Chapter 5 Competitive Rivalry and Competitive Dynamics True/False 1. Firms operating in the same market, offering similar products and targeting similar customers are competitors. A. True B. False Answer: True 2. Competitive rivalry is the contest to be the first mover in an international market. A. True B. False Answer: False 3. Competitive rivalry is the set of competitive actions and responses that occur among firms as they maneuver for an advantageous market position. A. True B. False Answer: True 4. "Competitive dynamics" indicates that firms and their strategic actions are independent. A. True B. False Answer: False 5. A strategy's success is determined not only by the firm's initial competitive actions but also by how well it anticipates competitors' responses to them and by how well the firm anticipates and responds to its competitors initial actions. A. True B. False Answer: True 6. Firms with high market commonality and highly similar resources are direct and mutually acknowledged competitors. A. True B. False Answer: True 7. Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. A. True B. False Answer: True 8. Coca Cola and PepsiCo compete across a number of products (e.g., soft drinks, bottled water) and geographic markets (U.S. and foreign markets) indicating that both companies have market commonality. A. True B. False Answer: True 9. Research suggests that a firm with greater multimarket contact is less likely to initiate an attack, but more likely to respond aggressively when attacked. A. True B. False Answer: True 10. Extensive market commonality guarantees intense competition in an industry. A. True B. False Answer: False 11. Bayou Belle Water markets water drawn only from a single artesian well in Southern Louisiana. It has a loyal following in its region. Since Bayou Belle markets the water, just as Coca-Cola, Nestle, and PepsiCo do, Bayou Belle has high resource similarity with these international firms. A. True B. False Answer: False 12. Two firms, such as Fed Ex and UPS that have similar resources and common markets would be direct and mutually acknowledged competitors. A. True B. False Answer: True 13. Two firms, such as a small local, family-owned Italian restaurant and Olive Garden share few markets and have little similarity in resources, but are nonetheless direct and mutually acknowledged competitors. A. True B. False Answer: False 14. Awareness tends to be greatest when firms have highly similar resources and compete in multiple markets. A. True B. False Answer: True 15. Under the framework of competitive action and response, "ability" refers to an attacking or responding firm's knowledge of the competitive market characteristics. A. True B. False Answer: False 16. Walmart has recently opened a store in Alsatia, Missouri. Several local small retailers have decided that choosing not to respond to Walmart's competitive actions is a viable long-term option, because although the companies have high market commonality they have little resource similarity. These small retailers are correct in their decision. A. True B. False Answer: False 17. A tactical competitive action involves a significant commitment of specific and distinctive organizational resources. A. True B. False Answer: False 18. Boeing's decision to commit the resources required to build the super-efficient 787 midsized jetliner is an example of a tactical action. A. True B. False Answer: False 19. Walmart's aggressive pricing strategy is a strategic action that plays a major role in how it competes. A. True B. False Answer: False 20. First movers can gain a sustained competitive advantage when they reduce their costs through reverse engineering. A. True B. False Answer: False 21. To be a first mover, the firm must have readily available resources to invest in R&D as well as to rapidly and successfully produce and market a stream of innovative products. A. True B. False Answer: True 22. An organization with high profitability, such as Walmart, will be able to develop high organizational slack. A. True B. False Answer: True 23. Mighty Mike's, a manufacturer of power tools for the home hobbyist, has seen its main competitor, MyTools, bring out a line of power tools that are smaller sized, lighter weight, and suitable for women and older hobbyists who have weaker hands than the typical male workshop hobbyist. Mighty Mike is waiting to see whether MyTool's new line is a success. Mighty Mike could be classified as a second mover. A. True B. False Answer: True 24. Firms that are typically late movers usually have little organizational slack. A. True B. False Answer: True 25. Large firms with significant slack resources (i.e., are able to launch a greater number of competitive actions) but who remain flexible and act like small firms (i.e., are able to launch a variety of actions) will be more successful against rivals. A. True B. False Answer: True 26. The need for quality products and services is so high that quality alone can assure a firm that it will achieve strategic competitiveness and earn above-average returns. A. True B. False Answer: False 27. Quality begins at the bottom of the organization where employees must create values for quality that permeate the entire organization. A. True B. False Answer: False 28. A firm can predict that a competitor whose products suffer from poor quality is likely to be less aggressive in its competitive actions until those quality problems are corrected. A. True B. False Answer: True 29. In general, strategic actions elicit fewer competitive responses than do tactical actions. A. True B. False Answer: True 30. Even if the effects of a competitor's strategic action on the focal firm are significant (e.g., loss of market share), little response is likely from that firm. A. True B. False Answer: False 31. It is more likely that locally owned, one-location cafes in a small town will respond more rapidly to tactical actions by each other than they will to strategic actions by the Burger King franchise that has recently moved to their town. A. True B. False Answer: True 32. A firm with a reputation as a price predator (an actor that frequently reduces prices to gain or maintain market share) generates few responses to its pricing tactical actions. A. True B. False Answer: False 33. Firms are likely to imitate the actions of a competitor that is noted for risky, complex, and unpredictable behavior because this is a way to imitate unobservable core competencies. A. True B. False Answer: False 34. The more dependent a firm is on its market, the more aggressively it will defend it from another competitor. A. True B. False Answer: True 35. Disney is an example of a firm in a slow-cycle market because its animated characters are shielded from imitation by copyrights and trademarks. A. True B. False Answer: True 36. Patent laws and regulatory requirements such as required FDA (Food and Drug Administration) approval to launch new products shield pharmaceutical companies' positions in this slow-cycle market. A. True B. False Answer: True 37. Carl has just graduated with a management degree. He has a good understanding of his personal strengths and weaknesses and knows he would fit best in a stable organizational environment. In his job search, Carl should target firms in slow-cycle markets. A. True B. False Answer: True 38. Fast-cycle markets are characterized by "generational products," which start out with a substantial technological advance in the performance of a product category followed by incremental technological advances as new generations of products are introduced. A. True B. False Answer: True 39. The satellite dish at Faye's weekend home has malfunctioned. When she calls to have the dish repaired, the service representative tells her that the dish is obsolete and that parts for it are no longer made. Faye must replace the old dish with a new dish. This is an example of lack of firm loyalty to a product in a fast-cycle market. A. True B. False Answer: True 40. Unlike fast-cycle markets, the struggle for market share in standard-cycle markets is moderate. A. True B. False Answer: False Multiple Choice 41. Competitive rivalry has the most effect on the firm's _________ strategies than the firm's other strategies. A. business-level B. corporate-level C. acquisition D. international Answer: A 42. Multimarket competition occurs when firms A. sell different products to the same customer. B. have a high level of awareness of their competitors' strategic intent. C. simultaneously enter into an attack strategy. D. compete against each other in several geographic or product markets. Answer: D 43. Competitive dynamics refers to the A. circumstances in which competitors are aware of the degree of their mutual interdependence resulting from market commonality and resource similarity. B. set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position. C. total set of actions and responses taken by all firms competing within a market. D. ongoing set of competitive actions and competitive responses between competitors as they maneuver for advantageous market position. Answer: C 44. Intensified rivalry within an industry results in A. increased hiring across the industry. B. increased total revenues across the industry. C. decreased average profitability across the industry. D. increased entries into the industry. Answer: C 45. Hilliard Pharmaceuticals and Ahrens Vitamins, Inc., have high market commonality, both geographically and in the market segments in which they compete. Hilliard, the number two firm in the industry, has undertaken a major strategic attack upon Ahrens, the market leader. Which of the following statements is most likely to be TRUE? A. Ahrens will not respond aggressively since this is a strategic move and not a tactical action. B. As the market leader, Ahrens has little to fear from an attack by Hilliard and will not expend organizational slack on a major response. C. Ahrens will respond aggressively because of the high multimarket contact between Hilliard and Ahrens. D. Ahrens will respond after a long delay as the nutrition supplement industry is a slow-cycle industry. Answer: C 46. In general, compared with firms which compete in only one market, among firms which face one another in multiple markets there is A. similar competitive rivalry. B. less competitive rivalry. C. more competitive rivalry. D. no competitive rivalry. Answer: B 47. Research suggests that a firm with greater multimarket contact is ________ likely to initiate and attack, and __________ likely to respond aggressively when attacked. A. more; more B. less; more C. less; less D. more; less Answer: B 48. Which pair of firms has the LEAST resource similarity? A. small, family-owned Italian restaurant; Olive Garden B. Target; Walmart C. HP; Dell D. FedEx; UPS Answer: A 49. Rapid-Built Homes specializes in low-cost prefabricated, modular homes that can be erected in a matter of days anywhere in the country. Rapid-Built focuses on entire subdivisions of homes developed by real estate speculators. ModernModular Homes (ModMod) specializes in modular homes designed by architects, which can be built anywhere in the country. The buyers usually build the home themselves from kits on their own lots. ModMod sells fewer than 100 house kits per year. ModMod is run by two professors of architecture as a sideline business. According to the "Framework of Competitive Analysis," we can say that Rapid-Built and ModMod A. are direct mutually acknowledged competitors. B. have high resource similarity. C. have high market commonality. D. are probably not engaged in intense competitive rivalry. Answer: D 50. Firms with ________ market commonality and _____ resource similarity are direct and mutually acknowledged competitors. A. low; high B. low; low C. high; high D. high; low Answer: C 51. In general, firms are more aware of competitors who have similar resources and who A. have low market dependence. B. are late movers. C. have low market commonality. D. compete against the firm in multiple markets. Answer: D 52. _________ and _______ describe the situation in which organizations are direct competitors and are fully aware of the competition. A. High market commonality; high resource similarity B. High market commonality; low resource similarity C. Low market commonality; high resource similarity D. Low market commonality; low resource similarity Answer: A 53. Firms with few competitive resources are more likely to A. not respond to competitive actions. B. respond quickly to competitive actions. C. delay responding to competitive actions. D. respond to strategic actions, but not to tactical actions. Answer: C 54. _________ relates to the gains or losses a firm will experience if it attacks a rival or responds to an attack by a rival. A. Motivation B. Awareness C. Responsiveness D. Ability Answer: A 55. Both _________ and _________ affect the awareness and motivation of a firm to undertake actions and responses. A. first-mover advantages; corporate size B. market commonality; resource similarity C. management capabilities; competitive analysis D. speed of management decisions; management actions Answer: B 56. The larger the resources of a firm taking a competitive action compared with the resources of the other firms in the industry, the _________ the response will be of these other firms. A. more fragmented B. slower C. larger D. more tactical Answer: B 57. Walmart initially used a focused cost-leadership strategy to compete only in small communities by using sophisticated logistics systems and efficient purchasing practices to gain a competitive advantage. The response of local competitors was _________ because they A. rapid; were nimble and flexible. B. slow; lacked the ability to marshal resources. C. rapid; perceived gains from responding to Walmart's attack. D. rapid; had the resources and flexibility compete against Walmart. Answer: B 58. A competitive action can be one of two types, either _________ or _________. A. aggressive; defensive B. quality-based; cost-based C. strategic; tactical D. market-based; resource-based Answer: C 59. Which of the following is an example of a strategic action? A. A "two movies for the price of one" campaign by Blockbuster Video B. Use of product coupons by a local grocer C. Entry into the European market by Home Depot D. Fare increases by Southwest Airlines Answer: C 60. Which of the following is an example of a tactical action? A. Walmart's launch of Sam's Club stores B. Continental Airlines exit from a hub airport in Denver C. Netflix beginning to offer music DVDs in addition to movies D. Dell's launch of a new line of high performance, custom-made PCs Answer: C 61. Which of the following is the most strategic action by Walmart? A. Aggressive pricing to ensure they are a price leader B. Aggressively pricing toys and electronics during the holiday season C. Aggressively pricing school-related items in the back-to-school season D. Entering a new foreign market Answer: D 62. On the whole there are more competitive responses to A. strategic actions than to tactical actions. B. tactical actions than to strategic actions. C. buyer pressures than to supplier pressures. D. the demands of the top management team than to industry structural pressures. Answer: B 63. First movers are A. entrepreneurs who lead in the establishment of new industries. B. firms that are first to exit a declining industry. C. firms that take an initial competitive action. D. individuals who move frequently as employment opportunities change in a locale. Answer: C 64. The chief disadvantage of being a first mover is the A. high degree of risk. B. high level of competition in the new marketplace. C. inability to earn above-average returns unless the production process is very efficient. D. difficulty of obtaining new customers. Answer: A 65. Which of the following statements is FALSE? A. First movers tend to take higher risks than second and later movers. B. First movers tend to have significantly higher revenues than second movers. C. First movers have lower survival rates than second and late movers. D. First movers tend to have more organizational slack than later movers. Answer: C 66. A second mover A. is typically ineffective in its response to the first mover. B. attempts to provide a product with greater customer value than the first mover's product. C. usually incurs higher expenses than the first mover since it must engage in reverse engineering. D. typically has a higher survival rate than first movers which typically take greater risks. Answer: B 67. Late movers are those firms that A. respond to a competitive action a significant amount of time after the first mover's action and the second mover's response. B. respond to a first mover's competitive action often through imitation or a move designed to counter the effects of the action. C. take an initial competitive action (either strategic or tactical). D. typically achieve higher-than-average returns because they can imitate the most efficient actor. Answer: A 68. Bubble-Up, Inc., is a small manufacturer of educational toys for children under age 10. It has co-existed with three other competitors in the educational toy industry for over 20 years, each of them maintaining a stable market share. There is a wide-spread rumor that Mega-Toy, Inc., the market leader in the broad children's toy market, has decided to target educational toys. Which of these statements is most likely TRUE? A. The owners of Bubble-Up are unconcerned about Mega-Toy's entry to the market because of the resource dissimilarity between the firms. B. Bubble-Up's greater organizational slack will allow it to aggressively attack Mega-Toy. C. Bubble-Up's smaller size may make it more flexible in introducing innovations than Mega-Toy. D. Competitive rivalry will not increase for Bubble-Up because Mega-Toy is not dependent on the educational toy market. Answer: C 69. A firm that is LEAST likely to launch competitive actions is one that has A. organizational slack. B. advanced research and development. C. recently improved the quality of its products. D. large size. Answer: D 70. All competitive advantages do not accrue to large-sized firms. A major advantage of smaller firms is that they A. are more likely to have organizational slack. B. can launch competitive actions more quickly. C. have more loyal and diverse workforces. D. can wait for larger firms to make mistakes in introducing innovative products. Answer: B 71. Which of the following is TRUE of Walmart? A. Walmart has an unusual amount of flexibility for a large firm. B. Walmart's success is largely due to the fact it has little market commonality with other industry firms. C. Decision-making responsibility is centered at its Arkansas headquarters, which allows the firm to respond quickly to competitive attacks. D. Walmart's advantage lies in its ability to "think big." Answer: A 72. Which of the following is TRUE of Southwest Airlines? A. Southwest has an unusually low amount of flexibility for a large firm. B. Southwest's success is largely due to the fact it has little market commonality with other airlines. C. Decision-making responsibility is centered at its Dallas headquarters, which allows the firm to respond quickly to competitive attacks. D. Southwest's advantage lies in its ability to "think small." Answer: D 73. Without quality, the firm's products A. can compete effectively on the basis of low price. B. lack credibility among customers. C. must be exported to developing countries, because they are not competitive in the United States or developed countries. D. are associated with predatory competition. Answer: B 74. Quality is A. meeting or exceeding customer expectations in the goods and/or services offered. B. only a major factor in the production of luxury goods, such as BMW cars. C. an assured way to gain competitive advantage. D. a viable trade-off with product cost in gaining a competitive advantage. Answer: A 75. Quality affects competitive rivalry because a competitor whose products suffer from poor quality likely will _____________ until A. initiate more competitive actions; the firm returns to profitability. B. initiate fewer competitive actions; the quality problems are corrected. C. initiate more competitive actions; the quality problems are corrected. D. advertise more; customers believe the quality had improved. Answer: B 76. Competitors are more likely to respond to competitive actions that are taken by A. differentiators. B. larger companies. C. first movers. D. market leaders. Answer: D 77. A firm is likely to respond to an attack by a competitor in all of the following situations EXCEPT when A. the attack is by a price predator. B. the attack makes the firm's market position less defensible. C. the attack damages the firm's ability to use its capabilities. D. the attack improves the competitor's market position. Answer: A 78. Which company below committed significant resources to enter the information services market and, given its success, was imitated by other competitors? A. Compaq B. IBM C. HP D. Dell Answer: B 79. Akamai Technologies is a dominant player in the content delivery network (CDN) market. Akamai is not very diversified (i.e., is dependent on the CDN market). If rival CDN providers such as Limelight Networks and Level 3 Communications lower their basic CDN service prices, what would be Akamai's likely response? A. raise its prices B. do nothing since it is the market leader C. exit the industry D. lower its prices Answer: D 80. Lobelia's Nursery and Garden Resource Center has long provided high-quality, typical types of seasonal bedding plants to customers in the Mobile, Alabama, metropolitan area. It has traditionally competed with the other plant nurseries within a 50-mile radius of Mobile. Recently, Lobelia has opened a branch in Fairfax, Virginia. Lobelia's research shows that most Fairfax nurseries have only one location. Lobelia can expect the local Fairfax nurseries to A. be unmotivated to respond because their market position is not threatened by a new competitor from out-of-town. B. respond with fierce attacks because of resource dissimilarity. C. respond aggressively because of high market dependence. D. take no competitive response because of the lack of mutual interdependence among the nurseries. Answer: C 81. Which organization has the highest market dependence? A. a chain of rapid-service oil change shops B. a manufacturer of chemicals for the international pharmaceutical industry C. a regional department store having 26 locations in the Northwest D. a company that specializes in making replacement tiles for the space shuttle Answer: D 82. Sustained competitive advantage is most achievable in a _________ market. A. slow-cycle B. medium-cycle C. standard-cycle D. fast-cycle Answer: A 83. Walt Disney's focus on _________ is typical of a slow-cycle market. A. innovation B. total quality C. proprietary rights D. economies of scale Answer: C 84. The CEO of the Wholesome Food retail grocery chain, which specializes in organic and natural produce and meat, has stated, "The key to success is to find your niche and focus on it, regardless of what anyone else does." The CEO A. realizes that he must understand competitors in order to predict their competitive actions and responses. B. understands that he is the market leader in his niche and thus has a sustainable competitive advantage. C. believes he has placed his firm in a slow-cycle industry where concerns about protecting unique competencies dominate concerns about market share. D. realizes his firm has such lower resources than other competitors that his chain is "competitively invisible" to them. Answer: C 85. The ability of Disney to maintain its competitive advantage through proprietary rights to its characters would be severely weakened if A. theme parks with alternative cartoon characters were built in large numbers. B. numerous lawsuits against copyright thieves tainted the reputation of the company. C. Disney attempted to move beyond its traditional industry. D. Disney's cartoon characters became widely perceived as old-fashioned and unappealing. Answer: D 86. Lawsuits over patent and copyright infringements are more common and intense in A. fast-cycle markets because the market is innovation-driven. B. standard-cycle markets because the firm's brand name is such an important competitive advantage. C. slow-cycle markets, because of the ability to shelter the company from imitation of its competitive advantage. D. standard-cycle markets because innovation is rare, and so gives the innovating firm a significant competitive advantage. Answer: C 87. Traditionally, the music industry signed multi-year contracts with artists and sold copyright protected music through established distribution channels. A shift to the digital format and the rise of Internet technology has resulted in the sharing of music over peer-to-peer networks, a practice the industry called "piracy." In recent years, the music industry has seen a rapid decline in the number of CDs sold. At the same time, the ownership of the distribution rights of musical content under copyright laws remains clear. Attempts at innovation by individual record labels to offer music as direct downloads to consumer are quickly copied by other labels. Based on these factors, the best assessment is that the music industry has shifted from a _________ to a _________ cycle market. A. slow; fast B. slow; standard C. standard; slow D. standard; fast Answer: D 88. Which industry can be LEAST described as a slow-cycle market? A. freight railroads B. pharmaceuticals C. cell phone provider D. private ownership of highways and bridges Answer: C 89. Reverse engineering is characteristic of A. first movers. B. fast-cycle markets. C. market leaders. D. price predators. Answer: B 90. Companies in fast-cycle markets need to profit quickly from an innovative product for all of the following reasons EXCEPT A. the technology used is not proprietary. B. the prices of component parts tends to rise rapidly. C. product prices fall quickly in fast-cycle markets. D. counterattacks from rivals come quickly. Answer: B 91. A company in a _________ industry is LEAST likely to make heavy use of patents and copyrights. A. slow-cycle B. medium-cycle C. standard-cycle D. fast-cycle Answer: D 92. _________ markets are often described as volatile and innovative. A. Slow-cycle B. Fast-cycle C. Standard-cycle D. Sheltered Answer: B 93. An organization's loyalty to its own product is a competitive disadvantage in a(n) _________ market. A. slow-cycle B. standard cycle C. intermediate cycle D. fast-cycle Answer: D 94. Because Coca-Cola, Nestle, and PepsiCo all sell a product (bottled water) that is essentially the same and all three giant companies are engaged in battles for market share using incremental changes in their products and seeking loyalty to brand names, it is most likely that the bottled water market is a(n) A. slow-cycle market B. standard-cycle market. C. fast-cycle market. D. intermediate-cycle market. Answer: B 95. Competition between candy makers (e.g., Hershey, Mars, Cadbury, Nestle, and Godiva) where firms package design (including package downsizing) and ease of availability is characteristic of a(n) A. slow-cycle market B. standard–cycle market. C. fast-cycle market. D. intermediate-cycle market. Answer: B 96. Goods or services in standard-cycle markets reflect A. organizations that serve a mass market. B. numerous first mover advantages. C. an inability to sustain a competitive advantage except for brief periods of time. D. competitive advantages that are shielded from imitation. Answer: A 97. The competitive actions and responses in ______ markets are designed to seek large market shares, to gain customer loyalty through brand names, and to carefully control the firm's operations in order to consistently provide the same positive experience for customers. A. standard-cycle B. fast-cycle C. slow-cycle D. intermediate-cycle Answer: A 98. The flat-panel television market where prices have come down and competition has become more stable is best characterized as A. standard-cycle. B. fast-cycle. C. slow-cycle. D. competitive rivalry. Answer: A 99. Consumer goods producers are innovating in terms of healthy products. This type of incremental innovation is typical of A. fast-cycle markets. B. standard-cycle markets. C. incremental-cycle markets. D. slow-cycle markets. Answer: B 100. In order to compete effectively, standard-cycle firms need all of the following EXCEPT A. large market share. B. customer loyalty through brand name. C. careful control of operations to preserve consistency for customers. D. rapid and continuous product introductions. Answer: D Essay 101. Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. Answer: Competitors are firms competing in the same market, offering similar products, and targeting similar customers. Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competitors as they compete against each other for an advantageous market position. For the individual firm, the set of competitive actions and responses it takes while engaged in competitive rivalry is called competitive behavior. Competitive dynamics is the set of actions and responses taken by all firms that are competitors within a particular market. 102. What is market commonality? What is resource similarity? How are these concepts combined to identify the level of competition between two firms? Answer: Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. When firms produce similar products and compete for the same customers, the competitive rivalry is likely to be high. Firms competing against one another in several or many markets engage in multimarket competition. Research suggests that a firm with greater multimarket contact is less likely to initiate an attack, but more likely to respond when attacked. In general, multimarket competition reduces competitive rivalry but some firms will still compete when the potential rewards (e.g., potential market share gain) are high. Resource similarity is the extent to which the firm's tangible and intangible resources are comparable to a competitor's in terms of both type and amount. Firms with resource similarity are likely to have similar strengths and weaknesses and to use similar strategies. The combination of high or low market commonality and high or low resource similarity identifies whether firms are competitors. Firms having both high market commonality and high resource similarity are direct and mutually acknowledged competitors. If firms share few markets and have little similarity in resources they are not direct and mutually acknowledged competitors. 103. Define awareness, motivation, and ability in reference to competitive behavior. Answer: Awareness, motivation, and ability are the drivers of competitive behavior. They influence the firm's actions toward and responses to competitors. Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity. Awareness affects the extent to which the firm understands the consequences of its competitive actions and responses. Awareness is greatest when firms have highly similar resources. Motivation concerns the firm's incentive to take action against a competitor or to respond to a competitor's attack. If the firm does not believe that attacking its competitors will improve its position, it will not act. If the firm does not believe a competitor's action will result in losses for it, it will not have motivation to respond. High market commonality gives firms more motivation to attack and to respond to competitors' actions than when market commonality is low. Ability relates to each firm's resources and the flexibility these resources provide. When a firm faces a competitor with similar resources, careful study of a possible attack is essential because a competitor with similar resources is likely to respond to competitive attack. When the resources between two competitors are very dissimilar, the weaker firm will delay in responding to an attack by the stronger firm. 104. Define competitive actions and responses and explain the two types of competitive actions and responses. Answer: A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages and 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 strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement or reverse. A tactical action or 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. Strategic actions tend to receive strategic responses. Tactical actions tend to receive tactical responses because they are easy to put into place. Strategic actions elicit fewer total competitive responses than do tactical actions. Responses to strategic actions will be slower than will responses to tactical actions because competitors need time to observe whether the strategic action will be successful. But, if a competitor's action threatens a large number of a firm's customers, the firm will react strongly regardless of whether the competitor's action is strategic or tactical. 105. What are the advantages and disadvantages of being a first mover, second mover, and late mover? Answer: First movers can gain market share, customer loyalty, and high revenues by being the first in the market. But, first movers also take more risk because it is difficult to judge the returns the firm will earn from product innovations. Moreover, if the first mover is successful, other firms will enter its arena. First movers tend to have a significant amount of organizational slack to fund research and development. Second movers imitate the first movers, after they have studied the first mover's successes and mistakes. Consequently, second movers can develop more efficient processes and technologies than first movers, which results in lower costs. Late movers react to the first and second movers' actions after a long delay. A late mover may be able to earn average returns if it has learned how to create at least as much value for customers as the value created by the first and second movers. In general, late movers are relatively ineffective. 106. What factors contribute to the likelihood of a response to a competitive action? Answer: In general, a firm is more likely to respond to a competitive action if: (1) the action leads to better use of the competitor's capabilities to gain or produce stronger competitive advantage or to improve its market position, (2) the action damages the firm's ability to use its capabilities to create or maintain an advantage, or (3) the firm's market position becomes less defensible. In addition, a firm is more likely to respond to a competitor's tactical action, rather than to a competitor's strategic action. Strategic actions involve a significant commitment of resources and are difficult to implement and reverse, as well as requiring time to put into place. In contrast, tactical actions can be implemented quickly and are quickly reversed, and are relatively less costly than strategic actions. A firm is also more likely to respond to a competitor's action when the competitor is the market leader—a firm that has the reputation for above-average returns. Successful actions by competitors are likely to be quickly imitated, even if not initiated by a market leader. Actions by price predators are usually not responded to, nor are actions by firms with reputations for risky, complex, and unpredictable behavior. Finally, competitors with high market dependence are likely to respond strongly to attacks threatening their market position. 107. Define slow-cycle, fast-cycle, and standard cycle markets. Answer: In slow-cycle markets, the firm's competitive advantage is shielded from imitation for long periods of time and imitation is costly. Competitive advantages are sustainable in slow-cycle markets. Successful firms in slow-cycle markets have difficult-to- understand and costly-to-imitate advantages resulting from unique historical conditions, causal ambiguity, and/or social complexity. These conditions can include copyrights, patents, and ownership of an information resource. Firms in slow-cycle markets focus on protecting their competitive advantages and exploiting them as long as possible. In fast-cycle markets, imitation happens quickly. Competitive advantages are not sustainable. Reverse engineering and quick technology diffusion facilitate rapid imitation. In fast-cycle markets, innovation is critical and firms avoid "loyalty" to any product. Firms must focus on rapidly and continuously developing new competitive advantages, because prices fall quickly and firms need to profit rapidly from innovations, and move on to the next product. Fast-cycle markets are volatile and the pace of innovation is frenzied. In standard-cycle markets, the firm's competitive advantages are moderately shielded from imitation and imitation is moderately costly. Competitive advantages are partially sustainable if the firm can continuously upgrade the quality of its capabilities making its competitive advantage dynamic. Typically, these markets have large firms seeking high market share, striving for customer brand loyalty, and controlling their operations to give customers consistent experiences. Economies of scale are necessary for survival. Competition for market share is intense and is often based on incremental innovation in a product rather than radical innovation. Subjective Short Answer Case Scenario 1: Romulac, Inc. Romulac Inc. (RI), a subsidiary of a large successful manufacturing conglomerate, supplies a key component in the assembly of residential cooling systems (air conditioning units, etc.). There has been tremendous consolidation in RI's industry, to the point where only five suppliers of this particular component account for nearly 90 percent of U.S. industry sales. Paralleling this trend, its customers—composed of makers of branded residential air conditioning units like Carrier and Trane—have seen similar levels of consolidation in their own industry. Half of these firms produce all their components in-house, while the balance purchases them from specialized component manufacturers like RI. RI's business is extremely capital intensive, and their 40 percent share of the market allows them to also be the most profitable domestic player. Strong competitors exist in Europe and Asia. Although like RI, these foreign players' strongholds are their home regions, with negligible presence outside of the region. Some of the larger Asian manufacturers have signaled an interest in more aggressively pursuing the lucrative U.S. market. RI is presently considering a $400 million dollar investment in a new plant, which will create a component that is much quieter, more efficient, and is likely to satisfy future regulatory standards. While the core technology for the new component is very old, RI's engineering and design skills have allowed them to retain their low cost advantage, even though the component will represent a significant improvement over products currently provided by its competition. 108. (Refer to Case Scenario 1). Develop an argument as to why RI should try to be a first-mover with this new technology. Answer: The best answers will begin by suggesting that RI move quickly to retain its dominant market share, particularly since the technology itself is not new, and competitors may easily develop their own efficient designs. A more subtle argument is that RI has an opportunity to set a new industry standard, and as the leader, may likely gain even greater market share. RI should consider being a first-mover with the new technology to establish itself as a leader in innovation, gain early market share, preempt competitors, and potentially set a new industry standard, thereby securing a competitive advantage in the long term. 109. (Refer to Case Scenario 1). Develop an argument as to why RI should hold back and be a second mover with the new technology. Answer: The best answers will observe that RI cannot predict with certainty that its new technology will be cheaper, or as cheap to produce. Thus, a primary risk is that RI invests in the plant, the industry moves to the new technology, but the technology is actually more costly to produce—in this way, RI may cannibalize its existing low-cost position with a higher-cost one. By waiting, RI can learn from its competitors' mistakes. A secondary risk is that competitors will learn from RI's initial mistakes, and be able to offer the new technology for considerably lower cost. The nightmare scenario here is that the industry moves to the new technology, RI has a higher cost position, and overseas competitors steal domestic market using the new technology, which they have learned to manufacture at a lower cost. Thus, RI could avoid this latter risk by again waiting out the competition. 110. (Refer to Case Scenario 1). As one of RI's direct competitors, how would you try to predict what it will do with regard to the new technology? Answer: The best responses can begin by pointing to three main characteristics that are likely to heavily influence RI's choices. The ways these factors bode in favor and against the move should be discussed. First, RI is both large and a dominant player in this market. Second, RI is very profitable and such profitability is a direct consequence of its large market share. Finally, RI is the subsidiary of a large successful conglomerate—students would want to point out that the new technology will require a large corporate commitment ($400 million). A related issue is whether the corporate parent considers itself to be primarily a first or second mover in its competitive interactions. 111. (Refer to Case Scenario 1). Assume that you are a consultant and have been asked by the management at Romulac Inc. whether it should be a first mover with the new component technology. Romulac is leaning toward being a first mover because the general evidence is that first movers have greater survival rates than later market entrants. Is this true or false? Answer: False Case Scenario 2: Plasco. Plasco is a $3 billion U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. Historically, Plasco has been the category killer for most of its products and has devoted tremendous resources to new product development on an ongoing basis—this research intensity has allowed the company to release, on average, a new product every day over the past 5 years. Despite its past strength and high brand awareness, Plasco's profitability has been eroded by dramatic increases in the cost of plastic resin, the primary input into its plastic products. Moreover, the retail channel has experienced rapid consolidation resulting in a shift in the balance of power from branded manufacturers like Plasco, to strong retailers like Walmart, who in turn have been unwilling to help Plasco absorb the higher resin costs. Enhancing Walmart's power is the fact that it can always turn to alternative high-volume sources of consumer plastic products like Sterlite. Further hampering Plasco's recovery is the emergence of feisty little foreign competitors like Zig Industries, a $250 million Israeli firm that has begun to take part of Plasco's market share in plastic toolboxes. Ironically, Plasco was the first company to offer plastic toolboxes some 20 years ago. This innovation changed the market dramatically and Plasco's first mover strategy rewarded it with a rapidly growing new segment and a dominant market position. Today, Plasco's toolboxes are viewed as rather boring, while Zig's products are ingeniously designed to catch the customer's eye in the aisle (better merchandising the product) and capture their interest (and pocketbook) with many new and novel features. Zig is also able to provide this new line of toolboxes at between 10 percent to 15 percent less than Plasco. 112. (Refer to Case Scenario 2). Is Walmart a competitor or a customer of Plasco? Answer: The best answers will start by summarizing that Walmart is both a customer and a competitor. It is a customer in the sense that it is a primary outlet for Plasco's products. Walmart is a competitor from the standpoint that Walmart has control over Plasco's profitability and, in a sense, is competing for a portion of the profit pool in Plasco's industry as well. 113. (Refer to Case Scenario 2). Is the toolbox business a slow-, standard-, or fast-cycle business? Answer: The best answers will suggest that the cycle characteristics of the toolbox market appear to have shifted over time. Before Plasco entered the business, metal toolboxes were the norm and this was likely to be characterized as standard to slow in terms of its cycle speed. The metal toolbox market was probably an oligopolistic one, dominated by a few profitable players. With the entrance of Plasco and its plastic toolboxes, the cycle speed among metal toolbox manufacturers increased, where they no longer dominated the industry. Plasco's innovative product plus its unique capacity (at the time) to produce a durable plastic toolbox probably turned its segment into a slow-cycle market (with Plasco enjoying a near monopoly position), while the metal toolbox took on standard- to fast-cycle market characteristics. With the new entrance of Zig into plastic toolboxes, this segment is now likely to be characterized as standard to fast cycle - plastic technologies aren't proprietary and designs are readily copied by competitors. 114. (Refer to Case Scenario 2). How can a small player like Zig be such a successful competitor against a large, established firm like Plasco? Answer: The value of this question is that it forces students to consider how changes in both a focal industry and its upstream industry may affect competition. The best answers can begin by noting that the market for plastic toolboxes is probably pretty large (tools, cosmetics, fishing gear, toys, etc.), especially on a global basis. Couple this observation with the fact that there are a number of mega-retailers who would find this to be a necessary product to stock on their shelves. Thus, this market segment is nearly an industry in and of itself and a small focused player could gain economies of scale in manufacturing as well as distribution and marketing to the staple, volume retailers like Walmart, Home Depot, and Carrefour. Finally, Plasco was apparently treating the plastic toolbox market as a stable one, leaving it less likely to invest much of any additional resources into further innovation. This creates a window of opportunity for a nimble, aggressive, focused and talented new entrant like Zig. 115. (Refer to Case Scenario 2). Although Plasco was the first mover in plastic toolboxes several years ago, its competitor Zig has gained market share by building brand loyalty to its boxes, which are viewed as more attractive and have novel features. The characteristics of this market are most similar to a standard-cycle market. Answer: True Case Scenario 3: The Pet Food Industry. The pet food industry is composed primarily of six market segments: dry dog food, dry cat food, moist dog food, moist cat food, canned dog food, and canned cat food. Five large firms dominate the market and each has some market share in all segments, and the leading share in at least one segment. The largest firm participates solely in the pet food industry, while the next four firms are actually subsidiaries of some of the world's largest food and consumer products companies. Top management of these larger firms have made public statements that suggest they each see themselves as future leaders of the pet food industry. All five have acquired comparable skills in terms of manufacturing and marketing. Two small firms also participate in the industry, but these players are relatively weak and compete in just two of the six segments; the pet food industry is the only industry in which they operate. Inputs to the industry are basic commodities and there is no real threat of substitute products except across segments and price points. The industry is growing slowly, barely keeping up with the rate of inflation. Barriers to entry are enormous when pet food companies can gain scale economies in production coupled with aggressive marketing, though even then these coordinated actions may only yield average industry profitability. Any firm can increase its market share only to the extent that another firm's share is decreased. 116. (Refer to Case Scenario 3). The pet food industry is best characterized as an example of A. slow-cycle markets. B. standard-cycle markets. C. fast-cycle markets. D. neither slow-cycle, standard-cycle, nor fast-cycle markets. Answer: B 117. (Refer to Case Scenario 3). The pet food industry provides an example of A. market commonality. B. resource similarity. C. multimarket competition. D. market commonality, resource similarity, and multimarket competition. Answer: D 118. (Refer to Case Scenario 3). Members of the pet food industry are likely to experience A. no competition. B. little competition. C. moderate competition. D. extensive competition. Answer: D Test Bank for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147
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