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Working Paper

Competitive Reactions and Modes of Competitive Reasoning: Downplaying the Unpredictable?

Joel E. Urbany, David B. Montgomery, and Marian Moore, 2001 [01-121]

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Understanding and anticipating interdependent competitor reactions is critical to firm performance. However, the literature suggests that decision makers often do not effectively conjecture about competitors' future behavior and that firms know far less about competitor behavior than economic theory assumes.

In this report, authors Urbany, Montgomery, and Moore focus on how and under what circumstances managers incorporate predictions of future competitor reactions into their decision making. They first identify three general modes of competitive conjecture: (1) ignoring the competition, (2) extrapolating a competitor's past behavior, and (3) anticipating a competitor's reactions to the firm's moves. They examine the incidence of the third mode—strategic competitive reasoning—in two studies that examine the factors driving decisions by approximately 150 responding managers. They found that strategic competitive thinking was quite rare, but was more common for pricing than for market entry, new product, and advertising budgeting decisions.

A third study asked nearly 100 executives (including MSI Trustees at a trustees' meeting) to suggest why the results of the first two studies found such a paucity of consideration of competitor reactions. Their responses explaining the results showed substantially greater weighting given to more certain, measurable, justifiable internal factors than to uncertain competitor behavior. Surprisingly, the dominant explanations indicate that managers do not see the value of competitor analysis, rather than that they find it too costly in terms of time, cognitive effort, and money.

This latter result suggests that if firms would like to enhance their managers' willingness to consider potential competitor reactions, they can probably get maximum leverage by focusing on ways to enhance the perception of the value of competitor reaction analysis. Efforts to increase senior management attention to competitive analysis and manager training in the tools, methods, and results of competitive analysis should help address this issue. Of course, efforts to reduce the cost of competitor intelligence collection and analysis are also in order.

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