Chapter 5: Competitive Rivalry and Competitive Dynamics 147that affect the likelihood a firm will take a competitive action and the factors that affect
the likelihood a firm will respond to a competitor’s action. In the chapter’s final section,
we turn our attention to competitive dynamics to describe how market characteristics
affect competitive rivalry in slow-cycle, fast-cycle, and standard-cycle markets.5-2 Competitor Analysis
As previously noted, a competitor analysis is the first step the firm takes to be able to
predict the extent and nature of its rivalry with each competitor. Competitor analyses
are especially important when entering a foreign market because firms doing so need
to understand the local competition and foreign competitors currently operating in that
market.^23 Without such analyses, they are less likely to be successful.
The number of markets in which firms compete against each other is called mar-
ket commonality while the similarity in their resources is called resource similarity
(both terms will be discussed later). These two dimensions of competition determine
the extent to which firms are competitors. Firms with high market commonality and
highly similar resources are direct and mutually acknowledged competitors. The
drivers of competitive behavior—as well as factors influencing the likelihood that a
competitor will initiate competitive actions and will respond to its competitors’
actions—influence the intensity of rivalry.^24
In Chapter 2, we discussed competitor analysis as a technique firms use to understand
their competitive environment. Together, the general, industry, and competitive environ-
ments comprise the firm’s external environment. We also described how competitor anal-
ysis is used to help the firm understand its competitors. This understanding results from
studying competitors’ future objectives, current strategies, assumptions, and capabilities (see
Figure 2.3 in Chapter 2). In this chapter, the discussion of competitor analysis is extended
to describe what firms study to be able to predict competitors’ behavior in the form of their
competitive actions and responses. The discussions of competitor analysis in Chapter 2
and in this chapter are complementary in that firms must first understand competitors
(Chapter 2) before their competitive actions and responses can be predicted (this chapter).
Being able to accurately predict rivals’ likely competitive actions and responses helps a
firm avoid situations in which it is unaware of competitors’ objectives, strategies, assump-
tions, and capabilities. Lacking the information needed to predict these conditions for
competitors creates competitive blind spots. Typically, competitive blind spots find a firm
being surprised by a competitor’s actions, potentially resulting in negative outcomes.^25
Increasingly, members of a firm’s board of directors are expected to use their knowledge
and expertise about other businesses and industry environments to help a firm avoid
competitive blind spots.^26
5-2a Market Commonality
Every industry is composed of various markets. The financial services industry has
markets for insurance, brokerage services, banks, and so forth. To concentrate on the
needs of different, unique customer groups, markets can be further subdivided. The
insurance market could be broken into market segments (such as commercial and
consumer), product segments (such as health insurance and life insurance), and geo-
graphic markets (such as Southeast Asia and Western Europe). In general, the capabil-
ities that Internet technologies generate help to shape the nature of industries’ markets
along with patterns of competition within those industries. For example, according to
a Procter and Gamble (P&G) official: “Facebook is both a marketing and a distribu-
tion channel, as P&G has worked to develop ‘f-commerce’ capabilities on its fan pages,