Although the industry-based view of business strategy emphasizes the importance of industry structure and RBV emphasizes the value of firm resources for competitive advantage, it is also recognized that the decisions a firm makes in terms of its actions and reactions in relation to its competitors in a market is a major determinant of firm performance. The competition-based theories of business strategy emerged to fill this gap and ensure attention to the dynamics of competition between rivals. It is important to emphasize that the need for firms to think strategically is driven by the existence of competition. If there is no competition, there is no need to make strategy a priority. Firms that hold monopolistic positions within their industries do not face competition and therefore have little need for thinking strategically.

Bruce Henderson, founder of Boston Computer Group, points out that "competition existed long before strategy"28 as he draws an analogy between business competition and competition between biological organisms. He observes that according to Gause's principle of competitive exclusion, two animals of the same species attempting to live together within the same environment will not survive. This competitive reality in biology drives differentiation of species, and the same dynamic occurs in business competition.

Strategic Conflict

Key Thought Leader: Carl Shapiro, 1989

One competition-based theory of business strategy is strategic conflict. The strategic conflict approach complements Porter's strategies in that it recognizes the ability a firm has to manipulate its market environment, thus improving its competitive outlook.29 Utilizing a game theoretic foundation, strategic conflict can help firms identify and pursue a preferred position within their industry. As firms take action, they also anticipate what action they believe their rivals will take. Some of the potential strategic "moves" Shapiro highlights include investment in physical capital, investment in intangible assets (e.g., R&D), strategic control of information (impacting rival firms' beliefs about market conditions), horizontal mergers, product standardization (e.g., in highly networked industries), and strategic contracting.

Teece et al. point out that the relevance of applying strategic conflict's gaming concepts can be context specific.30 For example, a firm that overwhelmingly dominates a given industry may not need to be as attentive to rival firm's activities as a firm in an industry where the competitive advantages are more subtle or evenly dispersed, further reinforcing the principle that the need for strategy is driven by the existence of competition.

Competitive Dynamics Theory

Key Thought Leaders: Ken Smith, Walter Ferrier, Hermann Ndofor, 2001

Competitive dynamics theory helps explain the interaction and impact of firm actions and competitor reactions in a given industry.31 Action can relate to any observable decision made by a firm for the purpose of defending their current competitive position or attempting to gain a new competitive position. Examples of actions may include making price changes, initiating special marketing activities, introducing new products, or withdrawing from a market. Reactions represent the corresponding response taken by a rival firm.

The competitive dynamics model looks at both the firm initiating a competitive move as well as the reacting rival firm. Several characteristics of the initiating firm's action are considered by the competitor before formulating a response. First, the magnitude of the action is assessed. For example, an action that required significant financial investment or resources would be considered high magnitude and warrant more competitive attention. Second, the scope of the action is relevant. An action that has an impact on multiple competitors is more potentially threatening than an action that has an impact on only one competitor firm. Third, the type of action (tactical/temporary versus more strategic) is considered.

Several attributes of responder's reaction are also relative to the competitive dynamics, including the likelihood of a response (if the attack is substantial, the likelihood is higher) as well as the frequency and timing of the response. The longer the time lag between action and response, the greater the advantage to the initiator, also known as a first-mover advantage. In addition to the attributes of the actor/action and reactor/ response, the characteristics of the industry itself also impact the competitive dynamics model. For instance, a high rate of industry growth can reduce competitive interactions, as the growing demand minimizes the need for individual firms to jockey for position. Likewise, a more concentrated market with a smaller number of competitors leads to more collusion and less competitive activity. An industry with high entry barriers limits the number of new entrants that incumbent firms need to be considered with.

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