The Resourceful Paradox
Plentiful Resources can Breed Complacency when a Competitor is Stalking the Market
The cost of failing to react to competition can be exceptionally high: challengers often topple market leaders. An examination of how resources influence the way managers weigh up competitors suggests companies need to remain vigilant if they are to fight back effectively.
Resources are essential to competitiveness but for companies fending off a rival they can be a double-edged sword if they also encourage complacency that results in inertia. While having resources can make decision-makers think they are able to react effectively to a competitive new product, they can also stifle their motivation to do so.
A new study by Marion Debruyne, Ruud Frambach and Rudy Moenaert, “Using the Weapons You Have: The Role of Resources and Competitor Orientation as Enablers and Inhibitors of Competitive Reaction to New Products”, sheds light on this paradox by exploring how decision-makers assess and react to competition.
Competition: Picking up the Gauntlet
Survival in a competitive world may hinge on the way a company responds to the launch of a new product by a rival - and how managers weigh up the threat can make the difference between success and failure. Debruyne, Frambach and Moenaert ask a key question: how does the availability of resources affect the ways in which decision-makers assess competition and then react to it?
Theories suggest resources boost a firm’s ability to react to a new product, so the research team predicted that greater resources would strengthen the perception among executives that they had the ability to respond.
But forms of inertia exist by which abundant resources can lessen the motivation to react, and so the researchers predicted that greater resources would weaken the perception among executives that a competitor’s product was likely to succeed. To help them understand why, they looked at the importance decision-makers attach to getting to know and understand their rivals - their “competitor orientation”.
A better understanding of a competitor may either weaken, or strengthen, the belief of managers that a new product is unlikely to succeed. If it weakens it, this suggests that resources make decision-makers attach less importance to competitors’ actions and underestimate their likely effect. However, if it strengthens it, this suggests that decision-makers assume new products will have a lesser likelihood of success because their own resource position makes it more difficult for rivals to penetrate the market.
Research & Results: Knowledge is Strenght
The researchers chose to study competitors’ actions and reactions by conducting a simulation in which MBA students used the “Markstrat” computer-generated model market. Using information generated by Markstrat and from questionnaires filled in by participants, the team collected then tabulated data for 10 key variables.
The results generated valuable insights about competitive behaviour and showed that the way in which a new product is assessed does affect a firm’s propensity to react to it.
By investigating the influence of a firm’s resources on the two dimensions of the assessment process – the motivation to react to competition and the ability to do so – the researchers were thereby able to gain an awareness of how those resources influence the way decision-makers react. The results indicated that:
- financial and marketing resources strengthen the confidence executives have in their ability to react to a competitor’s challenge. However, those same resources reduced their perception that the new product has a high likelihood of success - thereby stifling their motivation to react to it. By contrast, technological resources seem to have little effect on how managers assess a new product.
- financial resources also influence the degree to which decision-makers feel a new product to be a direct attack on their market - highlighting the sense of threat felt by managers in wealthy firms.
- a better understanding of a competitor does indeed rein in the assumption that financial and marketing resources make it less likely the rival’s new product will succeed. However, the presence of financial resources can sharpen the reflex to react to a new product if decision-makers have a better understanding of their competitor while, in general, marketing resources limit that inclination to react.
- the greater the similarity between a competitor’s new product and that of a company established in the market, the more it is perceived to be a threat. Nonetheless, decision-makers still feel it is both possible to react and that the new product is less likely to succeed if it closely resembles their existing line.
- market growth – and, surprisingly, higher sales expenditures, although these are associated with market growth – strengthened decision-makers’ belief in their company’s ability to react to competition.
Implications: Complacency Versus Vigilance
The findings of this pioneering study have several important implications for decision-makers facing the threat of competition:
Resources can be a double-edged sword. While it is reasonable to expect that having plentiful resources makes a company a formidable adversary, this does not necessarily make decision-makers confront their competitors. By distinguishing between the ability to react to competition and the motivation to do so, the research team show that resources can have countervailing effects: decision-makers in resource-rich companies may feel more able to mount a counter-attack against a new product, but they may underestimate its potential and so be less motivated to react.
Complacency can be fatal. The availability of financial and marketing resources leads decision-makers to underestimate the likelihood of success of a competitor’s new product, and when this is examined through the prism of competitor orientation it strongly suggests that it is complacency, and not the natural advantage that resources are felt to bestow on a company, that is to blame. Therefore, in order to enhance a sense that it is urgent to react, firms must explicitly manage the way in which staff look at acts of competition by focusing their attention squarely on the activity of a rival company.
Survival requires vigilance. Financial resources can damp the urgency to react unless there is a good understanding of a competitor but, because finances can be deployed so flexibly in reaction to competition, these have a bigger impact than marketing resources on the belief among decision-makers that they are able to react. For financial resources actually to enhance a company’s response to competition, they need to be deployed in conditions in which the firm remains highly vigilant towards its competitors.
Simulations work. The research team demonstrates how valuable a simulation can be in providing decision-makers with structured information that makes it easier to assess market developments and competitive behaviour. In the absence of reliable information, managers may be prone to rely only on internal data – and that can be dangerously inadequate.
Related academic paper
‘Using the weapons you have: the role of resources and competitor orientation as Enablers and inhibitors of competitive reaction to new products’, Marion Debruyne, Ruud T. Framback, Rudy Moenaert. Journal of product Innovation Management. 27 (2) : 161 - 178.