STRATEGY AS ACTION STRATEGIC MANAGEMENT SERIES Editors Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson Strategy as Action: Competitive Dynamics and Competitive Advantage Curtis M. Grimm, Hun Lee, and Ken G. Smith Strategy as Action Competitive Dynamics and Competitive Advantage Edited by Curtis M. Grimm Hun Lee Ken G. Smith 1 2006 1 OxfordUniversityPress,Inc.,publishesworksthatfurther OxfordUniversity’sobjectiveofexcellence inresearch,scholarship,andeducation. Oxford NewYork Auckland CapeTown DaresSalaam HongKong Karachi KualaLumpur Madrid Melbourne MexicoCity Nairobi NewDelhi Shanghai Taipei Toronto Withofficesin Argentina Austria Brazil Chile CzechRepublic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore SouthKorea Switzerland Thailand Turkey Ukraine Vietnam Copyright#2006byOxfordUniversityPress,Inc. PublishedbyOxfordUniversityPress,Inc. 198MadisonAvenue,NewYork,NewYork10016 www.oup.com OxfordisaregisteredtrademarkofOxfordUniversityPress Allrightsreserved.Nopartofthispublicationmaybereproduced, storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans, electronic,mechanical,photocopying,recording,orotherwise, withoutthepriorpermissionofOxfordUniversityPress. LibraryofCongressCataloging-in-PublicationData Grimm,CurtisM. Strategyasaction:competitivedynamicsandcompetitive advantage/CurtisM.Grimm,HunLee,andKenG.Smith. p. cm.—(Strategicmanagementseries) Includesbibliographicalreferencesandindex. ISBN-13:978-0-19-516144-1 ISBN0-19-516144-0 1. Competition. 2. Strategicplanning. I. Lee,Hun,1962– II. Smith,KenG. III. Title. IV. Strategicmanagementseries(OxfordUniversityPress) HD41.G6952005 658:4'012—dc22 2004010879 9 8 7 6 5 4 3 2 1 PrintedintheUnitedStatesofAmerica onacid-freepaper PREFACE Curtis Grimm and Ken Smith arrived at the Robert H. Smith School of Business at the University of Maryland in August 1983, fresh Ph.D. degrees in hand. Although from different disciplinary backgrounds—Grimm from industrial organization economics and Smith from strategic management—we shared a keen interest in challenging current ways of thinking about strategy and competitive interaction. We wereespeciallyconcernedwithscholars’conceptionofstrategyasinactive. Tous,strategywasaction!Itwasahigh-stakesraceofactionandreaction, where timingofactioniscrucial tosuccess. Wesubsequentlydevelopeda body of research on the actual competitive actions and reactions of real firmsacrossabroadrangeofindustries.Theideaspresentedinthisbookare drawn from that research, which has been reported in a wide variety of academicjournals. When should a firm be innovative or entrepreneurial, when should it aggressively take on rivals from a position of strength, and when should it cooperate? What is the right way to attack a rival, or the best way to defend an established position? When is it important to act quickly? We have explored those questions over our 20-year collaboration, in- cluding the last several years with a former Ph.D. student, Hun Lee, As- sociateProfessorofStrategicManagementatGeorgeMasonUniversity.The threeofushavesynthesizedandadvancedtheseideasinaformatdesigned toserveasasupplementtoabasicstrategytextforanMBAcourseorthe undergraduatecapstonecourse.Thebookwouldalsobeappropriateinan electivecourseonindustryandcompetitoranalysis.Theideasareofgreat relevancetocurrentandfuturemanagersintoday’scompetitiveandfast- pacedbusinessenvironment.Researchersinstrategywillalsofindvaluein readingthetext. Morespecifically,inchapter1wehighlighttheintensityofcompetition today, and stress the urgency of using an action perspective to gain com- petitive advantage. Chapter 2 reviews the different economic perspectives of competition and introduces game theory as an approach for investi- gating competitive advantage. Chapters 3 and 4 present frameworks that facilitate the analysis of a firm’s relative market and resource position. Chapter 5 introduces the action model of advantage and shows how ac- tions both consume and develop firm resources while influencing a firm’s market position and performance. The chapter points out that actions provokereactions,andthatitisinthecontextofactionandreactionthat advantages are developed and eroded. Chapters 6 through 8 all focus on engaging competitors to ‘‘win the battle’’ and improve the firm’s resource and market position. In partic- ular, chapter 6 examines the case of the firm with limited resources and a poor market position and argues that such firms must undertake en- trepreneurial actions that delay reaction by exploiting competitive un- certainty and blind spots. Chapter 7 considers the case of the firm with a relative internal resource advantage over rivals and shows how it can exploit such a resource advantage through Ricardian actions. Ricardian actions based on resource advantages delay reaction because of resource scarcity. Chapter 8 presents the case of the market leader and explains how such a firm can use market power and intimidation to defend its markets through actions that deter competitors and delay reaction. In contrast to chapters 6 through 8, chapter 9 examines how firms can engage in cooperative actions when ‘‘winning the battle’’ is precluded by resource and market parity among firms. Competitive reaction is not as likely with cooperative actions. Chapter 10 demonstrates more specifi- cally how managers can use the model and discusses the types and sources of information needed to do so. The final chapter summarizes the book’s arguments and considers linkages across the resource positions presented in chapters 6 through 9. Attention is focused on firm evolu- tion. A stage model of organizational development is offered as an in- tegrative device to summarize and explain how firms build advantage over time. We have used earlier versions of this material very effectively in the classroom and recommend that instructors of strategy consider its adop- tion.Importantly,thebookisintegrative,presentingafreshperspectiveon strategy but one that fully incorporates and can be used with more tra- ditionalviews.Porter’svaluechain,industryandSWOTanalysis,andthe resource-basedviewarealldiscussedwithinourframework.Ourapproach helps those ideas to come alive in an up-to-date and dynamic action context that has great practical relevance. vi PREFACE The book also integrates material on the legal, regulatory, and ethical environment of business. An instructor using the text can address those important issues completely within a strategy context rather than pre- senting them separately after fundamental strategy ideas have been cov- ered.Forexample,theopeningchapterdiscussestheevolvingcompetitive environment, includingthephenomenaofderegulation andprivatization, globalization, and technological change that motivate and necessitate the action-oriented approach we present. The chapters on co-opting actions anddeterrentactionsincorporatetheantitrustlawsandethicalstandards withwhichmanagersmustgrapple.Ratherthanavoidingthoseissues,we face head-on the difficult tradeoffs managers often must make when an action that will improve firm profitability, and the manager’s salary and status, is in a gray area of legality and ethics. Many people contributed in important ways to this book. Duane Ire- land,MikeHitt,andBobHoskissonaskedustowriteabookoncompetitive dynamics for the Oxford University Press Series on Strategic Management and provided excellent assistance throughout, including detailed com- ments on a preliminary version of the manuscript. We thank John Rau- schenbergandKeithFaivre,oureditorsatOxfordUniversityPress,fortheir assistance and patience during the course of the project. We gained much from our earlier collaboration with Martin Gannon in developing the ideas presented here. Several former doctoral students worked with us and sharpened our thinking, including Ming-Jer Chen, August Schomberg, Greg Young, Tom Quasney, Pam Derfus, and Wally Ferrier.WealsothankMBAstudentsAnthonyAiroso,SarahBartholomen, James Parker, Kristi Vigil, and Elizabeth Welch and graduate research as- sistantDharmeshTrivedifortheirresearch,someofwhichispresentedin chapter 10. We owe a particular debt of gratitude to Pamela Derfus, a former doc- toral student, who served as our research assistant and in-house editor. Pam contributed substantially to the clarity of our prose as well as to the substance of the material. We have all received strong institutional backing in writing this book. The Robert H. Smith School of Business offered a uniquely supportive environment for writing this book. Dean Howard Frank has taught us much about leadership and the importance of taking action. Former As- sociate Dean Judy Olian provided consistent support and encouragement. George Mason University and Dean Rich Klimoski provided support by funding summer research and a study leave. Many colleagues contributed comments, ideas, and inspiration, in- cluding Steve Carroll, Tom Corsi, Ed Locke, Lee Preston, Rhonda Reger, Brian Shaffer, Hank Sims,and SusanTaylor. Numerousdoctoral students PREFACE vii at Maryland, including Dax Basdeo, Kevin Clark, Yan Dong, Don Knight, Patrick Maggitti, Ayesha Malhotra, Cormac Mac Fhionnlaoich, Chris Lin, Daniel Simon, and Kefeng Xu, provided research assistance and helpful comments. Lastbutnotleast,weextendspecialthankstoourfamilies,whoinspire, support, and motivate our efforts. viii PREFACE CONTENTS Part I. The New Competitive Advantage 1: Disruptive Competition: Intensifying Actions and Reactions in the Twenty-First Century 5 Part II. Strategic Paradigms of Competitive Advantage 2: Economic Theories of Competition and Competitive Advantage: Neoclassical, Industrial Organization, Game Theory, Schumpeterian, and Evolutionary Economics 31 3: Knowing Your Relative Market Position 48 4: Knowing Your Relative Resource Position 68 Part III. Action-Based Dynamic Model of Competitive Advantage 5: An Action-Reaction Framework for Building Competitive Advantage 83