially with large companies, to gain an advantageous market position.

Small firms’ flexibility and nimbleness allow them to develop variety in their competitive

actions; large firms tend to limit the types of competitive actions used.

Large firms, however, are likely to initiate more competitive actions along with more

strategic actions during a given period.

Thus, when studying its competitors in terms

of organizational size, the firm should use a measurement such as total sales revenue or

A second mover is a

ﬁ rm that responds to the

ﬁ rst mover’s competitive

action, typically through

imitation.

late mover is a

ﬁ rm that responds to

a competitive action a

signiﬁ cant amount of

time after the ﬁ rst mover’s

action and the second

mover’s response.

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Chapter 5: Competitive Rivalry and Competitive Dynamics

total number of employees. The competitive actions the firm likely will encounter from

competitors larger than it is will be different from the competitive actions it will encoun-

ter from smaller competitors.

The organizational size factor adds another layer of complexity. When engaging in

competitive rivalry, the firm often prefers a large number of unique competitive actions.

Ideally, the organization has the amount of slack resources held by a large firm to launch

a greater number of competitive actions and a small firm’s flexibility to launch a greater

variety of competitive actions. Herb Kelleher, cofounder and former CEO of Southwest

Airlines, addressed this matter: “Think and act big and we’ll get smaller. Think and act

small and we’ll get bigger.”

In the context of competitive rivalry, Kelleher’s statement can be interpreted to mean

that relying on a limited number or types of competitive actions (which is the large firm’s

tendency) can lead to reduced competitive success across time, partly because competi-

tors learn how to effectively respond to the predictable. In contrast, remaining flexible

and nimble (which is the small firm’s tendency) in order to develop and use a wide vari-

ety of competitive actions contributes to success against rivals.

As explained in the Strategic Focus, Wal-Mart is a huge firm and generates annual

sales revenue that makes it the world’s largest company. Because of its size, scale, and

resources, Wal-Mart has the flexibility required to take many types of competitive actions

that few—if any—of its competitors can undertake. Demonstrating this type of flexibility

in terms of competitive actions may prove critical to Wal-Mart’s battles with competitors

such as Costco and Target, among others.

Quality

Quality has many definitions, including well-established ones relating it to the produc-

tion of goods or services with zero defects

and as a cycle of continuous improvement.

From a strategic perspective, we consider quality to be the outcome of how a firm com-

pletes primary and support activities (see Chapter 3). Thus, quality exists when the firm’s

goods or services meet or exceed customers’ expectations. Some evidence suggests that

quality may be the most critical component in satisfying the firm’s customers.

In the eyes of customers, quality is about doing the right things relative to perfor-

mance measures that are important to them.

Customers may be interested in measuring

the quality of a firm’s goods and services against a broad range of dimensions. Sample

quality dimensions in which customers commonly express an interest are shown in Table

5.1. Quality is possible only when top-level managers support it and when its importance

is institutionalized throughout the entire organization and its value chain.

When qual-

ity is institutionalized and valued by all, employees and managers alike become vigilant

about continuously finding ways to improve quality.

Quality is a universal theme in the global economy and is a necessary but not

sufficient condition for competitive success.

Without quality, a firm’s products lack

credibility, meaning that customers don’t think of them as viable options. Indeed,

customers won’t consider buying a product until they believe that it can satisfy at

least their base-level expectations in terms of quality dimensions that are important

to them. Boeing’s new 787 aircraft may have problems in the marketplace because of

quality concerns. For example, Chi Zhou, Chairman of Shanghai Airlines, suggested

that the 787 does not “fully meet the quality that Boeing touted earlier.” As such

Zhou stated that his airline may cancel or postpone delivery of its order for nine

aircraft.

Quality affects competitive rivalry. The firm evaluating a competitor whose products

suffer from poor quality can predict declines in the competitor’s sales revenue until the

quality issues are resolved. In addition, the firm can predict that the competitor likely

won’t be aggressive in its competitive actions until the quality problems are corrected in

order to gain credibility with customers. However, after the problems are corrected, that

competitor is likely to take more aggressive competitive actions.

Quality exists when

the ﬁ rm’s goods or

services meet or

exceed customers’

expectations.

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Part 2: Strategic Actions: Strategy Formulation

Likelihood of Response

The success of a firm’s competitive action is affected by the likelihood that a competi-

tor will respond to it as well as 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 when (1) the action leads to better use of the competi-

tor’s capabilities to gain or produce stronger competitive advantages or an improvement

in its market position, (2) the action damages the firm’s ability to use its capabilities to cre-

ate or maintain an advantage, or (3) the firm’s market position becomes less defensible.

In addition to market commonality and resource similarity and awareness, motiva-

tion, and ability, firms evaluate three other factors—type of competitive action, repu-

tation, and market dependence—to predict how a competitor is likely to respond to

competitive actions (see Figure 5.2 on page 133).

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. Strategic actions commonly receive strategic responses

and tactical actions receive tactical responses. In general, strategic actions elicit fewer total

competitive responses because strategic responses, such as market-based moves, involve

a significant commitment of resources and are difficult to implement and reverse.

Another reason that strategic actions elicit fewer responses than do tactical actions

is that the time needed to implement a strategic action and to assess its effectiveness

can delay the competitor’s response to that action.

In contrast, a competitor likely will

respond quickly to a tactical action, such as when an airline company almost immediately

Product Quality Dimensions

1. Performance—Operating characteristics

2. Features—Important special characteristics

3. Flexibility—Meeting operating speciﬁ cations over some period of time

4. Durability—Amount of use before performance deteriorates

5. Conformance—Match with preestablished standards

6. Serviceability—Ease and speed of repair

7. Aesthetics—How a product looks and feels

8. Perceived quality—Subjective assessment of characteristics (Product image)

Service Quality Dimensions

1. Timeliness—Performed in the promised period of time

2. Courtesy—Performed cheerfully

3. Consistency—Giving all customers similar experiences each time

4. Convenience—Accessibility to customers

5. Completeness—Fully serviced, as required

6. Accuracy—Performed correctly each time

Table 5.1 Quality Dimensions of Goods and Services

Source: Adapted from J. Evans, 2008, Managing for Quality and Performance, 7th ed., Mason, OH: Thomson Publishing.

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Chapter 5: Competitive Rivalry and Competitive Dynamics

matches a competitor’s tactical action of reducing prices in certain markets. Either stra-

tegic actions or tactical actions that target a large number of a rival’s customers are likely

to elicit strong responses.

In fact, if the effects of a

competitor’s strategic action on the focal firm 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 a response while reputa-

tion 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 above-average returns, especially for consumer

goods producers.

Thus, a positive corporate repu-

tation is of strategic value

and affects competitive

rivalry. To predict the likelihood of a competitor’s

response to a current or planned action, firms evaluate the responses that the competi-

tor has taken previously when attacked—past behavior is assumed to be a predictor of

future behavior.

Competitors are more likely to respond to strategic or tactical actions when they are

taken by a market leader.

In particular, evidence suggests that commonly successful

actions, especially strategic actions, will be quickly imitated. For example, although a

second mover, IBM committed significant resources to enter the PC market. When IBM

was immediately successful in this endeavor, competitors such as Dell, Compaq, HP, and

Gateway responded with strategic actions to enter the market. IBM’s reputation as well

as its successful strategic action strongly influenced entry by these competitors. However,

the competitive landscape has changed dramatically over time. For example, Lenovo, a

Chinese firm, paid $1.75 billion in 2005 to buy IBM’s PC division.

In contrast to a firm with a strong reputation such as IBM, competitors are less

likely to take responses against a company with a reputation for competitive behavior

that is risky, complex, and unpredictable. The firm with a reputation as a price preda-

tor (an actor that frequently reduces prices to gain or maintain market share) gener-

ates few responses to its pricing tactical actions because price predators, which typically

increase prices once their market share objective is reached, lack credibility with their

competitors.

100

Occasionally, a firm with a minor reputation can sneak up on larger,

more resourceful competitors and take market share from them. In recent years, for

example, firms from emerging markets have taken market share from major competitors

based in developed markets.

101

Dependence on the Market

Market dependence denotes the extent to which a firm’s revenues or profits are derived

from a particular market.

102

In general, competitors with high market dependence are

likely to respond strongly to attacks threatening their market position.

103

Interestingly,

the threatened firm in these instances may not always respond quickly, even though an

effective response to an attack on the firm’s position in a critical market is important.

Sargento Foods is a family-owned company based in Wisconsin. The firm is a leading

packager and marketer of “shredded, snack and specialty cheeses (that are) sold under the

Sargento brand, cheese and non-cheese snack food items and ethnic sauces.” With sales

exceeding $600 million annually, Sargento’s business is founded on a passion for cheese.

Because Sargento’s business operations revolve strictly around cheese products, it is totally

dependent on the market for cheese. As such, any competitor that chooses to attack Sargento

and its market positions can anticipate a strong response to its competitive actions.

AP Photo/Ng Han Guan

While IBM’s initial suc-

cess in the PC market

may have inspired a

host of competitors, the

competitive landscape

has continued to shift

with the acquisitions

of Gateway by Acer,

Compaq by HP, and

IBM’s PC division by

Lenovo.

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Part 2: Strategic Actions: Strategy Formulation

Competitive Dynamics

Whereas competitive rivalry concerns the ongoing actions and responses between a firm

and its direct competitors for an advantageous market position, competitive dynamics

concern the ongoing actions and responses among all firms competing within a mar-

ket for advantageous positions. Building and sustaining competitive advantages are at

the core of competitive rivalry, in that advantages are the key to creating value for

shareholders.

104

To explain competitive dynamics, we explore the effects of varying rates of com-

petitive speed in different markets (called slow-cycle, fast-cycle, and standard-cycle mar-

kets) on the behavior (actions and responses) of all competitors within a given market.

Competitive behaviors as well as the reasons for taking them are similar within each

market type, but differ across types of markets.

105

Thus, competitive dynamics differ in

slow-cycle, fast-cycle, and standard-cycle markets. The sustainability of the firm’s com-

petitive advantages differs across the three market types.

As noted in Chapter 1, firms want to sustain their competitive advantages for as long

as possible, although no advantage is permanently sustainable. The degree of sustain-

ability is affected by how quickly competitive advantages can be imitated and how costly

it is to do so.

Slow-Cycle Markets

Slow-cycle markets are those in which the firm’s competitive advantages are

shielded from imitation commonly for long periods of time and where imitation is

costly.

106

Thus, competitive advantages are sustainable over longer periods of time in

slow-cycle markets.

Building a unique and proprietary capability produces a competitive advantage

and success in a slow-cycle market. This type of advantage is difficult for competi-

tors to understand. As discussed in Chapter 3, a difficult-to-understand and costly-

to-imitate resource or capability usually results from unique historical conditions,

causal ambiguity, and/or social complexity. Copyrights, geography, patents, and owner-

ship of an information resource are examples of resources.

107

After a proprietary advan-

tage is developed, the firm’s competitive behavior in a slow-cycle market is oriented to

protecting, maintaining, and extending that advantage. Thus, the competitive dynam-

ics in slow-cycle markets usually concentrate on competitive actions and responses

that enable firms to protect, maintain, and extend their competitive advantage. Major

strategic actions in these markets, such acquisitions, usually carry less risk than in

faster-cycle markets.

108

Walt Disney Co. continues to extend its proprietary characters, such as Mickey Mouse,

Minnie Mouse, and Goofy. These characters have a unique historical development as a

result of Walt and Roy Disney’s creativity and vision for entertaining people. Products

based on the characters seen in Disney’s animated films are sold through Disney’s theme

park shops as well as freestanding retail outlets called Disney Stores. Because copyrights

shield it, the proprietary nature of Disney’s advantage in terms of animated character

trademarks protects the firm from imitation by competitors.

Consistent with another attribute of competition in a slow-cycle market, Disney

protects its exclusive rights to its characters and their use. As with all firms competing

in slow-cycle markets, Disney’s competitive actions (such as building theme parks in

France, Japan, and China) and responses (such as lawsuits to protect its right to fully

control use of its animated characters) maintain and extend its proprietary competitive

advantage while protecting it.

Patent laws and regulatory requirements such as those in the United States requiring

FDA (Food and Drug Administration) approval to launch new products shield pharma-

ceutical companies’ positions. Competitors in this market try to extend patents on their

Slow-cycle markets are

those in which the ﬁ rm’s

competitive advantages

are shielded from imitation

commonly for long periods

of time and where imitation

is costly.

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Chapter 5: Competitive Rivalry and Competitive Dynamics

drugs to maintain advantageous positions that the patents provide. However, after a patent

expires, the firm is no longer shielded from competition, allowing generic imitations and

usually leading to a loss of sales.

The competitive dynamics generated by firms competing in slow-cycle markets are

shown in Figure 5.4. In slow-cycle markets, firms launch a product (e.g., a new drug) that

has been developed through a proprietary advantage (e.g., R&D) and then exploit it for

as long as possible while the product is shielded from competition. Eventually, competi-

tors respond to the action with a counterattack. In markets for drugs, this counterattack

commonly occurs as patents expire or are broken through legal means, creating the need

for another product launch by the firm seeking a protected market position.

Fast-Cycle Markets

Fast-cycle markets are markets in which the firm’s capabilities that contribute to

competitive advantages aren’t shielded from imitation and where imitation is often

rapid and inexpensive. Thus, competitive advantages aren’t sustainable in fast-cycle

markets. Firms competing in fast-cycle markets recognize the importance of speed;

these companies appreciate that “time is as precious a business resource as money

or head count—and that the costs of hesitation and delay are just as steep as going

over budget or missing a financial forecast.”

109

Such high-velocity environments place

considerable pressures on top managers to quickly make strategic decisions that are

also effective.

110

The often substantial competition and technology-based strategic focus

make the strategic decision complex, increasing the need for a comprehensive approach

integrated with decision speed, two often-conflicting characteristics of the strategic

decision process.

111

Reverse engineering and the rate of technology diffusion in fast-cycle markets

facilitate rapid imitation. A competitor uses reverse engineering to quickly gain

the knowledge required to imitate or improve the firm’s products. Technology is

diffused rapidly in fast-cycle markets, making it available to competitors in a short

period. The technology often used by fast-cycle competitors isn’t proprietary, nor is

it protected by patents as is the technology used by firms competing in slow-cycle

markets. For example, only a few hundred parts, which are readily available on the

open market, are required to build a PC. Patents protect only a few of these parts, such

as microprocessor chips.

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Figure 5.4 Gradual Erosion of a Sustained Competitive Advantage

Source: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by taking strategic initiative, Academy of

Management Executive, II(2): 111–118.

Returns from

a Sustained

Competitive

Advantage

Counterattack

Exploitation

Launch

Time (years)

Fast-cycle markets

are markets in which

the ﬁ rm’s capabilities

that contribute

to competitive

advantages aren’t

shielded from imitation

and where imitation

is often rapid and

inexpensive.

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Part 2: Strategic Actions: Strategy Formulation

Fast-cycle markets are more volatile than slow-cycle and standard-cycle markets.

Indeed, the pace of competition in fast-cycle markets is almost frenzied, as companies

rely on innovations as the engines of their growth. Because prices often decline quickly

in these markets, companies need to profit quickly from their product innovations.

Imitation of many fast-cycle products is relatively easy, as demonstrated by Dell and HP,

along with many other PC vendors that have partly or largely imitated the original PC

design to create their products. Continuous reductions in the costs of parts, as well as the

fact that the information required to assemble a PC isn’t especially complicated and is

readily available, make it possible for additional competitors to enter this market without

significant difficulty.

113

The fast-cycle market characteristics just described make it virtually impossible

for companies in this type of market to develop sustainable competitive advantages.

Recognizing this reality, firms avoid “loyalty” to any of their products, preferring to can-

nibalize their own before competitors learn how to do so through successful imitation.

This emphasis creates competitive dynamics that differ substantially from those found

in slow-cycle markets. Instead of concentrating on protecting, maintaining, and extend-

ing competitive advantages, as in slow-cycle markets, companies competing in fast-cycle

markets focus on learning how to rapidly and continuously develop new competitive

advantages that are superior to those they replace. They commonly search for fast and

effective means of developing new products. For example, it is common in some indus-

tries for firms to use strategic alliances to gain access to new technologies and thereby

develop and introduce more new products into the market.

114

In recent years, many of

these alliances have been offshore (with partners in foreign countries) in order to access

appropriate skills while maintaining lower costs to compete.

115

The competitive behavior of firms competing in fast-cycle markets is shown in

Figure 5.5. As suggested by the figure, competitive dynamics in this market type entail

actions and responses that are oriented to rapid and continuous product introductions

and the development of a stream of ever-changing competitive advantages. The firm

launches a product to achieve a competitive advantage and then exploits the advantage

for as long as possible. However, the firm also tries to develop another temporary

competitive advantage before competitors can respond to the first one (see Figure 5.5).

Thus, competitive dynamics in fast-cycle markets often result in rapid product upgrades

as well as quick product innovations.

116

146

Figure 5.5

Developing Temporary Advantages to Create Sustained Advantage

Source: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by taking strategic initiative, Academy of

Management Executive, II(2): 111–118.

Returns from

a Series of

Replicable

Actions

Counterattack

Exploitation

Launch

Time (years)

etc.

Firm Has Already

Advanced to

Advantage No. 2

As explained in the Opening Case, candy

seems to be recession proof. For example, in

the depression of the 1930s, candy companies

actually performed well. In fact, several candy

products that remain popular today were developed and introduced during the 1930s. For

example, Snickers was introduced in 1930, Tootsie Roll Pops in 1931, and Mars Bars in 1932.

During tough economic times, people spend more time at home and look for ways they can

reduce their stress. Eating candy is an enjoyable way to relax and it is inexpensive compared

to many other outlets one may seek. It is an affordable luxury. Eating candy makes people

think of better times and may even remind them of enjoyable times as a child. One person

who works in his father’s candy store on the weekend says that he likes to do so because

people are happy when they are buying candy.

For these reasons, the performance of candy manufacturers has been one of the

few bright spots in the recession of 2008–2009. For example, the Hershey Company

experienced a 3.8 percent sales increase in 2008 compared to 2007 as well as an increase in

profits. Few companies in other industries had such

a positive experience. In fact, Hershey announced

plans to increase its advertising by almost 17 percent

in 2009. Many of the best-selling candies during the

recession are cheaper and old fashioned, which has

also helped Hershey. However, even some of the

more exclusive candy companies had performance

gains during the recession. Godiva Chocolatier, Inc.,

expects continued growth, while Lindt & Sprungli

AG, maker of premium candies, had a 5.8 percent

increase in sales during 2008. Cadbury achieved a

30 percent increase in its annual profits. Nestle’s

profits were 10.9 percent higher in 2008 as well.

Hershey took several actions in recent years that

have aided its performance gains. For example, it

finally responded to its competitors’ premium product

lines (e.g., Godiva, Cadbury) with a premium line of

its own, Bliss Chocolates. In addition, it developed

a line of chocolates for Starbucks that are sold as

premium candies. However, Hershey’s best sales have

come from its basic product lines such as Hershey

Bars, Kisses, and Reese’s Peanut Butter Cups. Thus, Hershey placed a renewed emphasis on

these product lines. Hershey also experienced increased sales through discount retailers and

at convenience stores (especially after the price of gasoline declined significantly).

Sources: S. Grimmett, 2008, Hershey (HSY): Kisses sweeten the recession, Today’s Financial News, http://www.

todaysfinancialnews.com, October 8; J. Gordon, 2008, Prospecting in the recession? Think chocolate, The

Customer Collective, http://www.thecustomercollective.com, November 3; D. Hockens, 2009, Hershey’s profits

rise as economy slumps, Pennlive Blog, http://www.pennlive.com/blogs, January 27; J. Jargon & A. Cordeiro, 2009,

Recession puts Hershey in sweet spot, The Wall Street Journal, http://www.wsj.com, January 28; 2009, Cadbury choco-

late sales soar in recession, YumSugar, http://www.yumsugar.com, February 26; C. Haughney, 2009, When economy

sours, tootsie rolls soothe souls, The New York Times, http://www.nytimes.com, March 24.

SOOTHING THE SOUL

WITH KISSES—CANDY

KISSES THAT IS

Mark Savage/CORBIS

Not only have candy manufactur-

ers seen sales increase during the

recession, brands such as Hershey

are investing more in marketing and

launching new product lines to take

on more upscale competitors.