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The Red Queen effect

May 01, 2008

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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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