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Research by Curt Grimm and Ken Smith
Here’s the paradox: the more aggressively a firm competes,
the greater its performance. But by competing so
aggressively, it also forces its rivals to compete more
aggressively, thus improving their performance. By being
competitive—and thus successful—a firm also creates more
competitive—and thus more successful—rivals for itself.
Ken Smith, Dean’s Chair and Professor of Management and
Organization, and Curt Grimm, Dean’s Professor of Supply
Chain and Strategy, have been exploring the effects of
competitive action on firm performance for many years. In a
recent study, co-authored with Pamela Derfus, a former
doctoral candidate at the Smith School, and Patrick Maggitti,
former doctoral student and now assistant professor at
Temple University, they examine the relationships between
firm actions, rival actions, rival action speed, and firm
performance. They find that the brutal pace of competition,
while it may have negative as well as positive effects for
individual firms, creates stronger and fitter industries and
firms as a whole.
Smith and Grimm refer to this as the Red Queen effect,
co-opting terminology used by biologists and ecologists to
describe the way populations become more fit because of
competition. The term is based on a conversation between
Alice and the Red Queen in Lewis Carroll’s Through the
Looking Glass. Alice realizes that she is running as fast as
she can but not moving forward. The Red Queen responds:
“Here, you see, it takes all the running you can do to keep
in the same place. If you want to get somewhere else, you
must run at least twice as fast as that!”
The study examines all the major competitors in 11
different industries across a broad spectrum of the U.S.
market where 70percent or more of industry sales were
generated by firms that were public, have a distinct
single-business entity competing in the U.S. market, and
report performance relative to the U.S. market. A searchable
index of firm actions was developed from thousands of
newspaper and journal articles, as well as industry trade
magazines. Almost 77,000 articles were identified and then
painstakingly content-analyzed to identify potential
competitive actions, including pricing, capacity, geography,
marketing, and product introduction. Only the earliest
report of an action was entered into the study’s database.
The number of days between a firm’s action and a rival’s
reaction was determined, as was firm performance as a result
of each action. Finally, industry conditions were used to
capture the industry context in which these actions took
place.
Using this database, the authors analyzed over 4,700 firm
actions and their effects on the firm’s performance, an
emerging approach to studying competition and a methodology
Grimm and Smith pioneered.
Grimm and Smith found that industry conditions and market
position play a significant role in moderating the effect of
firm actions on rival actions and their joint influence on
performance. In high-concentration industries and low-growth
industries, managers should be more cautious of taking
actions because of the mutual dependence with rivals.
“The issue for businesses is that it is essential to take
aggressive action in the fast-paced dynamics of our
economy—pricing, marketing, product innovation, expanding
into new markets,” says Grimm. “That has been a fundamental
takeaway from our research for a long time. But competitors
aren’t going to stand by while their rivals are taking
aggressive action, so you’ve got to be looking several moves
ahead, like a chess game, always anticipating your rivals.”
Still, it is always better to take action than not,
caution the authors. “Sometimes managers think they need to
predict the outcome with complete certainty before they act,
and that keeps them from acting at all. But we’ve found that
it is always better to act, and act quickly, even in the
face of possible reactions from your rivals,” says Smith.
The authors point to Southwest, Wal-Mart, Nike, and
Target as examples of firms that have by their aggressive
competitive actions edged out rivals and kept them from
being able to respond effectively.
And the Red Queen effect, Smith and Grimm argue, points
to the need for continual swift action on the part of firms
in order to match the pace of rivals, and that this will
eventually lead to better health and fitness for the
competitive firms in the industry.
The U.S. airline industry, for example, has been
intensely competitive since deregulation. A period of
painful restructuring of the industry followed, with some
airlines going out of business entirely. Southwest Airlines
put tremendous pressure on their competitors, forcing them
to respond, leading to a situation where most airlines now
look more like Southwest. The airline industry is much more
effective and efficient as a result.
”The Red Queen Effect: Competitive Actions and Firm
Performance” was published in the February issue of the
Academy of Management Journal. For more information,
contact
ksmith@rhsmith.umd.edu or
cgrimm@rhsmith.umd.edu.
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