Apart from choosing operational strategies, organizations also need to decide how to respond to moves made by rivals. Figuring out the reaction, if at all, to a competitor’s move is one of the most challenging decisions that a company needs to consider.
There are three factors that determine the response to a competitive move: awareness, motivation, and capability. These three factors in combination determine the level of competition tension that exists between rivals.
The result of a series of moves and countermoves may be difficult to predict and importantly, miscalculations can be costly enough.
Companies may need to react quickly in case of many situations, such as head-to head advertising campaigns, price cuts, and attempts to grab key customers. Quick reaction is important. A long delay in response generally provides the attacker with an edge.
PepsiCo, for example, waited fifteen months to copy Coca-Cola’s May 2002 introduction of Vanilla Coke. In the meantime, Vanilla Coke got a huge market niche; 29% of US households purchased the beverage by August 2003.
General Electric CEO, Jack Welch, noted in his autobiography, success in most competitive rivalries “is less a function of grandiose predictions than it is a result of being able to respond rapidly to real changes as they occur. That’s why strategy has to be dynamic and anticipatory.”
Multipoint competition makes it difficult to decide whether to respond to a rival’s moves. A firm may face the same rival in more than one market. In case of multipoint competitors, companies must understand that a competitive move in one market can affect others.
A mutual forbearance can make multipoint competition a matter of success. Mutual forbearance occurs when each competitor recognizes that the other can retaliate in multiple markets.
For example, cigarette makers R. J. Reynolds (RJR) and Philip Morris meet in many markets. In the early 1990s, RJR started using lower-priced cigarette brands in the United States. Later, Philip Morris started building market share in Eastern Europe where RJR had been establishing a strong position.
There are three main responses to disruptive innovation.
First, executives may think that the innovation will not replace established offerings. Thereby, they may choose to focus on traditional modes and ignore the disruption. Traditional bookstores such as Barnes & Noble did not consider book sales on Amazon to be competitive in the beginning.
Second, an organization can react to the challenge by attacking on a different platform. For example, Apple reacted to direct sales of cheap computers by Dell and Gateway by introducing power and versatility in its products.
Third, possible response is matching the competitor’s move. Merrill Lynch had confronted the introduction of online trading by forming its own Internet-based unit.
A firm’s success can be damaged when a competitor lures the customers away by charging lower prices for its goods or services. The creation of a fighting brand is a move that can prevent this problem. A fighting brand is a low-end brand that tries to protect the firm’s market share without damaging the firm’s existing brands.
In the late 1980s, General Motors (GM) was confronted with the sales of small, inexpensive Japanese cars in the United States. GM wanted to recapture lost sales, but it did not want to damage existing brands, such as Chevrolet, Buick, and Cadillac, by opting for low-end cars. GM responded with small, inexpensive cars under its new Geo brand.