Understanding competitive dynamics
Competitive dynamics is the study of the actions and responses to actions made by companies. In some markets companies strongly monitor the competitive actions of other firms, regularly responding to them with either the same or different actions. Competitive dynamics is the study of this – how firms react to each other in the various markets that they compete.
Dimensions of competitive dynamics
A primary means by which firms compete is on price. Lowering the price of your product may cause a ripple effect, with other firms in the industry also lowering their prices. Or it may have the exact oppositive effect – it is possible that it may cause a competitor to try and change their positioning, recognizing that they are unable to compete with you on price, so instead deciding to target a more premium segment of the market.
Another dimension that there may be competition dynamics on is product introductions. If one firm launches a particular product, another company may also launch a similar product or feature set.
Imitation of other competitive actions
There is a whole range of other actions that competitors may imitate. If you announce the establishment of a new facility, your competitors too may announce a similar facility so as not to get left behind. Similarly, a CSR decision may trigger other firms in the industry to make similar announcements.
Dimensions that may influence an industry's competitive dynamics
The tendency for firms to respond or to not respond to competitor actions can depend on many factors. Some of the factors likely to influence the nature of competition include:
Industry structure is a common influencer of competitive dynamics. In concentrated industries – where there are few firms competing – then each firm is likely to more actively monitor the others. This can result in quick responses to firm actions – one behavior quickly mirrored by other firms.
Past behaviors and rivalry
Past behaviors may also influence likely responses. Companies can get into cycles of competition – intense rivalry where firm actions are quickly copied. Past behaviors may also inform companies’ responses – if you know your competitor may quickly imitate your move, it may influence whether you decide to make a particular change or not.
Different industries and product markets that the firms compete in
The number of different markets that firms compete in may also play a role in competitive actions and responses. If companies meet in many different markets, then it is possible there may be mutual forbearance – where firms decide that they don’t want to risk intense competition in all marks, so opt not to engage in competitive actions.
Final thoughts: Competitor analysis can increase your understanding of competitors likely responses
Competitive analysis is a key component of assessing your competitors – to see what behaviors they are engaging in and their potential responses to your actions. The greater strategic foresight that you are able to develop regarding likely competitor actions and response, the better placed you are to factor their likely moves into your decision-making.