Competitor Analysis and Interfirm Rivalry: Toward a Theoretical

Integration

Ming-Jer Chen

The Academy of Management Review, Volume 21, Issue 1 (Jan., 1996), 100-134.

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© Academy of Management Review
199, Vol. 21, No. 1. 100-134.

COMPETITOR ANALYSIS AND INTERFIRM

RIVALRY: TOWARD A
THEORETICAL INTEGRATION
MING-JER CHEN
Columbia University

This article bridges two important subjects in strategy: competitor

analysis and interfirm rivalry. Through a refined conceptualization of
competitor analysis, the article introduces two firm-specific, theory-
based constructs: market commonality, developed from the literature
on multiple-point competition. and resource similarity, derived from
the resource-based theory of the firm. The joint consideration of these
two constructs shows the complementarity of these two prominent but
contrasting strategy theories. Each firm has a unique market profile
and strategic resource endowment, and a pair-wise comparison with
a given competitor along these two dimensions will help to illuminate
the prebattle competitive tension between these two firms and to pre-
dict how a focal firm may interact with each of its competitors. The
idea of competitive asymmetry is introduced, that is, the notion that
given pair of firms may not pose an equal degree of threat to each
other. To illustrate competitor mapping. measures of these two con-
structs are proposed, and an example is offered. The article ends with
a number of implications for research and practice.

The study of competitor analysis (Hamel & Prahalad, 1990; Porac &
Thomas, 1990; Porter, 1980, 1985; Zajac & Bazerman, 1991) and of interfirm
rivalry (Bettis & Weeks, 1987; D'Aveni, 1994; MacMillan, McCaffery, & Van
Wijk, 1985; Smith, Grimm, & Gannon, 1992) occupies a central position in
strategy. Therefore, a basic understanding of each subject, as well as an
integrated comprehension of both, is of paramount importance.
A primary objective of competitor analysis is to understand and pre-
dict the rivalry, or interactive market behavior, between firms in their

This article is dedicated to William H. Newman, a mentor and an exemplar of scholar-

ship. The author would like to thank Eric Abrahamson, Laura M. Brown, Jane Dutton, Javier
Gimeno, Anil K. Gupta, Donald C. Hambrick, Kathryn R. Harrigan, Donald R. Lehmann,
John Michel, Danny Miller, lan C. MacMillan, Paul Schoemaker, and Kuo-Hsien Su for their
helpful comments on a eatlier draft of this article. The author would also like to acknowl-
edge the insightful comments of the Editor and the reviewers. The completion of this article
was supported partially by the Management Institute at the Columbia Business School and
by a Crosby-Foggitt Fellowship from the Snider Entrepreneurial Center of the Wharton
School. Kuo-Hsien Su and Jaeik Oh helped in data extraction and analysis. The work ben-
efited from the Whittemore Conference on Hypercompetition, co-sponsored by the Tuck
School and Organization Science.
100
1996 Chen 101

quest for a competitive position in an industry (Caves, 1984; Porter, 1980;

Scherer & Ross, 1990). Toward this end, researchers have examined fac-
tors that influence competitive responses and their ensuing performance
implications (Chen, Smith, & Grimm, In press) and patterns of entry into
and exit from rivals’ markets (Baum & Korn, In press). However, research-
ers have made limited effort to investigate the prebattle competitive re-
lationship between rivals and the extent to which it may predict rivalrous
behavior in the market. This omission is due partly to the restricted con-
ceptual treatment of competitor analysis, which has not fully incorpo-
rated the essential antecedents that affect a firm's competitive activity,
let alone considered them in an integrated way.
Intensity of rivalry, one of Porter's (1980) well-known five forces driv-
ing competition, has remained mainly a theoretical construct confined to
the industry level. In terms of analyzing firms competing in an industry,
the strategic-group approach (Barney & Hoskisson, 1990; McGee & Thom-
as, 1986) is by far the most popular and relevant. However, researchers
who use this approach have largely ignored the market context in which
competitors carry on their battles and the extent to which two firms actu-
ally compete directly against each other. Although the marketing litera-
ture recognizes the importance of the market context, its contribution has
been primarily in analyzing competitors and competition at the brand or
individual-market level (Weitz, 1985), rather than at the firm level. Other
approaches usually represent a high degree of abstraction and rely pri-
marily on managers’ or researchers' subjective perceptions, which often
are too remote to be linked to competitive behaviors in the market (Zahra
& Chaples, 1993).
Thus far, some of the most fundamental questions in competitor anal-
ysis have remained unexplored (Gatignon, 1984; Weitz, 1985). For exam-
ple, how can researchers studying competition differentiate among play-
ers in an industry to explain each player's market behaviors? How can a
firm, before launching an attack, assess its prebattle relationship with a
given rival and the resultant likelihood that this rival would retaliate?
How can a firm gauge which opponent is most likely to attack its markets?
How can strategists differentiate among a set of competitors to allow the
firm to allocate appropriate resources and attention to each? Finally,
although the importance of competitor analysis and interfirm rivalry is
well recognized, there has been no systematic attempt to integrate the
two topics.
This article seeks to provide a conceptual link by proposing two firm-
specific, theory-based constructs: the market commonality and the re-
source similarity between a given pair of competitors. Taking the firm as
the basis for analysis, I argue that each firm has a unique market profile
and resource endowment and that a comparison with a given competitor
along these two dimensions will help to illuminate the competitive rela-
tionship between them and to predict how they may attack (or respond to)
each other in the market. This firm-specific conceptualization also leads
102 Academy of Management Review January

to the idea of competitive asymmetry, the notion that a given pair of firms
may not pose an equal threat to each other. I first offer a number of
propositions that use market commonality and resource similarity to pre-
dict competitive attack and response. I also propose measures to assess
market commonality and resource similarity along with a demonstration
of how such measures could be implemented. The article ends with a
number of implications for research and practice.

THEORETICAL BACKGROUND

Competitor Analysis: An Overview

Several streams of research have addressed, directly or indirectly,
the question of competitor analysis for firms within an industry. Strategy
researchers have drawn extensively from industrial organization (IO) eco-
nomics (Barney, 1986; Porter, 1980), which holds that firms that exist in the
same industry are de facto competitors. This assumption has been chal-
lenged by strategic-group literature, whereby authors argue that there
are different groups of firms within an industry and that firms are homo-
geneous within groups, along a set of strategic attributes, and heteroge-
neous between groups.’
The strategic-group approach helps one recognize the significance of
strategic posture, which is likely to reveal how a firm may be capable of
competing in an industry. From the perspective of predicting rivalry, the
exclusive emphasis on homogeneity of strategic posture imposes a con-
straint. Without examining a firm's strategic attributes in the market(s)
where it actually interacts with others, one has little idea against whom
it competes directly: Many firms may not be direct or primary competitors
because of a different market focus. Two firms will have little motivation
to engage each other competitively if they have limited markets in com-
mon.
Thus, though most strategic-group theorists do not claim to be iden-
tifying “competitors,” a point raised explicitly by Hatten and Hatten
(1987), this approach is nevertheless frequently applied to competitor
analysis, with problematic results. Some studies unquestioningly rely
upon the premise that "when a company chooses to enter a specific stra-
tegic group, it selects the members of that group as its competitors” (Kot-
ler & Armstrong, 1989: 496). It is not uncommon for firms serving com-
pletely different markets yet having similar strategic postures to be
grouped and inferred by analysts as direct competitors.
This inattention to the market is unfortunate in light of a vital, yet

! In addition to the conventional IO economics-based groups (e.g.. Cool & Schendel,

1987; Fiegenbaum & Thomas, 1990; Hatten, Schendel, & Cooper, 1978), recent studies concern
the cognitive (Reger & Hutf, 1993) and the socio-organizational bases of groups (Anderson &
Lawless, 1993; Baum & Singh, 1992), some of which may be more amenable to a direct
application for competitor analysis.
1996 Chen 103

largely ignored, point in early strategic-group literature: “Firms within a

[strategic] group resemble one another closely and recognize their mutual
dependence more sensitively” (Caves & Porter, 1977: 250). Two firms
would surely recognize their interdependence most closely if they com-
peted in the same sets of markets. For the purpose of competitor analysis,
the consideration of shared market captures in a very fundamental way
the mutual dependence of two firms.
The marketing literature has long emphasized the significance of the
market and its competitive implications (Abell, 1980; Day, 1981; Kotler &
Armstrong, 1989; Lehmann & Winer, 1990; Weitz, 1985). Competing brands
in a market are considered direct competitors and are analyzed accord-
ingly. In addition to proposing such market-level variables as market size
and distribution of market share, this emphasis on market-based compe-
tition suggests that each market is unique.
Similarly, within the strategy literature, recent multiple-point com-
petition studies (Gimeno, 1994; Karnani & Wernerfelt, 1985; Smith & Wil-
son, 1995) have highlighted the significance of shared markets in compe-
tition.? However, as elaborated in the following pages, the notion of
shared markets represents only a first step in understanding the compet-
itive relationship between firms. The conceptualization of shared market,
or market interdependence, does not take into account the differences
among various markets—in terms of importance or magnitude, for in-
stance—and it does not capture the asymmetrical nature of competitive
relationships between firms.
More important, the level of analysis of these studies has generally
been at the individual market level, not at the firm level (Eliashberg &
Chatterjee, 1985; Weitz, 1985). Thus, with a few exceptions such as Abell
(1980) and Day (1981), critical issues of primary interest to strategy re-
searchers, such as overall firm strategies and resources, and the result-
ing implications for rivalry, remain largely unexplored.
With respect to analyzing individual competitors at the firm level,
researchers who have adopted a resource-based view (Barney, 1991; Con-
ner, 1994; Peteraf, 1993a) have attempted to differentiate among firms
along the firms' strategic or resource endowments. The assumption un-
derlying this literature that each firm is unique implies that competitor
analysis is a firm-specific analysis, an idea that has strong implications
for this article. Another interesting although unexplored implication of
this line of thinking is that relationships between firms are not symmet-
rical. However, despite its insightful focus on the firm, this line of re-
search has been primarily inward looking and has not yet begun to in-
corporate in its research domain the market context in which firms

2 Many economic studies have also been devoted to this topic (e.g., Bernheim and
Winston, 1990; Scott, 1982), and Gimeno (1994) has provided a comprehensive review of this
research stream. In this article, I focus mainly on strategy studies on the subject.
104 Academy of Maragement Review January

compete. As Amit and Schoemaker (1993) and Porter (1991) noted, to be a

complete theory, the resource-based perspective must incorporate explic-
itly the external competitive environment.
Other strategy researchers have devoted substantial efforts to a num-
ber of important issues in competitor analysis. Porac and Thomas (1990)
argued that each firm will have its own conceptualization of competitors.
Consequently, a firm can self-select its rivals for competitor analysis
independent of past or even future market encounters. Porter (1980) con-
sidered a competitor's response profile. Zajac and Bazerman (1991) intro-
duced the idea of “blind spots” and showed their implications, such as
industry overcapacity. Amit, Domowitz, and Fershtman (1988) highlighted
the significance of conjecture variations (Bowley, 1924), defined as the
degree to which firms are aware of their interdependence and use this
awareness in formulating their actions. Ghoshal and Westney (1991) ex-
amined competitive analysis systems, Prescott and Smith (1987) studied
competitive intelligence, Strebel (1983) performed stock market assess-
ment, and Young (1987) analyzed sources of competitive data.
However, from the point of view of predicting rivalry, the research in
general has sutfered from several limitations. First, the identity of a firm's
competitors is assumed to be known, or competitors are treated as undif-
ferentiated entities. Second, almost all the research is normative or de-
scriptive. The proposed constructs, though conceptually important, are
difficult to operationalize for empirical investigation (Zahra & Chaples,
1993). There is almost no recognition of the relational nature of competi-
tion and rivalry (Barnett, 1993). Most fundamentally, only a very few re-
searchers (e.g., Smith, Grimm, Gannon, & Chen, 1991; Zajac & Bazerman,
1991) have explicitly addressed the conceptual links between the analysis
of competitors and the prediction of their behaviors, which is supposed to
be a primary objective of conducting such analysis (Porter, 1980).
A Framework for Competitor Analysis: Market Commonality and
Resource Similarity

Competitors are defined here as firms operating in the same industry,

offering similar products, and targeting similar customers. The logic un-
derlying this article, similar to that of the resource-based perspective, is
that the firm serves as the basis for competitor analysis. A firm will ex-
perience different degrees of competitive tension, the extent to which the
firm would consider a given competitor as a primary competitor, from
each of its competitors because of differences along the market and re-
source (or strategic) dimensions. To capture the unique nature of each
competitive relationship, as reflected in these dimensions, competitor
analysis is best carried out as an intraindustry comparison derived from
the study of the relationships between pairs of firms. Moreover, any
asymmetry between firms can be assessed only by looking from the point
of view of a focal firm. Thus, the focus of the analysis is not on under-
standing groups of firms or individual competitors in isolation, but on
1996 Chen 105

assessing competitive tension between firms and thus the potential of

these two firms for engaging in rivalrous behavior. Such firm-specific,
pair-wise analysis of competitors mirrors the fine-grained examination of
interfirm rivalry using the action/response dyad (Chen & MacMillan, 1992;
Smith et al., 1992) and complements the conventional structural or group
approach to understanding competition. Only through this kind of micro-
analysis can the subtlety and nuances of competition and rivalry be re-
vealed.
The joint consideration of the strategic and market dimensions is
supported in the literature. Harrigan (1979, 1985) argued that an industry
is usually composed of many markets and that each market may be
served by different strategies. Day (1981), defining markets and compet-
itors, advocated an integrated perspective combining the top-down ap-
proach, which specifies markets in terms of strategic capabilities and
resource transferabilities, and the bottom-up approach, which empha-
sizes customer market requirements. Abell (1980: 229, emphasis added)
also aptly noted: "It is important . . . to identify not only those competitors
who mirror your particular approach to the market, but also all the others
that intersect you in a market but approach the market from a different
perspective.” Competitor analysis is thus conceptualized as the study of
two vital firm-specific factors: market commonality and resource similar-
ity.
The literatures on organizational change, learning, and decision
making suggest three essential factors that underlie organizational ac-
tion: the awareness of interfirm relationships and action implications, the
motivation to act, and the capabilityof taking action (Allison, 1971; Dutton
& Jackson, 1987; Kiesler & Sproull, 1982; Lant, Milliken, & Batra, 1992;
Schelling, 1960). The focus on the two dimensions of market and resource
also points to these three behavioral antecedents: Awareness and moti-
vation are conditioned mainly by market relationship, and capability de-
pends largely on strategic or resource endowments. These three determi-
nants, which have not been considered in an integrated way in previous
competitor analysis research, are critical to the prediction of interfirm
rivalry (Miller & Chen, 1994).
It is important to note that markets and resources—and, indeed, com-
petition itself—may be defined either as objective phenomena that all
firms will consider the same way or as subjective interpretations of reality
(Abrahamson & Fombrun, 1994; Fombrun & Zajac, 1987: Porac & Thomas,
1994; Porter, 1980; Reger & Huff, 1993). Although both views are important
and may be complementary, this article focuses primarily on the objective
view of competition. Similarly, market commonality and resource simi-
larity are treated here as two conceptually distinct, loosely coupled con-
structs. The relationship between these two constructs—the possible cau-
sality between the two or their source in some third construct—is beyond
the scope of this article. The focus here is to highlight their significance
in competitor analysis and their roles in predicting rivalry.
106 Academy of Management Review January

Market commonality. The research on multiple-point competition has

highlighted the importance of shared markets, and market interdepen-
dence more generally, in competition, using the notion of multimarket
contact. The degree of multimarket contact between two firms determines
whether they are direct and immediate competitors.
Multimarket contact typically is measured by the average number of
markets in which a firm competes with all the competitors in a given
market, excluding this focal market (Boeker, Goodstein, Stephan, & Mur-
mann, 1994; Gimeno & Woo, 1994). A main focus of this line of research is
on testing the effect of multimarket contact on rivalry in a given market.
However, as noted by Baum and Korn (In press), most of these studies
typically examine variables such as average price charged, firm perfor-
mance, and market stability, which either relate only indirectly to rivalry
or represent the outcome of rivalry rather than rivalry per se. Furthermore,
researchers typically treat multimarket contact as an aggregate property
of either the firm (e.g., Barnett, 1993) or the market (e.g., Evans & Kes-
sides, 1994), and they generally do not recognize that instances of com-
petitive engagements or of “mutual forbearance” (Edwards, 1955) vary not
from market to market or from firm to firm but from relationship to rela-
tionship (Baum & Korn, In press).
More fundamentally, despite the literature’s focus on multimarket
contact, researchers have not fully considered that the intensity of com-
petition would vary in each of the shared markets where two firms com-
pete. From a competitive point of view, different markets would have
different sets of competitors, and the market power each competitor
wields also would vary across these markets (Montgomery, 1985). From a
strategic point of view, each market would play a different role in each
firm's overall market profile (Chen & MacMillan, 1992). In short, each
market is unique. Two firms are head-on opponents and will experience
great tension if they compete directly in many markets and, more funda-
mentally, if each is a key player in markets vital to the other.
The notion of market interdependence, as proposed in the literature,
by definition implies mutuality and symmetry. However, the market re-
lationship between a pair of firms, as elaborated more fully in the fol-
lowing pages, may not necessarily be symmetrical. The construct of mar-
ket commonality developed in this article represents a more narrowly
defined view of interdependence: it is firm specific, and it is considered
from a focal firm's point of view. One advantage of this refinement of the
notion of interdependence is its ability to detect the asymmetry that often
exists in the market relations between firms.
Market commonality is defined as the degree of presence that a com-
petitor manifests in the markets it overlaps with the focal firm. A given
competitor's market commonality with a focal firm is conditioned both by
the strategic importance to the focal firm of the shared markets and by
that competitor's strength in these shared markets. As noted by Day (1981)
and Porac and Thomas (1990), market is a complex and multidimensional
1996 Chen 107

construct, and different definitions are needed for different strategic pur-
poses. To allow generalizability, market is broadly defined here to in-
clude both product- and customer-based concepts such as geographical
market, market segment, or brand (Day 1981). Of course, within any in-
dustry, there is generally a commonly agreed-upon notion of market
(Abrahamson & Fombrun, 1994).
Resource similarity. The resource-based view of the firm seems par-
ticularly useful in differentiating competitors from a strategic point of
view (Amit & Schoemaker, 1993; Barney, 1991; Mahoney & Pandian, 1992;
Teece, Rumelt, Dosi, & Winter, 1994). The firm is the focal level of analysis
in this reemerging strategy theory; the underlying orientation considers a
firm as a unique bundle of tangible and intangible resources and capa-
bilities (Penrose, 1959; Wernerfelt, 1984). A basic assumption of the re-
source-based work is that resource bundles and capabilities are hetero-
geneously distributed across firms and that each firm is idiosyncratic
because of the different resources and assets it has acquired over time
and because of the various routines it has developed to manage them
(Barney, 1991; Peteraf, 1993a; Teece, Pisano, & Shuen, 1991). A firm's com-
petitive position and advantage in the industry are defined by its unique
resource bundle (Conner, 1994; Rumelt, 1984). More important, resource
endowments are "sticky” and likely to constrain a firm's strategic choices
(Teece et al., 1991). Collis (1991: 51) made this point explicit: “Strategy is
constrained by, and dependent on, the current level of resources . . . the
firm's asset investments, which in aggregate are the fundamental deter-
minants of its strategic position.”
Resource similarity is defined as the extent to which a given compet-
itor possesses strategic endowments comparable, in terms of both type
and amount, to those of the focal firm. The understanding of resource
similarity is important for competitive advantage because firms with sim-
ilar resource bundles are likely to have similar strategic capabilities as
well as competitive vulnerability in the marketplace. Similarly, firms
with divergent resource bundles are likely to have diverse competitive
repertoires to draw on because of the unique profiles of their strategic
resources.
In summary, the conceptualization of both market commonality and
resource similarity as firm-specific constructs developed from an individ-
ual firm's perspective is fundamentally rooted in the resource-based the-
ory of the firm. However, in this article I adopt a different perspective
arguing that each firm, although unique, differs from others in degrees
along a continuum of market commonality and resource similarity. Com-
parison is not only possible, but it is also necessary for purposes of em-
pirical research. A framework of competitor analysis, based on these two
dimensions, is proposed in Figure 1.
Juxtaposing these dimensions yields four quadrants into which
a given competitive relationship may fall. Quadrant I illustrates the
relationship of a focal firm with a competitor with high resource similarity
108 Academy of Maragement Review January

FIGURE 1
A Framework of Competitor Analysis

4 N

High

Market mjt
Commonality m| v

Low

& _/
Low Resource High
Similarity

The shaded area represents the degree of market

commonality between two firms.
[ Resource endowment A
<] Resource endowment B

and high market commonality. The Venn diagram, representing resource

similarity by the shapes of figures and market commonality by the degree
of intersection between the figures, illustrates this relationship. The con-
struct of market commonality, as outlined previously, captures more than
simply shared markets; thus, the figure is meant only to be suggestive of
the construct rather than strictly representational. Firms in Quadrant I are
similar in shape and have a substantial intersection. They are clearly
direct and mutually acknowledged competitors. In contrast, Quadrant IV
includes firms having similar resources and competing in very few mar-
kets, if any.

Interfirm Rivalry: Competitive Action and Response

Recent investigation of interfirm rivalry has yielded some useful

ideas (Baum & Korn, 1994; Chen et al., 1992; MacMillan, McCafferty, & van
1936 Chen 109

Wijk, 1985; Smith et al., 1392). First, the research recognizes a distinction
between the concept of interfirm rivalry, which emphasizes the conduct of
individual firms, and the general conceptualization of competition, which
focuses on properties of the industry or market structure (Baum & Korn,
1994; Caves, 1984; Hannan & Freeman, 1989; Jacobson, 1992). Second, us-
ing the individual competitive move as the unit of analysis, rivalry can be
analyzed by studying the exchange of moves and countermoves (Caves,
1984; Porter, 1980; Smith et al., 1992), or the action/response dyad.
The action/response dyad is consequential because it is at this level
where competitive engagement occurs (Chen et al., 1992) and where the
dynamic nature of strategy and competition and the "mutual interdepen-
dence” of firms in an industry are best captured (Porter, 1980: 17). An
action (or attack) is defined here as a specific competitive move initiated
by a firm, such as introducing a new product or entering a new market,
that may lead to the firm's acquiring its rivals’ market shares or reducing
their anticipated returns (Chen & Hambrick, 1995; Chen & MacMillan,
1992). Similarly, a response (or retaliation) is a specific countermove,
prompted by a rival’s attack, that a firm takes to defend or improve its
share or profit position in the industry.
The importance of competitive attack has been widely acknowledged
in such concepts as first-mover advantage (Lieberman & Montgomery,
1988) and competitive initiative (MacMillan, 1982). Underlying such theo-
ries is the notion that, in a world of uncertainty, firms count on the success
of some competitive actions to secure lasting benefits (Wemerfelt & Kar-
nani, 1987). As MacMillan (1982: 43) noted: “To the extent that strategists
can capture and maintain the initiative, their competitors are obliged to
respond, thus being forced to take a reactive role rather than a proactive
role.”
The significance of competitive response lies in the fact that attacks
are rarely made with impunity and that the ultimate effectiveness of an
action depends largely on defenders’ responses (Chen & MacMillan, 1992;
Smith et al., 1992). The need for a firm initiating an attack to consider
potential responses is particularly crucial in intensely rivalrous situa-
tions, in which firms are closely interdependent and in which damaging
countermoves can occur very rapidly (D'Aveni, 1994). In such situations,
the expectation of retaliation will drive competitive decision making.
Thus, a key feature of rivalry is its dynamic and interactive nature (Schell-
ing, 1960; Weigelt & MacMillan, 1988).
Moreover, researchers have shown that actions and responses matter
to performance (Chen & Hambrick, 1995): The greater the number of com-
petitive moves a firm initiates, the better its performance (Young, Smith,
& Grimm, 1994); attackers and early responders gain market share at the
expense of late responders (Chen & MacMillan, 1992); the greater a firm's
tendency to respond, the better its performance (Smith et al., 1991); and
the more responses a firm's actions provoke, the worse its performance
(Chen & Miller, 1994).
110 Academy of Management Review January

An important research task, then, has been identifying predictors of

competitive attack and response. The research so far has focused on pre-
dicting response using such factors as the attributes (a) of the attack
(Chen, et al., 1992), (b) of the attacker (Chen & MacMillan, 1992), and (c) of
the defender (Smith et al., 1991). In contrast, no effort has been made to
predict attack, nor has attention been devoted to analyzing the structural
context before the launch of an attack or the prebattle relationship be-
tween the attacker and a defender. The latent potential for rivalry or
structural tension is a most critical factor in explaining the extent to
which two firms will mount attacks against each other and why a rival
"feels the pressure” (Porter, 1980: 7) to retaliate once an attack is initiated.
In my conceptualization of competitor analysis I suggest that rather than
treating the attacker and the defender independently, one should take
into account the defender’s overall market and resource profiles in com-
parison with those of the attacker in predicting attack and response; that
is, a competitor's strengths and weaknesses (Porter, 1980) would be as-
sessed with respect to a particular focal firm. This approach responds
directly to the call to consider strategy as a relative construct (Snow &
Hambrick, 1980).

PROPOSITIONS: LINKING COMPETITOR ANALYSIS TO

INTERFIRM RIVALRY

This section will use the concepts of market commonality and re-
source similarity to predict the likelihood of attack and the likelihood of
response. Underpinning the prediction are three drivers of competitive
behavior: awareness, motivation, and capability. In general, awareness
is considered a prerequisite for any move, and it is likely to be increased
by both market commonality and resource similarity. Market commonal-
ity will affect a firm's motivation to attack (or respond); resource similarity
will influence attack (or response) capability. Several streams of litera-
ture will be used to show support for these general predictions, mainly
multiple-point competition for market commonality and the resource-
based theory of the firm for resource similarity. In addition, the idea of
competitive asymmetry is introduced, and its implications for rivalry are
discussed.
Figure 2 offers a schematic representation of the linkages between
competitor analysis and interfirm rivalry. The building blocks of compet-
itor analysis—market commonality and resource similarity—influence
the drivers of competitor behavior. These drivers (awareness, motivation,
and capability), in turn, influence the likelihood of competitive attack and
response. The figure also suggests that interfirm rivalry affects organi-
zational outcomes such as economic performance and changes in market
share, although the issue is not specifically addressed in the present
article. The figure then reveals a feedback loop as rivalrous moves alter
the existing positions in commonality and similarity, thereby setting up a
111

esuodsey jo pooyrieNrTe
Ruppung esimoseye
A
A9DRY JO PooYIeNITe Y
Aypuowrmo 1o e
1o1aDyeg
ssuodsey pup uoudy sanneduwion jo s1eauq
sAapoary ungsejup sisA[puy sopedwon
Azpary unnasiu] pup sisi[puy ojedwo) jo ylomawni peaypibajul uy
2 34NO1d
1936
112 Academy of Management Review January

new competitive relationship for the next battle. These relationships are
elaborated and clarified in the next sections.
Finally, in the following propositions about market commonality, re-
source similarity is held constant. Similarly, market commonality is held
constant in presenting propositions on resource similarity. In addition,
multiple-point competition research has identified key market structure
variables (e.g., growth and concentration) for control in empirical testing.
Research on competitive action and response has shown the significance
of the attributes of the attack (e.g., type of action), of the attacker (e.g.,
commitment), and of the defender (e.g., competitor dependence) in pre-
dicting response. These are the factors that must be assumed to be equal
in making the following predictions.

Market Commonality and Interfirm Rivalry

Market commonality, which captures the extent to which two firms
are in direct competition in the market, is a primary dimension of com-
petitor analysis as well as a driver of rivalry.® A major thrust of multiple-
point competition research has been in testing the mutual forbearance
hypothesis (Edwards, 1955), which argues that competitors interacting in
multiple markets would be less motivated to compete aggressively in a
market because of their awareness of the possibility of retaliation across
various markets (Barnett, 1993; Gimeno, 1994; Ma & Jemison, 1994). Thus,
“firms that are close competitors may not be the most intense rivals”
(Baum & Korn, In press). (However, this statement does not imply that
distant competitors will be strong rivals.) Although empirical testing of
this hypothesis has produced conflicting results (Gimeno, 1994), recent
refined studies show general support for the rivalry-reducing effects of
multimarket contacts (Baum & Korn, 1994; Gimeno & Woo, 1994). Gimeno
and Woo (1994) have shown that firms with more multimarket contacts
tend to take more conservative stances toward each other, leading to less
rivalry, as reflected by relatively higher market prices. Baum and Korn
(1994) found that increases in multimarket contact reduce rivals’ rates of
entry into each other's markets, thus minimizing this particularly aggres-
sive competitive incursion.
Thus, with respect to the initiation of attacks, it appears that an
attacker will be less likely to target rivals with high market commonality
than those with low market commonality, because the stake involved is
very substantial. The risk-averse propensity of decision makers in large-
stake situations also has been well noted in the decision-making litera-
ture (Bass, 1983).
Proposition la: The greater B's market commonality with

31t should be noted that there may be factors other than market commonality which
affect the degree to which two firms are in direct competition, such as differentiation (Beath
& Katsoulacos, 1991; Hotelling, 1929).
19% Chen 13

A, the less likely A is to initiate an attack against B, all

else being equal.
Consider now a situation in which an attack has been launched,
perhaps because an aggressive competitor is attempting to increase mar-
ket share or to reposition itself. This situation will be discussed from a
defender's viewpoint. Adopting this perspective will help identify which
defenders are most likely to respond to any given attack.
The behavioral implications of market commonality for response
have been noted by Porter (1980: 88): “A central characteristic of competi-
tion is that firms are mutually dependent: firms feel the effects of each
other's moves and are prone to react to them.” Similarly, proponents of the
resource-dependence perspective (Pfeffer, 1982, 1987; Pfeffer & Salancik,
1978) also pointed to the significance of market interdependence—an
idea related to market commonality —and the general tendency for firms,
facing uncertainty about the actions taken by other firms, to react in order
to manage interdependencies.
Dutton and Jackson (1987) contended that decision makers are more
likely to respond to issues labeled as threats. An attack would no doubt be
viewed as threatening by a firm if this attack were initiated by a rival with
high market commonality. The finding that response likelihood is posi-
tively related to competitor dependence (Chen & MacMillan, 1992), or the
extent to which a defender relies for revenues on the markets under at-
tack, further supports the prediction.? Finally, the implication of Baum
and Korn's (In press) finding that rivals with high multimarket contact are
less likely to exit each other's markets is that such rivals are strongly
committed to defending their positions and thus cannot be attacked with
impunity.
These theories and findings suggest that the firm that has greater
market commonality with the initiator of the attack would be more likely
to respond.
Proposition 1b: The greater A’s market commonality
with B, the more likely B is to respond to A's attack, all
else being equal.

Resource Similarity and Interfirm Rivalry

The dynamic and iterative nature of competitive rivalry (Amit et al.,
1988; Weigelt & MacMillan, 1988) suggests that a defender’'s potential
response is a matter of great concern for an attacker. An attacker may be
hesitant to target a rival that seems likely to retaliate. Assuming that all
affected competitors would be equally motivated to respond to an attack,

“The concept of competitor dependence is action specific, depending upon a given

attack once that attack has been launched: Different attacks will affect different competitors,
and an attack also will atfect each competitor differently, depending on the significance of
the markets involved. In contrast, the idea of market commonality captures the preattack
relationship between market rivals.
114 Academy of Management Review January

an initiator contemplating a competitive attack will assess its own capa-

bility of acting in comparison with the potential defender’s capability of
retaliation. Defending firms with strategic endowments comparable to
those of the initiator will be the most capable of effective response.
Hence, an initiator will think twice about launching an attack against
such arival. In short, a firm’s awareness of the resource similarity with a
defender and the defender’s capability of responding will play a key role
in the firm's decision whether to attack.
The prediction that firms are less likely to attack rivals with similar
strategic resources is in line with Peteraf’s (1993b) finding that rivalry
within a strategic group will be less intense than intergroup rivalry.
Proposition 2a: The greater B’s resource similarity with
A, the less likelyA is to initiate an attack against B, all
else being equal.
Consider the point of view of a defending firm, assuming that an
attack has been launched and that the defending firm has become aware
of the attack and is motivated to respond to it. Such a firm's response—
determined mainly by response capability—is likely to be conditioned by
its degree of resource similarity with the initiator. This argument is de-
veloped from the resource-based theory of the firm, whose proponents
argue that sustained competitive advantage in the market is rooted in the
firm's internal resources and capabilities (Barney, 1991; Conner, 1991;
Peterat, 1993a).
This phenomenon touches on a most fundamental issue in a firm's
quest for competitive advantage in the market: the extent to which a
competitive move will be imitated by competitors, which are character-
ized by varying degrees of resource and strategy heterogeneity in com-
parison to that of the initiator of the move. A number of related ideas and
mechanisms have been proposed in the resource-based literature: imper-
fect imitability and imperfect substitutability (Barney, 1986, 1991; Dierickx
& Cool, 1989), barriers to imitation (Reed & DeFillippi, 1990), isolating
mechanisms (Rumelt, 1984), and resource position barriers (Wernerfelt,
1984). (The notion of mobility barriers [Caves & Porter, 1977; Hatten &
Hatten, 1987] is also relevant here.) Ideally, a firm would like to initiate a
competitive challenge that would fully utilize its resource-based advan-
tages—or more specifically, the heterogeneous asset bases (Rumelt,
1984)—in order to prevent competitive imitation (Collis, 1991), or, if im-
possible, at least to maximize competitors’ difficulties in imitation.
In the context of this article, resource heterogeneity or dissimilarity,
relating to the initiator, certainly would play a vital role in circumscribing
a competitor's ability to respond; resource similarity would have exactly
the opposite effect. Empirically, the organizational resources required for
response—in terms of both quantity and diversity—have been found sig-
nificant in the prediction of response: If the response will require sub-
stantial resource commitment and major organizational restructuring, ri-
vals are less likely to respond and will respond more slowly (Chen &
1996 Chen 115

MacMillan, 1992; Chen & Miller, 1994). Therefore, the organizational re-
quirements for response would be more manageable for competitors with
resource bases similar to the attacker's than for those with very different
ones, all other things being equal.
Furthermore, as often noted in the resource-based work, firm capa-
bility extends the notion of intangible resources to include various orga-
nizational routines developed by the firm (Collis, 1991; Winter, 1987). In
competition, firms would not only be more motivated but also more ca-
pable of reacting easily to those kinds of situations that evoke routine
responses by drawing from the preprogrammed and preestablished rou-
tines that exist inside the firm (Allison, 1971). These preexisting routines
are more likely to be available if a move is initiated by a similar firm,
from both the strategic and resource points of view. In short, defenders
that are most similar to the attacker in their strategic resource endow-
ments will have the greatest potential and capability for retaliation.
Proposition 2b: The greater A's resource similarity with
B, the more likely B is to respond to A’s attack, all else
being equal.

Market Commonality Versus Resource Similarity

Two firms will surely recognize their competitive relationship most

clearly if they compete in the same markets and develop comparable
market profiles. Market interdependence is the most significant factor
affecting conjectural variations and mutual dependence from a competi-
tive point of view (Gimeno & Woo, In press). Firms that have the highest
market commonality are the most direct and mutually recognized com-
petitors (although they may not necessarily be the most fierce ones). As
discussed above, one of the problems in previous competitive studies in
strategy, especially strategic group, is the lack of attention to market
relationships or the assumption that they are constant. Instead, the focus
has been on strategic or organizational similarity, reflecting only a firm's
capability to act rather than its motivation. In a competitive situation, a
firm must first be motivated to act or react, regardless of its capability.
Motivation is a necessary condition and prerequisite for behavior, and it
is a more direct and stronger predictor of interfirm rivalry than is capa-
bility (Chen & Miller, 1994).
In addition, contention in the market will have not only the most
direct, but also the most visible and immediate, effects on competitive
behavior, much more so than competition based on resource endow-
ments. Competitive exchanges with high-market-commonality rivals will
have direct and immediate implications for market share or the bottom
line (Chen & MacMillan, 1992). Moreover, the degree to which two firms
are interdependent in the market usually will be quite visible to strate-
gists, whereas strategic resource endowments, because of their idiosyn-
cratic nature and their causal ambiguity (Barney, 1991), will tend to be
116 Academy of Management Review January

much less transparent. Because of the visibility associated with high mar-
ket commonality, other stakeholders connected with the firm also will be
aware of any competitive challenge and, thus, pressure the firm with
respect to the issues of whether and how to act and react (Pfeffer, 1982,
1987; Porter, 1984).
Proposition 3: Market commonality is a stronger predic-
tor of competitive attack and response than is resource
similarity.

Competitive Asymmetry and Interfirm Rivalry

Tversky's (1977) original work on the features of similarity formalizes

the concept of asymmetry and provides this article the theoretical ground-
ing for the consideration of competitive asymmetry between firms. Chal-
lenging the basic assumption of symmetry underlying all theoretical
treatments of similarity, he provided empirical evidence for asymmetric
similarities and argued that similarity between two objects should not be
treated as a symmetric relation. Tversky demonstrated that the commonly
accepted symmetry axiom underlying the metric distance function is not
valid in capturing the concept of similarity. That is, d(a,b) # d(b,a). State-
ments of similarity are directional and depend on which element of the
comparison is the “subject” and which the “referent” (Tversky, 1977: 328).
In illustrating this concept, Tversky further pointed out that “A is like B"
is not the same as “B is like A" (1977: 328). Although Tversky's general
theory has been applied primarily to human behavior at the individual
level, it is equally applicable to competitive behavior at the firm level. In
this article, the configuration of a given competitive relationship would
differ, depending on which firm was considered the focal firm. A direct
implication is that if A is B's primary competitor, it does not necessarily
follow that B is A's primary competitor. That is, Figure 1 could appear very
different, depending on which firm in a pair is considered the focal firm.
Furthermore, Tversky's challenge of the triangle inequality and, con-
sequently, the transitive law also has strong implications for competitor
analysis and offers further support for the notion of competitive asymme-
try. In competition, if A is a major competitor of B, and B is a major
competitor of C, it does not necessarily follow that A is a major competitor
of C: Each competitive relationship, in terms of both market commonality
and resource similarity, is unique and directional, not symmetrical.
Given this condition, each firm will define competitors differently and
will also experience different degrees of competitive threat from each
competitor because of the differences along the dimensions of market
commonality and resource similarity.
The firm-specific conceptualization of competitors and competitive
relationships further suggests that the competitive relationship between
a pair of firms is asymmetric, depending on which competitor is the focal
firm under consideration. In other words, A may pose a greater threat to
1936 Chen 17

B than does B to A. This asymmetry is likely to be present in most com-

petitive engagements (Carpenter, Cooper, Hanssens, & Midgley, 1988;
Lehmann & Winer, 1990). However, with only a few exceptions, this con-
cept has not been addressed in the strategy literature. Although authors
of current resource-based work have recognized the existence of asym-
metry in general and its potential as a source of sustainable economic
rent (Amit & Schoemaker, 1993), they have not yet incorporated this idea
into their research agendas, nor have they extended this basic premise to
examine interfirm relationships in the competitive context.
Adopting the resource-based view of the firm, Collis (1991: 51) argued
that because the “vector of resources each [firm] possesses (represented
by its core competence) is different,” each firm would approach rivals and
competition very differently, even among firms in the same “external
opportunity set.” Porter (1979) noted that the importance of entry barriers
depends on the particular strategy adopted by the firm. Similarly, Hatten
and Hatten (1987) made it explicit that mobility barriers between strategic
groups are asymmetrical. Porac and Thomas (1990), using taxonomic
mental models, suggested that there are variations in the ways firms
define their competitors.
A few examples further illuminate this important idea. In airline com-
petition, Hawaiian Airlines—a smaller and geographically focused air-
line—would find both American and United, two megacarriers that have
expanded aggressively in the Pacific markets, its primary competitors.
However, American and United may encounter Hawaiian as a competitor
only in the specific markets that overlap, but not as a direct competitor in
general. The following quotation neatly captures one firm's view of this
phenomenon.

Ask Scott McNealy, the chairman of fast-growing Sun Mi-

crosystems Inc., who his competitors are, and he names Dig-
ital Equipment Corp., Hewlett-Packard Co. and International
Business Machines Corp. What about NCR Corp., the fifth-
largest U.S. computer maker and twice Sun's size? “We never
see them,” he says. (Wilke, 1930: A1)
Proposition 4a: Competitive asymmetry is likely to exist
within a pair of competitors. That is, any two firms are
unlikely to have identical degrees of market common-
ality and of resource similarity with each other.
In line with Tversky (1977), the significance of this competitive asymmetry
lies in its behavioral implications for interfirm rivalry. Consideration of
asymmetry helps to avoid the dangerous assumption that a specific com-
petitor's awareness, motivation, and capability are the same for any par-
ticular firm. For example, firms that are considered nonkey competitors
may be granted a wide latitude of action without provoking retaliation
from their stronger counterparts. Similarly, stronger rivals may not be
aware of the threat from weaker opponents, which view such powerful
118 Academy of Management Review January

firms as their main targets. Such weaker firms may go unrecognized or

disregarded despite the damage they may inflict. The Japanese multina-
tional corporations’ (MNCs') gradual invasion of the world market during
the last several decades provides an excellent lesson about the potential
threat of seemingly insignificant competitors (Hamel & Prahalad, 1990).
The hard lesson learned by brand leaders in many consumer product
industries after they had lost substantial share points to their private-
label rivals provides a more recent example (Glemet & Mira, 1993). Hence,
Proposition 4b: Because of competitive asymmetry in
market commonality and in resource similarity, the like-
lihood that A will attack B will differ from the likelihood
that B will attack A. The same will hold true for response
likelihood.

ILLUSTRATION OF COMPETITOR ANALYSIS

To guide competitor mapping and future empirical research, mea-

sures of market commonality and resource similarity were developed and
applied to the airline industry. For illustration of competitor mapping in
1989, pairs of 17 major U.S. airlines were compared along these two di-
mensions using available public information. The objective measures
were validated by the perceptual data offered by key informants in the
industry.
Market commonality, or the degree of presence that a competitor
manifests in the markets where it overlaps with a focal firm, is deter-
mined by two factors: the strategic importance of each of the markets the
focal firm shares with the competitor and that competitor's market share
in these markets. Market in this industry was defined as a route (Gimeno,
1994; Karnani & Wernerfelt, 1985). The measure can be expressed as fol-
lows:

2,000
Mab = ) [Pa/Pa) X (Pu/P)] )
i=1

where M,;, = Market commonality that airline b has with the focal
airline a;
P,; = Number of passengers served by a in route i;
P, = Number of passengers served by a across all routes;
P,; = Number of passengers served by b in route i;
P; Number of passengers served by all airlines in route i;
A route, among the top 2,000 routes, served by both
o

aand b.
Each competitor's market commonality with a focal firm was devel-
oped from a detailed, market-by-market analysis across all their shared
1996 Chen 119

markets. To take into account the overall relational pattern in which a

given relationship is embedded (Burt, 1987) and the idea of competitive
relativity (Chen & Hambrick, 1995), the results were "normalized,” so that
the sum of the market commonality indices for all of a given firm's com-
petitors was equal to 1. Table 1 presents the market commonality map-
ping among pairings of 17 airlines. A list of focal firms is presented in the
left-hand column; the relative market commonalities that each focal firm
has with other airlines are presented from left to right.
Interesting examples can be found in Table 1. For instance, from
Trans World Airlines’ (TW's) point of view, the commonality index of
American Airlines (AA) is .21 (row 14, column 1); that of TW from AA's
perspective is .09 (row 1, column 14). Thus, AA is TW's primary competitor,
but not vice versa, an example of competitive asymmetry. (In other words,
M,;, # M,,.) In another example, from America West Airlines’ (HP's) per-
spective, the commonality index of Southwest Airlines (WN) is .40; from
‘WN’s point of view, the commonality index of HP is .38. Each is the other's
top competitor. However, WN (308 routes) and HP (454 routes) competed in
only 83 routes. Although they compete in relatively few markets, they are
head-to-head rivals in these markets. In another example, the market
commonality index of AA from HP's perspective is .08; AA, although a
large firm and active in most of HP's markets (415 of 454), is not a powerful
player in most of these markets. These two cases suggest that the sheer
number of shared markets may not capture fully the extent of market
tension that two firms develop in competition.
Resource similarity, or the extent to which a competitor shares com-
parable strategic endowments with a focal firm, was measured following
a procedure analogous to that of market commonality. For illustration, the
article chose a vital strategic endowment, fleet structure (Taneja, 1989).
Different aircraft are used for various strategic and operational purposes.
There were 26 major types used in 1989, classified according to such key
parameters as flying distance, number of passengers carried, and type of
engines used (Mondey, Cook, Hooks, & Chant, 1987). Each competitor's
resource similarity with a focal firm was developed from a detailed type-
by-type analysis across all the aircraft they had in common. A table sim-
ilar to Table 1 could be constructed to illustrate these relationships.
Finally, as Figure 3 shows, each of a firm's competitors can be
mapped out along both dimensions. Obviously, the composition of these
maps was different for each focal firm. For instance, Delta’s main com-
petitor is clearly American (AA). However, a similar mapping for AA re-
vealed that United (UA), not Delta, is AA’s most important competitor.
This example not only provides preliminary evidence of competitive
asymmetry, but it also highlights the importance of conducting competi-
tor analysis from multiple vantage points. Each competitive relationship
is unique and directional, and what a firm’s competitors think of the firm
is as important as what its managers think of those competitors.
In addition, this firm-based approach to competitor analysis can be
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122 Academy of Management Review January

applied to perform the kinds of tasks traditionally performed by industry-

or group-based analysis. For instance, the figure shows that Delta’s com-
petitors fall into three distinct competitor groups along the market and
resource dimensions. In contrast, the clustering of all a firm's competitors
in the lower left-hand corner of the figure would clearly indicate that the
firm was a niche player that had no significant competitor along either
the market or resource dimension. Finally, it should be noted that the
point at which similarity and commonality begin to matter in competitor
analysis depends on factors specific to the focal firm (e.g., its strategic
objectives or its resource constraints and allocation priorities).
Validation
Steps were taken to validate the proposed measures of market com-
monality and resource similarity using key industry informants. The pur-
pose is to examine the extent to which these two objective measures—
and their underlying constructs—would correspond to the competitive
tension imposed on each airline by its various competitors, as considered
by informed executives and experts. A mail survey of 163 highest level
executives (senior VPs or above of all major airlines) and experts (ana-
lysts and consultants) was conducted to study 14 sample airlines. (Three
airlines among the 17 used to construct the market commonality and re-
source similarity indexes had ceased operations by the time of the mail
survey.) Seventy-two questionnaires were returned (a response rate of
45%), of which 71 were usable. No nonresponse bias was detected, and
the average industry experience of the respondents was over 25 years.
Each respondent was asked to consider from the point of view of each
focal airline and to rank its top 5 competitors from a list of 13 competitors.
A scoring scheme was developed so that the airline ranked as the top
competitor of the focal airline received a score of 5; ranked second, a score
of 4, and so on; those not included in the ranking received 0. Scores were
then summed across all responses. Thus, each sum score reflected the
degree of competitive tension that a given competitor imposed on a focal
airline, as judged by survey respondents. A table similar to Table 1 could
be constructed to illustrate all these pair-wise competitive relationships
(a total of 182, or 14 X 13).
The survey data were then correlated with the market commonality
and the resource similarity measure, respectively. The individual pair-
wise figures, yielded from the market commonality measure (Table 1) and
from the resource similarity measure (not presented here), constitute the
basic data points for analysis. The correlation for the former is .74 (n =
182, p < .001), and .59 (n = 182, p < .001) for the latter. Thus, there is very
high correspondence between the subjective judgment by industry infor-
mants and the objective measures of market commonality and resource
similarity, developed from two different sources of information. The con-
vergence of results provides preliminary support for the validity of the
measures and the underlying constructs.
1936 Chen 123

DISCUSSION
There are two primary purposes for this article. First, it proposes a
new conceptualization of competitor analysis by introducing two firm-
specific and theory-based constructs: market commonality and resource
similarity, which would allow for differentiation among various players
in an industry. Second, it provides theoretical integration between two
important subjects in strategy: competitor analysis and interfirm rivalry.
Using these two constructs, the article presents propositions predicting
competitive attack and response.
The article first contributes to the literature on competitor analysis by
focusing on a very fundamental yet generally ignored issue, the extent to
which firms are in direct competition because of the similarity in their
market profiles and resource endowments. The introduction of market
commonality and resource similarity adds to current efforts in strategy
(resource-based work, in particular), population ecology (Barnett, 1993),
and network theory (Burt, 1987), which attempt, from different theoretical
angles, to provide a more differentiated depiction of the relationships
between firms.
The joint consideration of these two constructs also shows the com-
plementarity of two very prominent but contrasting strategy theories, the
industry structure or Porter’s (1980) theory and the resource-based theory
(Barney, 1991; Peteraf, 1993a), in studying competitive advantage and
competition. This article highlights the significance and usefulness of
applying both the former’s “outside-in” and the latter's “inside-out” per-
spectives for conceptualizing competitors and predicting rivalry.
More important, these two constructs and their underlying theories
are applied to predict attack and response, which reflect rivalry. Through
these propositions, the conceptual linkage between competitor analysis
and interfirm rivalry is made explicit, a vital issue that has remained
largely unaddressed in the literature.
For illustration, this article offers measures of market commonality
and resource similarity, using airlines as an example. The proposed mea-
sures, derived from public data, corresponded highly to the perceptual
competitor ranking provided by industry informants. The convergence of
results using two independent methods provides preliminary support for
the validity of the proposed measures and the underlying constructs
(Campbell & Fiske, 1959; Dess & Robinson, 1984; Schwab, 1980; Venkatra-
man & Grant, 1986).
Implications
There are several research implications. First, the article highlights
the significance of the market in which competitive battles play out and
the importance of comparing the overall market profiles of firms. Strategy
researchers seem to pay limited attention to the market context, instead
focusing on industry, strategic group, or the firm as a unit of analysis.
124 Academy of Management Review January

One direct implication of examining competitors on a market-by-market

basis is the conceptualization of competition and competitive relationship
as a phenomenon occurring at more than one level: at the global or firm
level, or across all the markets in which firms compete in general; at the
focal or subfirm level, or in the market(s) in which a given competitive
battle of interest is playing out. This idea of “multiple-level,” in contrast
to multiple-point, competition could provide additional insights for un-
derstanding and predicting rivalry.
Along the same line, this article spans various analytical levels: firm,
group, industry, market, competitive move. Porac and Thomas (1990) pro-
pose that different levels of focus and of abstraction are possible in de-
fining competitors. Indeed, level of analysis will have implications for the
way researchers examine competition and should be made explicit in any
competitive study (Nayyar, 1993). This article takes the firm as the nexus
of competitor analysis and treats the individual competitive move as the
basic building block of rivalry; these foci seem especially appropriate
and useful in bridging competitor analysis and interfirm rivalry.
Thus far, the discussion has focused on competition within an indus-
try or at the business level. However, it is important to stress that the
concepts developed here can be equally applied at the corporate level.
The framework is amenable to the analysis of competitors pursuing a
single, dominant, or related diversification strategy (Rumelt, 1974). Ap-
plying the same idea would show that Proctor & Gamble and Unilever
may be paired in Quadrant I in Figure 1 because they compete head on in
many similar industries with comparable resource endowments; GE and
Citicorp may be rivals moving from Quadrant III to Quadrant II, because
of GE's increasing commitments in financial service industries. (A similar
approach can be applied to analyze Walt Disney and Westinghouse, two
conglomerates that have recently attempted to move strongly into the TV
network industry through acquisition.) This same idea also would be ap-
plicable to mapping global competitors in various country markets
(Franko, 1989) or rivals competing where industry boundaries are unclear
or ill defined (e.g., multimedia industries), and to examining competition
among nations (Porter, 1992).
The conceptualization of resource similarity in terms of the compara-
bility of resource endowments and the proposed measure from the airline
industry also have implications for researchers’ adopting the resource-
based view of the firm. Recent interest in applying this theory seems very
strong in the field of strategy. Progress has been made at the conceptual
level, but it has been greatly limited by difficulties in operationalization
and measurement of the proposed constructs (Conner, 1991). This article
is one of the first attempts in this direction; it is similar to efforts by
Henderson and Cockburn (1994), McGrath, MacMillan, and Venkatara-
man (1995), and Reed and DeFillippi (1990).
The measurement of resource similarity is potentially problematic
because of the different ways resources may be conceived. However, the
1936 Chen 125

proposed idea of using a type-by-type comparison between a focal firm

and each of its competitors offers some promise. Once a focal firm is
chosen as a basis for comparison, it becomes easier to determine which
of its resources is most relevant and which of its competitors is the most
(or least) similar. A firm's entire range of strategic endowments may be
aggregated on a resource-by-resource basis; the very different types of
resources held by a firm, such as human resources (Schuler & Jackson,
1987), strategic assets (Amit & Schoemaker, 1993), knowledge-based com-
petencies (Teece et al., 1994), corporate applied R&D (Helfat, 1994), and
brand equity, thus, could be assessed on a comparable basis in order to
develop an integrated measure of resource similarity on a firm level. It is
possible, for example, to ask industry informants to identify a firm’s entire
range of strategic endowments, to assess the relative importance of each,
and to compare all of a firm's competitors with the firm on a resource-by-
resource basis and from this information to develop an integrated mea-
sure of resource similarity on the firm level. (Market commonality also can
be assessed using a similar approach, involving key industry infor-
mants.) Alternatively, a multivariate method of assessing similarity could
be used (e.g., Cool & Dierickx, 1993).
The rationale underlying the first propositions suggests that different
forces drive action and response behavior: high market commonality with
a defender will reduce an attacker's aggression in initiating attacks,
whereas high market commonality with an attacker will increase a de-
fender's proclivity to respond. Chen and Hambrick (1995) found discrep-
ancy with respect to a firm's action and response profiles: Firms that were
aggressive in attacking rivals were not necessarily responsive under at-
tack, and vice versa. Baum and Korn's (In press) study of market entry and
exit behaviors also supports this logic.
This action/response dichotomy has implications. For example, an
important issue in competitive studies is whether similar firms tend to
compete more aggressively or less aggressively with one another. Peteraf
(1993b), following Caves and Porter's (1977) theory, found that strategi-
cally similar firms were less likely to compete, as reflected by their av-
erage high price. This result is also consistent with the assumption of
tacit collusion, which underlies multiple-point competition literature. By
contrast, Gimeno and Woo (In press), after controlling for multimarket
contact, showed that high strategic similarity would increase rivalry, as
reflected by low average price. This finding is in line with the argument
that structurally equivalent firms tend to be more competitive (Abraham-
son & Fombrun, 1994; Burt, 1987). (It should be noted that according to the
resource-based perspective, resource similarity would imply strategic
similarity, which, in turn, would predict greater rivalry. This prediction is
based solely on capability, as underlined in Proposition 2. In contrast, the
studies reviewed here have been focused almost exclusively on the mo-
tivational aspect of competitive decision making.) This apparent contra-
diction commands further investigation. This article suggests that the
126 Academy of Management Review January
issue is not whether similar firms are aggressive toward one another in
an absolute sense or across all conditions, but rather how they are likely
to behave in a given context, as attackers or as defenders.
This article also has several practical implications. A firm can use
competitor mapping, shown in Figure 3, to help allocate resources (time,
money, attention, etc.) in proportion to the degree of threat each compet-
itor imposes and to monitor that competitor's movement over time. Such
mapping also can help a firm to identify ideal attack targets: One firm
may identify its least direct competitor—from both the market and re-
source perspectives—as an appropriate target, whereas another might
elect to challenge its primary rival head on to gain market share. Fur-
thermore, executives also can use this framework to address the issue of
repositioning the firm in an industry (Porter, 1980). It is generally advis-
able to reposition if a firm is developing very high market and resource
similarity with dangerous or "bad” competitors (Porter, 1985), because the
risk is extremely high in this kind of situation, and any move a firm makes
could provoke serious retaliation. The issue then becomes weighing the
relative impediments between market (Caves & Porter, 1977) and resource
barriers (Wernerfelt, 1984). Similarly, by integrating the two dimensions,
firms also would be able to identify possible alliance partners for various
strategic or competitive purposes. For instance, it is possible that com-
petitors in Figure 1, Quadrant IV may complement well a firm considering
market expansion because of their different market focus yet similar re-
source endowments.
Competitive asymmetry also has important implications. Managers
of a firm should analyze the competitive environment from the point of
view of each of its competitors. What competitors think of a firm is as
important as what that firm thinks of them. A given competitor might
seem insignificant from the point of view of a particular firm (such myopia
often exists in competitors in Quadrant III); however, that competitor may
consider the firm its single most important competitor and, thus, its pri-
mary target of attack or counterattack (the perception very often adopted
by firms in Quadrant II). Ultimately, a key challenge for strategists is
actually to create competitive asymmetry and fully to utilize it to their
firm's advantage.
Limitations and Future Directions
Although an important first step, the article may be limited by its
focus only on existing competitors in an industry. Thus, it is important for
researchers to develop a conceptualization of potential competitors that
currently are not in the industry as well as to predict their likely entry
strategies and attack targets. The idea of resource similarity developed
here should be useful in this regard.
The action and response variables examined in this article represent
only a subset, albeit an important one, of rivalrous behavior. The purpose
here is to introduce the two independent variables of market commonality
1996 Chen 127

and resource similarity, rather than a selection of the dependent

variables. In the future, researchers can study the effects of these vari-
ables on issues such as market signals (Heil & Robertson, 1991), strategic
commitment (Ghemawat, 1991), bluffs (Porter, 1980), speed of decision
making (Eisenhardt, 1989), competitive (de-) escalation (D'Aveni, 1994),
and market entry and exit (Baum & Korn, In press). Naturally, the propo-
sitions presented here should be examined empirically to test the signif-
icance of market commonality and resource similarity in predicting ri-
valry.
The issue of level of analysis and its effects on the conceptualization
of competition have been addressed above. It also should be noted that
although the dyad focus and the firm-level pair-wise emphasis represent
a critical first step, the proposed approach nonetheless should be com-
plemented by the group or structural approach in which the social nature
of competition is considered. Although contextual or industry factors may
not be particularly helpful in predicting which firms are likely to initiate
attacks or engage in responses, they are certainly helpful in specifying
broad competitive parameters. That is, rivalry is not only a function of
market commonality and resource similarity, but it is also a function of
the industry structure or the context of the markets in which firms com-
pete. Competitive moves are often made with attention to their implica-
tions, not only for each of a firm's rivals but also for the complete com-
petitive landscape. (Figure 3 indicates, for example, that United is
American’s primary competitor, American is Delta’s primary competitor,
and so on, along a “chain” of competitive relationships. Any move made
by United, therefore, would have a trickle-down effect on all other com-
petitors along the chain.) Therefore, this line of research could be made
more fruitful if authors take into account these considerations, incorpo-
rating such variables as stability of market share or past social conditions
among competitors. How important would commonality and similarity be
under various demand situations? Under what conditions would they be
more important or less important? The consideration of contextual factors
would add further complexity and richness to the framework developed
here.
It also would be useful for researchers to conduct interindustry lon-
gitudinal studies to develop a fuller understanding of the relationship
between market commonality and resource similarity over time. The con-
vergence and divergence of these two drivers of rivalry may be an indi-
cation of the varying degree of rivalry at the macroindustry level. Simi-
larly, as Figure 2 illustrates, there is a feedback loop leading from rivalry
and its outcome back to the analysis of the prebattle relationship between
competitors. It would be most useful to track over time how structural
tension between firms affects actual rivalrous engagements and how re-
peated encounters will, in turn, affect the competitive relation between
these firms. This kind of investigation begins to forge the micro-macro
link that has not been addressed in social theorizing (Coleman, 1987).
Additionally, much more rigorous investigation of competitive asym-
128 Academy of Management Review January

metry—an important but generally ignored phenomenon—should be car-

ried out by researchers. Competitive asymmetry no doubt would have
significant implications for theorists’ analyzing any two firms with re-
spect to their strategic maneuvering and competitive exchanges.
Finally, it would be useful for authors to explore the relationships
between objective and subjective notions of competition, the extent to
which these two perspectives may correspond, and to what extent this
correspondence may relate to firm performance. It may be postulated that
perception motivates and explains behavior in general but that it is none-
theless influenced by objective competitive reality. However, it also may
be argued that the relative importance of perception and objective reality
changes across situations. For instance, a firm's perception about a rival,
even an objectively insignificant one, may be inflated if that rival is
present in a market of great importance to the firm. In industries in which
objective information about competition is easily available or those in
which the norms of competition are well established, there should be a
high correspondence between the objective and the perceptual. These
kinds of issues, which touch the heart of competition, surely deserve
further exploration.
In summary, the present article, drawing on a diverse set of theories
and spanning different analytical levels, raises a number of theoretical
issues that contribute to researchers’ understanding of interfirm compe-
tition. By introducing market commonality and resource similarity, I have
highlighted the significance of both market idiosyncracy and firm idio-
syncracy in capturing competitive relationships. The conceptualization of
market commonality refines the important idea of market interdepen-
dence, which prevails in the management literature. The idea of compet-
itive asymmetry introduced here offers a unique perspective that can be
used by theorists to gain a deeper understanding of competition; it also
brings to the fore the fundamental question of perceptual versus objective
views of competition. The microfocus on firm-specific competitive rela-
tionships and on individual competitive moves contributes toward the
ultimate goal of building a predictive theory of microcompetitive behav-
ior.
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Ming-Jer Chen received his Ph.D. from the University of Maryland. He is an associ-
ate professor in the Division of Management of Organizations at the Graduate
School of Business, Columbia University. His research interests include organiza-
tional strategy, competitive dynamics, competitor analysis, and global competition.