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Article Excerpt
Much of the empirical research on competitive reactions describes how or why rivals react to a firm's past actions, but stops short of examining whether managers attempt to predict such reactions, which we call strategic competitive reasoning. In three exploratory studies, we find evidence of managers' thinking about competitors' past and future behavior, but little incidence of strategic competitive reasoning. Competitive intelligence experts and other experienced managers' assessment of the results suggests that the relatively low incidence of strategic competitor reasoning is due to perceptions of low returns from anticipating competitor reactions more than to the high cost of doing so. Both the difficulty of obtaining competitive information and the uncertainty associated with predicting competitor behavior contribute to these perceptions. The paper suggests both a need for research on competitive behavior and an opportunity to influence and improve managerial judgment and decision making.
Key words: competitive reaction; competitive analysis; marketing strategy; managerial decision making
History: This paper was received September 11, 2001, and was with the authors 15 months for 2 revisions; processed by Barbara Kahn.
1. Introduction
Thinking strategically is a foundation of modern business and competitive strategy, yet is increasingly difficult in a dynamic environment. Day and Reibstein (1997) identify two strategic errors companies often fall prey to in the face of a dynamic business setting, strategic interdependence notwithstanding: "the failure to anticipate competitors' moves and the failure to recognize potential interactions over time" (p. 8). We characterize the first failure as managers' failure to anticipate competitors' likely actions, and the second as managers' failure to anticipate competitors' likely reactions to their own moves.
Beginning with the work of Zajac and Bazerman (1991), a strong conceptual case has developed suggesting decision makers often do not effectively conjecture about their competitors' future behavior, particularly their rivals' reactions to their own decisions (see Deshpande and Gatignon 1994, Hutchinson and Meyer 1994, Moore and Urbany 1994, Reibstein and Chussil 1997, Urbany and Montgomery 1998). Anecdotes about failures in considering competitive reactions abound, yet there is little or no evidence about how and to what extent managers account for competitors in their decision making. Not reasoning about rivals' reactions might be perceived as harmless in the eyes of those who would contend that either (1) such "nonstrategic" behavior would correct itself over time, or (2) the link between such conjecturing and performance is ethereal at best. Here we explore two questions: (1) To what extent do practicing managers consider competitors and their anticipated reactions when deciding on their own moves, and (2) how do experienced managers account for the answer we get to Question (1)? Heeding Laurent's (2000) pleas for more concern about the external validity of marketing models and for more qualitative input into those models, we went into the field to gather evidence from practicing executives. This paper reports our results and provides food for thought regarding future research and pedagogy in the area of competitive response.
2. Competitive Reasoning
We define competitive reasoning as the assessment and consideration of competitors that serves as an input into the firm's decision making. We recognize that a manager might simply ignore the competition, behaving strictly as a monopolist. This assumes that the success or failure of a decision depends only upon the company's capabilities and customers' response, not on competitors' actions or reactions. Leeflang's and Wittink's (1996) observation of limited competitive reactions in an apparently competitive environment may reflect this tendency.
Competitive reasoning, if it happens, can take three forms. First, managers may study their competitors in a manner that results in a description of the competitor (say, the competitor's goals, strengths and weaknesses, assumptions, strategy, past and current behavior, and so forth, Porter 1980), but stop short of making predictions about the competitor's future actions. Second, managers may make predictions about competitors' behavior, but only about actions, not reactions. Third, managers may specifically consider how their competitors are likely to react to their firm's own decisions. The third form of competitive reasoning is what we refer to as strategic competitive reasoning. Strategic competitive reasoning goes beyond both describing competitors and predicting competitors' future moves. It involves stepping into the shoes of the competitor and predicting the competitor's reactions to one's own moves (see Dixit and Nalebuff 1991).
Stepping into competitors' shoes can require a great deal of cognitive effort and a significant amount of information about competitors that is often neither readily accessible nor routinely collected (cf. Jaworski and Wee 1993). Consider the pieces that would have to be in place for a manager to think strategically about a competitor: The manager must be aware of the competitor's moves and countermoves, make the appropriate attribution regarding motives behind the moves, and accurately distinguish between competitor moves that are reactions and those that are independent moves (Moore and Urbany 1994, Clark and Montgomery 1996). These insights may be difficult to obtain for a variety of reasons--e.g., limited move-countermove sequences (Meyer and Banks 1997), delays between action and reaction, competitor responses in a different market (Ailwadi et al. 2001, Leeflang and Wittink 1996), short managerial tenures, and poor organizational memory (cf. Adams et al. 1998, Day 1991, Huber 1991).
Further, competition is only one of many factors managers must consider in strategic decision making. Many of the other factors, however, do not suffer as severely from the information and inference problems associated with reasoning about competitors. For example, managers may have greater confidence in information about internal company factors such as cost, capacity, and budgets. Information about customers may be more readily available and can be tailored for the decision at hand. To the extent that customer and internal company information are perceived by managers as more vivid, more available, less debatable, more reliable (after all, competitors may attempt to mislead), and less costly in terms of financial resources, time, and cognitive effort, greater attention will likely be paid to customer and internal decision factors (cf. Culnan 1983, Day and Wensley 1988, O'Reilly 1982). Profiling competitors' past behavior can be difficult; predicting competitors' future behavior is much more difficult. Predicting competitors' future behavior that is a response to any particular action of the focal firm is doubly difficult and open to internal challenge. Thus, managers may perceive that there are better uses of limited resources than trying to resolve uncertainty about competitors' future behavior, especially their potential reactions.
3. Purpose of This Paper
In the field of competitor interaction, a developing body of literature seeks to explain competitive reactions post hoc. This literature generally characterizes the likelihood of competitive reactions to a firm's action as a function of (a) the characteristics of the firm taking the action (e.g., market size, reputation) (Bowman and Gatignon 1995, Venkataraman et al. 1997), (b) the characteristics of the action (e.g., scale of entry, market responsiveness, visibility) (Chen et al. 1992, Dickson and Urbany 1994, Leeflang and Wittink 1992), (c) the characteristics of the rival (e.g., size, performance, desired reputation, organizational responsiveness) (Smith et al. 1989, Gatignon and Reibstein 1997), and (d) environmental characteristics (e.g., turbulence, market growth, industry concentration) (Ramaswamy et al. 1994, Robinson 1988; see also Ailawadi et al. 2001).
While this work illustrates that competitive reactions may be predictable to some degree, it provides no insight into whether or how managers seek to predict competitor behavior in their decision making. In the many contexts where competitor choices do affect firm outcomes, not considering competitors' actions ex ante is likely to lead to poorer decisions and poorer outcomes. For instance, Clark and Montgomery (1996) found that 79% of actual competitor reactions were not even perceived by a firm's managers, and this oversight had significant...
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