In the previous sections, we examined the first two components of strategic planning: strategic and tactical actions. In this section, we discuss the final component of strategic planning, which is gaining more attention from both researchers and practitioners: competitive dynamics. Competitive dynamics refers to the process by which firms undertake strategic and tactical actions and how competitors respond to these actions.³⁷ Although the previous sections do distinguish between and classify different types of strategic and tactical actions, the study of competitive dynamics is important in order to understand why managers undertake such actions. Inevitably, it is these actions and reactions that influence a firm’s ultimate financial performance.

Many studies of strategic planning and competition involve the analysis of industries. In contrast, research in competitive dynamics focuses on competitive dyads, which are groups of two companies competing vigorously within a particular industry.³⁸ By focusing on only two firms, researchers are able isolate the factors that affect the competitive actions of both the attacker—the first firm to make a strategic or tactical action—and the defender—the second firm, which must choose whether or not to respond to the attacker.³⁹

The following example may help clarify the influence of competitive dynamics on strategic planning: On a recent Monday morning, Barnes & Noble reduced the price of its e-book reader—the Nook—by 23 percent. This decision resulted after careful deliberation by the top managers at Barnes & Noble. Hours later, Amazon.com announced through a press release that it would reduce the price of its e-book reader—the Kindle—by an even larger amount, 27 percent.⁴⁰ The price war between Barnes & Noble and Amazon.com illustrates the intense rivalry between the two companies as they compete in the market for e-book readers as well as in the market for e-book sales. In this example, Barnes & Noble represents the attacker, and Amazon.com represents the defender.

Research suggests that three primary factors influence a firm’s action or reaction: awareness, motivation, and capability.⁴² These factors are illustrated in Figure 7.6. Competitor awareness refers to how mindful a company is of its competitor’s actions. In the example above, Amazon.com was clearly aware of Barnes & Noble’s price cuts, which garnered a great deal of media attention. This media coverage was not a surprise, as larger firms typically receive higher levels of media attention than do smaller firms.⁴³ In addition to media coverage, companies may learn about competitors’ actions by taking note of a competitor’s press releases. Alternatively, companies may learn about their competitors’ actions by seeking information from shared customers or suppliers or from employees who previously worked for the competitor.

Competitor motivation refers to the incentives that an organization has to take action. Extending the e-book example, Amazon.com was highly motivated to respond to Barnes & Noble’s price cuts. If Amazon.com had not responded to these price cuts, many customers may have opted to purchase a Nook instead of a Kindle. This buyer decision becomes important because sales of e-book readers lead to subsequent e-book sales. A customer purchase of a Nook, for instance, is likely to make multiple e-book purchases from Barnes & Noble. Considering such future sales highlights just how motivated both companies are in the market for e-book readers. In addition, managers’ incentives (e.g., pay packages) may also increase their motivation to engage in particular competitive actions.

Finally, competitor capability refers to a firm’s ability to undertake an action. Often, capability refers to the resources that a firm has to take an action. For instance, a firm’s competitor capability includes items such as available cash or the experience of the firm’s management team. Once again extending the previous example, Amazon.com does not necessarily need cash to implement a price reduction for its Kindle. Nonetheless, Amazon.com does have to consider the long-term, financial effects stemming from selling Kindles at a reduced price. Even though tactical actions may not require substantial resources, strategic actions may require large investments and, thus, high levels of resources.

Effective strategic planning requires an understanding of competitors’ competitive actions. The competitor awareness, motivation, and capability framework provides a useful tool that managers may use to forecast competitor actions and reactions. To the extent that managers can measure their organization’s activities (and those of its competitors) in an extremely precise manner, they will be able to gain insights about organizational performance and enhance their growth strategies.⁴⁴