Incumbent repositioning with decision biases

• Author: Brian Wu,Xianjin Du,Meng Li
• Published date: 01 December 2019
• Date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3047

RESEARCH ARTICLE

Incumbent repositioning with decision biases

Xianjin Du

1

| Meng Li

2

| Brian Wu

3

1

School of Management, Hefei University

of Technology, Hefei, China

2

School of Business, Rutgers University,

Camden, New Jersey

3

Ross School of Business, University of

Michigan, Ann Arbor, Michigan

Correspondence

Meng Li, School of Business, Rutgers

University, Camden, NJ.

Email: meng.li@rutgers.edu

Funding information

National Natural Science Foundation of

China, Grant/Award Numbers: 71871076,

71690235, 71521001

Abstract

Research Summary:Incumbent firms often reposition

themselves in response to entrants, but when doing so they

incur repositioning costs. Incumbent repositioning costs

and the associated decision biases have been identified in

the economics, operations, and strategy literatures as criti-

cal aspects of the competitive interactions between incum-

bents and entrants, but they have received limited

attention in game-theoretic treatments at the strategy level.

To fill this gap, we develop a strategic mental model to

analytically characterize the impacts of repositioning costs

and decision biases on firms' equilibrium strategies and

profits. Including these costs and biases changes, the

nature of strategic dynamics as well as introduces new

implications for strategic choice.

Managerial Summary:Our analysis shows that although

biases by themselves are unequivocally harmful for firms,

both the entrant and incumbent can earn more when they

are biased than when neither one is. In particular, when an

entrant is biased in estimating an incumbent's

repositioning ability, this unequivocally reduces its own

performance, if the incumbent is aware of the entrant's

bias and has correctly assessed it. In a similar vein, when

an incumbent is biased in its estimation of the entrant, this

hurts the incumbent. However, both the entrant and the

incumbent can earn more than they would in a setting

where both firms are unbiased. Furthermore, the incum-

bent is not necessarily better off by being less biased—that

is, aware of but with an inaccurate assessment of

entrant bias.

Received: 24 July 2017 Revised: 21 March 2019 Accepted: 4 April 2019 Published on: 20 June 2019

DOI: 10.1002/smj.3047

1984 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2019;40:1984–2010.wileyonlinelibrary.com/journal/smj

KEYWORDS

behavioral strategy, flexibility, managerial behavior, overconfidence,

repositioning costs

1|INTRODUCTION

Entrants have been identified as one important determinant of the market dynamic, especially the

profitability of incumbents (McCann & Vroom, 2010; Ravi Kumar & Sudharshan, 1988; Simon,

2005). Incumbents can be affected, for instance, when entrants attempt to penetrate a market by

reducing prices, which intensifies competition among firms (Besanko, Dranove, Shanley, &

Schaefer, 2009; McCann & Vroom, 2010; Rumelt & Teece, 1994; Simon, 2005). In response, to

avoid a confrontation that could lead to a destructive price war, incumbent firms often reposition

their products or brands (Carpenter, 1989; Ellickson, Misra, & Nair, 2012; Hauser & Shugan, 2008;

Trout & Ries, 1982). One well-known example of repositioning is Johnson & Johnson's Tylenol

brand of analgesics. Tylenol once dominated the over-the-counter market for pain relief by esta-

blishing the drug as effective with few side effects. After a competitor, Advil, entered the market in

1984, Tylenol revised its marketing to emphasize Tylenol's gentleness (Hauser & Shugan, 2008).

Another example is U.S. local retailers' decision to shift their pricing formats after Walmart entered

the market in the 1990s (Ellickson et al., 2012).

While repositioning can be advantageous, it may come at a cost because past strategic decisions,

which often entail prior commitments (Ghemawat, 1991), may need to be changed. Typical costs associ-

ated with repositioning (“repositioning costs”) include investments to overcome within-firm managerial

resistance to change, to rework channel relationships, and to educate (or advertise to) consumers about

the new positioning (Menon & Dennis, 2017). These repositioning costs have substantial implications

for the competitive interplay between firms (Ellickson et al., 2012; Wang & Shaver, 2014, 2016). Con-

sider the case of Mobileye (Yoffie, 2014), a technology leader in vision technologies for advanced driver

assistance systems (ADAS), which was highlighted in Menon and Dennis (2017, p. 1954):

Rather than selling its technologies directly to original equipment manufacturers

(OEMs), Mobileye initially partnered with Tier 1 automotive suppliers such as TRW

and Autoliv who, in turn, sold the OEMs integrated ADAS using Mobileye and non-

Mobileye vision technologies. Mobileye subsequently instituted an exclusivity policy

under which it would only work with Tier 1 suppliers who were not developing

(or were no longer developing) non-Mobileye ADAS. While this policy change resulted

in the loss of some partners (e.g., Autoliv), it led the remaining partners (e.g., TRW) to

emphasize the development of complementary parts (i.e., non-camera technology) for a

Mobileye-centered ADAS system while deemphasizing development of substitutes for

Mobileye's vision technology. The success of automotive vision technologies depends

on the technology's ability to accurately identify objects under varied driving conditions

and accurate identification requires an object identification database that improves with

extensive in-field use of the technology. Over time, then, the cost to a Mobileye current

partner of repositioning itself to be a direct competitor of Mobileye is increasing, and,

hence, Mobileye's policy change arguably benefits Mobileye by reducing the field of

potential vision-technology competitors despite exploding ADAS demand.

DU ET AL.1985