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Hsieh, K., & Vermeulen, F. (2014). The structure of competition: How competition between one’s rivals influences imitative market

entry. Organization Science, 25(1), 299-319.

Presented to:

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BRIEF INTRODUCTION

Title The Structure of Competition: How Competition Between One’s Rivals Influences Imitative Market Entry

Unit of Analysis Organization/Firm level

Study Foundations

Herding Theory (Banerjee 1992, & Bikhchandani et al. 1992)

Broad Question How a pattern of encounter b/w a firm’s competitor affects the mimetic behavior of a firm?

Research methodology

Causal

Study Context Product market entry & Geographic Market Entry

Boundary Assumption

Applicable across different settings and formsof market entry

Time Horizon Longitudinal

Target Industry Chinese pharmaceutical industry &Taiwanese computer hardware industry

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INTRODUCTION

1. Under uncertainty, firms often inclined to imitate

each other’s actions (Lieberman and Asaba 2006).

2. Empirical studies have predicted the influence of

imitation on diverse strategic decisions.

3. Imitation with respect to close competitor in the

same industry segment have particular scholarly

attention.

4. Findings regarding imitation behaviours have been

inconclusive or even conflicting.

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RATIONAL FOR THE STUDY

To show that a firm’s propensity to imitate or steer away from its direct competitors is determined by the extent and nature of rivalry between its competitors?

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EMPHASIS OF THE STUDY

Study focus is

1. How a firm’s mimetic behaviour is moderated by rivalry

b/w its competitor.

2. On a specific form of firm behavior market entry.

3. Competitive interactions between a firm’s rivals a) Can create a herding effect, which makes mimetic entry more

likely.b) Can decrease the mimetic behaviour because of intensified

competition.

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SIGNIFICANCE OF THIS STUDY The paper’s main contributions are

1. Examining a set of moderators, advance the literature on imitation by revealing under which circumstances

a) Firms have a propensity to imitate their direct rivals andb) Under which Firms are distinctly reluctant to follow suit.

2. Exploration of various characteristics “The Structure of Competition.” that different firms in an industry face.

3. Stimulating the possibility that other types of firm behavior might also depend on “The Structure of Competition.”

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The Structure of Competition“The pattern of who competes with whom in an

industry”Two companies can be direct competitors when

they operate in at least one common product segment.

A company can compete with a firm for one product but not for other.

Some direct competitors of a focal firm, might directly compete with each other, whereas others do not. E.g.….

Concern firms if meet each other in multiple segments of the industry, it is called multimarket contact.

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The Structure of Competition

•This paper, compare four basic situations 1. A firm whose direct competitors, don't compete each other. 2. A firm whose competitors also encounter each other.3. Firm whose competitors are engaged in Asymmetric

multimarket competition (subdued rivalry). 4. Firm whose competitors are engaged in Symmetric

multimarket competition (aggressive rivalry).

• Examination of these situations will give insights into a firm’s behaviour to mimetically enter a new market or stay out of it.

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Theory Development and HypothesisCompetition b/w a Firm’s Competitors Under uncertainty Prior market entry by a firm’s competitors

may be taken a signal of market attractiveness. This creates a herding effect making the firm to follow the suit. Herding effect will be more strong if a firm’s direct rivals also

encounter each other i.e. start acting as “reference group.” Thus drawing the firm entering into the new market, too. Even rational managers follow the herd to avoid reputational

risk. (Scharfstein & Stein 1990)

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Competition b/w a Firm’s Competitors

The study predict that

Prior Entry by Competitors

Direct Encounters b/w an Organization’s Existing Competitors

Firm’s Propensity to

Follow+ve

Hypothesis 1. The extent to which a firm’s direct competitors also compete directly with each other will increase the relationship between the number of

direct competitors that have entered a particular market and the firm’s likelihood of entering the same market.

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Theory Development and HypothesisAsymmetric Multimarket Contact b/w Firm’s Competitors Competitor's Prior entry may

1. Create a herding effect because of perceived attractiveness or2. Decreased attractiveness because of competitive crowding effect.

However in case of Multimarket Competition1. If existing competition is fierce, this rivalry may spill over into the new

market.2. If existing competition is subdued, this behavior will be followed in new

market. However in case of Asymmetric Multimarket Competition

1. Competition thus becomes more subdued,2. Nonaggressive behavior toward each other i.e. Mutual ForbearanceWhen two competitors have small footholds in each other’s key market, an implicit threat of reciprocal retaliation results.

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Asymmetric Multimarket Contact b/w Firm’s Competitors

Mutual forbearance will positively moderate the mimetic behaviour.

Prior Entry by Competitors

Direct Encounters b/w an Organization’s Existing Competitors

Firm’s Propensity to

Follow+ve

Hypothesis 2. Asymmetric multimarket competition among a firm’s direct competitors will further increase the relationship between the number of direct. competitors that have entered a particular market and the firm’s

likelihood of entering the same market.

Asymmetric multimarket competition b/w Existing Competitors

+ve

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Theory Development and HypothesisSymmetric Multimarket Contact B/w a Firm’s Competitors

When 2 multimarket competitors depend heavily on the same segment, aggressive competition is more likely to occur.

This aggressive behavior of competitors in the past, might lead to fierce competition in the new market too.

So the firm might choose not to join its competitors in the new market, in an attempt to avoid rivalry.

Firm will not be inclined to imitate its competitors’ entry decisions.

Symmetric Multimarket Contact is a condition when two multimarket competitors depend heavily on the same segment.

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Prior Entry by Competitors

Direct Encounters b/w an Organization’s Existing Competitors

Firm’s Propensity to

Follow

+ve

Hypothesis 3. Symmetric multimarket competition among a firm’s direct competitors will decrease the relationship between the number of direct

competitors that have entered a particular market and the firm’s likelihood of entering the same market.

Asymmetric multimarket competition b/w Existing Competitors

+ve

Symmetric multimarket competition

-ve

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Methods Study 1: The Chinese Pharmaceutical Industry

Research Setting:Domestic producers pharmaceutical ingredients during the period 1992–2001. (After economic reforms) Data collected using Pharmaceutical Industry Yearbook.Provided detailed production data on all drugs produced by each manufacturer in a given year.Population =1,634 firms, Sample=742 firms(produced at least 2 distinct ingredients from 22 therapeutic categories).These categories are used to identify direct competitive relationships and market entry events.“A market entry event was defined as a firm starting to produce an ingredient in a therapeutic category that it had not served before.”During the period 1992–2001, 331 of the 742 companies made 542 entries into 22 different product markets.

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Methods Study 2: The Taiwanese Computer Hardware Industry

Research Setting:Manufacturers of computer hardware in Taiwan.And their direct investments of into China during the period 1999–2005. Data is collected from Taiwan Stock Exchange & the Gre Tai Securities Market. Based on Standard Industry Classification (SIC) categories, product

markets are defined & 5 product market, categories selected. Population =205 companies+344direct competitors companies=549 Investment data obtained from Investment Commission & Market

Observation Post System(Taiwan Stock Exchange) “A market entry move was defined as the first direct investment

made by a Taiwanese company in a particular geographic market..” During the period 1999–2005, 389 of the 549 companies made 650

entries into 22 different geographic markets in China.

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Dependent Variables and Method of Analysis

Our hypotheses pertained to the likelihood that a firm enter a specific new market, as influenced by its direct competitors’ prior entries.

This entry likelihood is estimated by Cox’s (1975) semiparametric proportional hazard model i.e

be the hazard rate of entering a market at time t.To capture the effect if a firm have entered more than one market

at the same time, model will be

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Explanatory VariablesSr#

Explanatory Variables

Measurement

1 Competitors’ prior entry

The number of a firm’s competitors that had previously entered a particular market.

2 Direct Encounters b/w a Firm’s Competitors

Number of occasions that competitors of the focal firm also encountered each other and divided that by the maximum number of times they could have encountered each other. (therapeutic + SIC) categories. Figure 2 (value ranges from 0 to 1)

3 Asymmetric vs. Symmetric Multimarket Competition

1. Multimarket Contact b/w a firm’s competitors = No. of competitors meet in multiple markets divided by the number of times multimarket competition could have happened. Figure 3(value ranges from 0 to 1)

2. Extent of symmetry is measured by Euclidean distance

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Control VariablesSr# Study 1 Study 2

1 Market relationships between the firm itself and

its competitors.

Market relationships between the firm itself and its competitors.

2 Market Exits Market Exits3 Market Density Market Density4 Market Density2 Market Density2

5 Market Size Internationalization6 Incumbents operating at a

lossWealth per capita

7 Excess Capacity Skilled labor8 Market Concentration Ratio

(CR4)Transportation infrastructure

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Hypothesis Tests: Magnitude of Interactions

Study 1 Study 2 H1: An Additional competitor’ entry

will increase the Relative Hazard of entry factor a by 1.04 and 1

H2: Relative Hazard rate was 1.03 and 1. (Asymmetric)

H3: relative hazard rate was 0.92. (Symmetric)

H2: This Multipliers are 1.08 and 1.02 in study 2.

Where as, this rate was 1.09 and 1.01 for study 2.

It was 0.95.

Assessed the magnitude of interaction affect by taking the partial derivates of the relative hazard with respect to the variable competitors’ prior entry under different levels of direct encounters between a firm’s competitors.

H1: The Results indicates that a mimetic effect of prior entry is stronger in cases where a firm’s rivals also encounter each other.

H3: The Results indicates that influence of prior entry by a firm’s direct competitors would even turn negative in symmetric multimarket contact and additional entry would decrease the relative hazard rate.

Hypothesis Tests : Study 1

Hypothesis Tests: Study 2

Robustness Test and Additional Analysis

• The Study created two dichotomous variables, one is the extent of multimarket contact and second is extent to which it was symmetric by using grid search algorithm.

• In the both studies asymmetric multimarket contact between firm’s direct competitors positively moderated the relation between prior entrants and the firm’s entry rate, whereas symmetric competition negatively moderated the same relation.

Multimarket Contact Accounting for Market Share

The study have additionally computed

•symmetric and high share dependence

•The symmetric and equal dependence

Multimarket Contact Accounting for Market Share

•The result indicates that firm is less likely to enter mimetically into new market when engaged in symmetric multimarket competition with unequal market dependence.

Discussion•Competition may increase and decrease the firm’s

likelihood of mimetically entering a particular market, depending on the structural properties.

• Imitative entry is less likely when firm are engaged head to head competition because they depend heavily on the same segments.

•When rivals hold footholds in each other segments, and firms observe entry from this group into new market, it is inclined to follow suit.

Level of Analysis • Furthermore, to explore whether there are additional reason why

a firms' entire structure of competition matters for imitative entry, and not just the encounters between the subsets of prior entrants.(they conducted 19 face to face interviews)

• The interviews confirmed the that they pay attention to non entrants because they realize several of them may soon enter too.

• Firm’s behavior is determined by the full set of competitors around them, and not just the subset of prior entrants. (insights from interviews)

Limitation and Future Research Limitation Future Research

• The study limited the analysis by estimating structure of competitive interactions between a firm’s rivals.

• The study examined structure of competition influence into new product market.

• The study examined structure of competition influence on firm’s decision to entry mimetically.

• However, mapping all the encounters between firms within an industry one could find wider structures.

• Could potentially explore geographic market structures.

• The reciprocal loop can also evaluate in the future research.

Limitation and Future Research Limitation Future Research

• The study ignored the interlock ties, inter firm relationships and other joint categories of social and competitive structures.

• The study wants careful attention to generalize it, because both selected studies context have their limitations.

• The study was not able to entirely disentangle the various possible effects that leads towards the imitative behavior.

• Can examine the social ties and competitive structure more better understanding.

• Compare the listed and non listed firms or check the influence of foreign and domestic firms.

• Check the different factors that could influence when firms observe their rivals.

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Conclusion

•The study shows that firms might either follow or steer away from their direct competitors in the course of market expansion depending on the pattern of competitive relationships between their peers.

• It also open up the avenue that competitive interactions can affect other firm behaviour.