Hypercompetition

Hypercompetitive RivalriesRichard D’Aveni and Robert Gunther

The PLC Phase

Focus on the firm andits strategies at different

stages of the PLCSWOT framework

Hypercompetition Phase

Focus on the competitiveinteractions w.r.t. the four

competitive arenasC-Q/T-K/S/D framework

ValueNet Phase

Focus on all the playersrelevant to your operations

PARTS framework

Number of Players

Com

plex

ity o

f A

naly

sis

Limitations of traditional view

A key limitation of all the above strategies is that it ignores the dynamics of competition in the marketplace. While the issue of foremost importance for the company is the customer, D’Aveni notes that competitive interaction among firms typically goes through six stages

Strategic Competitive Advantage

Profits from asustained

competitiveadvantage

Time

LaunchExploitation

Counterattack

Profits from aseries of actions

Time

Exploitation

Launch

Counterattack

Firm has already moved to advantage 2

Traditional View

Hypercompetition

DEC

• DEC in minicomputers. The company posted a 31% average growth rate from 1977 to 1982 by focusing on the minicomputer. The company clung so tenaciously to its advantage in minicomputer technology that it failed to develop a strong position in the emerging markets for minicomputers and PCs. As CEO Ken Olsen commented in 1984 (Businessweek), “We had 6 PCs in-house that we could have launched in the late 70s. But we were selling so many (VAX minis), it would have been immoral to chase a new market.”

Hypercompetition

Four arenas of competition

• Cost & Quality (C-Q)• Timing and know-how (T-K)• Strongholds (S)• Deep pockets (D)

Coke vs. Pepsi• Coke: 1886; Pepsi: 1893

• 1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better value

• Ad jingle “twice as much for a nickel” better known in the US than the Star Spangled Banner

Pepsi Coke

Pri

ce /

Oun

ce

Pri

ce /

Oun

ce

Pepsi

Coke

Perceived Quality Perceived Quality

Coke vs. Pepsi, Contd.....

Pepsi Coke

Pri

ce /

Oun

ce

Pri

ce /

Oun

ce

First move:PepsiChallenge

Perceived Quality Perceived Quality

Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate

With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Coke’s level giving it a war chest to fuel an aggressive ad campaign

Battle shifted from Price to Quality, with Pepsi targeting the youth What followed was the Pepsi Challenge & “Real Thing” Coke ads

Youth & MiddleClass Segments 2nd move:

Coke’s Ad war

Coke vs. Pepsi, Contd.....P

rice

/ O

unce

Pri

ce /

Oun

ce

Perceived Quality Perceived Quality

Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. Pepsi responded with its discounts and by the end of the 80s, 50% of food store sales were on discount

Other companies moved into the lower left quadrant of the market. But the two major players forced price down to “ultimate value.”

To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market.

Attempts to move to next arena via niches in caffeine and sugar substitutes

GenericsRC Cola

Coke &PepsiPriceSpiral NewCoke

ActualClassic Coke& Pepsi

NewCokeIntended

Price-Quality Maneuvers

Price War

Full line Producers

Niching & Outflanking

Move to Ultimate Value

Attempt to redefine Quality

Commodity like Market

Return to Price Wars

Move to the next Arena

The Cycle of Price-Quality Competition - MovingUp the Escalation Ladder

Pri

ce

Perceived Quality

..

..

.

#1 Low quality (leaky) unbranded& 2 piece diapers

#2 Pampers (P&G)

#3 Kimbies (Kimberly Clark)

#4 Huggies (Kimberly-Clark)

#5 Luvs (P&G)

Creeping up the line in diapers

The Move Towards Offering Ultimate Value

E1

D

E2

E3

E4

D

E5

V1

V2

V3

First V

alue Line

Next V

alue Line

Ultimate

Value Line

Perceived Quality

Price

The Fast Food Business

Perceived Quality

Price

M1

B1

W1

W2

B2

M2 UV

Wendy’s

Burger King

McDonald’s

Firm builds a Tech. ResourceBase to create advantage

Then moves into a new marketfirst: Pioneer

Followers imitate products & overcome switching costsand brand loyalties

Pioneer throws up impediments to imitation

Followers overcome impedimentsand replicate pioneer’s resource base

First mover uses a TransformationStrategy & abandons product design/

technology based approach

Builds resources to match followersmanufacturing skills

Price War

First mover uses a LeapfrogStrategy to a new resource base

First mover movesdownstream into

higher value addedproducts

Escalating costs &risks each cycle

Cycle of Timing / Know-HowCompetition

The First Dynamic Strategic Interaction:Capturing First Mover Advantages

• Response lags: Obtaining monopoly rents• Economies of scale• Reputation, switching costs and loyalty• Advertising and channel crowding• User-base effects: Network size and user base provide funds for the next

leap• Producer learning / experience effects• Pre-emption of scarce assets (McDonald’s restaurant locations)

First movers need• Innovation skills• Customer knowledge• Market penetration and marketing skills• Flexible manufacturing skills

The Second Dynamic Strategic Interaction:Imitation & Improvement by Followers

Diffusion is rapid when

• reverse engineering is easy

• equipment suppliers help transfer key technologies or other business know-how

• industry observers, trade associations, etc. help transfer know-how

• personnel move to rival firms frequently

• leaks of secret information are commonplace and not illegal

To win, an imitator needs 3 things that fall in these regimes:

• Appropriability - related to the strength of patents and other legal protection and the difficulty for followers to invent around patents

• Dominant design paradigm - if follower enters before a dominant design emerges, it has a better shot with own design

• Complementary assets - marketing, manufacturing, and other skills are needed to produce a new product

The Second Dynamic Strategic Interaction:Imitation & Improvement by Followers

Follower strategies work best when the first mover is unable to keep up with demand (Adidas & Nike - no fortressing), is not satisfying all segments of consumers or all varieties of needs ( flanking) or has a design flaw that can be corrected (aspirin vs. buffered aspirin)

• Pure imitation strategy

• Adding bells & whistles• P&G - Crest (basic toothpaste); Lever - CloseUp (+freshen breath and

whiten teeth) and Aim (gel + fluoride protection); Beecham - AquaFresh (fights cavities + freshens breath + whitens teeth)

• Stripping down: Niche airlines

• Flanking products• Reconceptualized products: Mobike from inexpensive transport to vehicle

for fun and recreation to a status symbol

• Risk reduction: warranties, free samples, etc.

• Compatible products

The Third Dynamic Strategic Interaction:Creating Impediments to Imitation

• Deterrent pricing

• Secret information (Coke formula, SABRE investment costs)

• Size economies

• Contractual relationships

• Threats of retaliation

• Patents

• Bundles products (follower does not have access to all components)

• Switching costs

• Restrictive (e.g., geographic) licensing (e.g., Sealed Air)

Time

$ / U

nit

Time

$ / U

nit

Cost Cost

Price

IntroductoryPrice Umbrella

Followers enter

Price competitiveMarket

The Fourth Dynamic Strategic Interaction:Overcoming the Impediments

• Deterrent pricing: No problem if the follower is resource rich; Process innovations

• Secret information: Reverse engineering, experimentation (private label colas)

• Size economies: Process innovations; build scale in one geographic area and expand (Japanese auto builders); No problem if growth exceeds first mover’s capacity

• Contractual relationships: New supplier, vertical integration

• Threats of retaliation: Some may not be credible if innovator also loses

• Patents: Increase imitation costs only by 11%

• Bundled products: Joint ventures, vertical integration

• Switching costs: Advertising, promotions, etc.; may make market more attractive as follower can reap the benefits once in

The Fifth Dynamic Strategic Interaction:Transformation or Leapfrogging

• Transformation strategy

• Compaq - from a premium priced innovator to a low cost manufacturer

• Leapfrogging strategy

• Cyrix introduced the 486 clone in 18 months, compared to the standard 3 to 4 year industry cycle. And produced it at 4% of Intel’s initial investment. For a while also hoped to leapfrog Intel

• P&G and Ultra thin diapers in Japan

• McDonald’s leapfrogged over competition by reconceptualizing itself as a restaurant - not just a place for burgers

The Fifth Dynamic Strategic Interaction:Leapfrogging

Trinitron TV

Betamax

Walkman

I

P E

I

P

E

I

P E

I: New product Introduced

P: Profits from price umbrella

E: Profit decline due to new entry and R&D for next project

The Sixth Dynamic Strategic Interaction:Downstream Vertical Integration

• Sony entered the software side of the entertainment business with Columbia Pictures - but imitated by Matsushita

• Intel and motherboards

• Problem is that it ties up resources that could fruitfully be committed to building the company’s core businesses

Strongholds and Entry Barriers

Maxwell house was dominant in the East Coast market and Folgers was strong in the West Coast.

After being acquired by P&G, Folgers entered the Cleveland market to increase its eastern penetration.

Maxwell countered by attacking Folgers’ stronghold; lowering prices and increasing ad expenditures in Kansas city. Maxwell also introduced a “fighting brand” called Horizon which was similar to Folgers in taste and in packaging.

Folgers then escalated by entering Pittsburgh.

Maxwell responded by entering Dallas with reduced prices. The battle continued until the market was no longer two coastal segments but one national battleground

Strongholds and Entry Barriers

BIC revolutionized the disposable ballpoint pen with its mass merchandising skills

Gillette entered the market for disposable pens (PaperMate), overcoming entry barriers (access to distribution channels, economies of scale in advertising, brand equity, etc.) by using its own considerable skills in mass merchandising.

So BIC counter- attacked by entering Gillette’s stronghold, disposable razors - giving rise to multi-market competition.

FedEx vs. UPS• UPS – Dominant in ground based parcel delivery service, such as department

store parcels.

• FedEx grabbed market share of air-borne delivery, i.e., overnight service.

• Now, UPS is launching an all-out attack to garner a bigger chunk of the lucrative overnight business, where FedEx is king (60%).

• United States Postal Service - leader in two-day delivery, wants to move into the overnight business.

• Companies are taking the battle to the others' turf. “They're beginning to diversify further into each others' core markets. Federal (Express) has introduced some time-deferred, ground-based capabilities," Rockel said. “At the same time, UPS has developed (the) express air-based ability of their company."

• The fevered rush to capture business has also spread to the Internet. Both companies have web sites where consumers can order merchandise and businesses can track shipments. Even more importantly, both UPS and FedEx are investing billions of dollars to build distribution systems in Europe and Asia, betting on those largely untapped markets

Management Challenges

• Do you base your strongholds on geographic areas (Folgers) or product markets (FedEx)? How do competitors define strongholds?

• Where are your strongholds vulnerable to attack?• What barriers do you use to protect your strongholds? What

barriers are used by your competitors?• How can you respond to an attack from outside?• How will you make the move into another player’s stronghold?

What competitive response do you anticipate?• Who and what are setting the pace of escalation down the

strongholds ladder in your industry? Why?

Build entry barrier around market Ato exclude competition

Build entry barrier around market Bto exclude competition

Circumvent barriers and attackniche in market B

Short Run: Withdraw from niche or fail to respond

Delayed Response: Barriers to contain entrant to a segment of B

Entrant breaches barriersor triggers price war in B

Incumbent’s stronghold in B weak-ens as it grows more competitive

Long Run:Incumbent attacks entrant’s market A to punish

Entrant responds in market A or inmarket B

Standoff until one party gains theupper hand in market A or B

Both strongholds erodeor merge into one

market

Price WarOther firmdivests

One firm builds newstronghold

Cyclerestarts withentry into anew market

If one firm dominates

STRONG-HOLDSARENA

Shifting know-how in pharmaceutical industry

Skill Effect Firms

Direct selling tophysicians, 1950s

Allowed for theeffective marketing to

gatekeepers ineconomic transactions

Pfizer / Lederle;Created effectivedifferentiation ofproducts among

gatekeepers

“Blockbuster”marketing, early~mid

80s

Single product focus ofentire detail force andpromotion; effectivewith narrow product

line

Glaxo; created a newway to sell; through

selling, gaveblockbuster potential toa chemically indifferent

drug

Specialized selling Specialized salesforcefor different therapeutic

classes / medicalspecialities; more focuswith broad product line

Merck; Speciallytrained and focused

units in cardio,hospital, etc.

Handling regulatoryrequirements

Speeds drug to market,expanding time

available to patent foreconomic profits

Merck; Marion: Oflimited value without

competence inacquiring new drugs

Deep pocket develops

Launches attack todrive out small firms

Antitrust laws invoked - work

occasionally

Small firms forcedto outmaneuver

deep pocket

Hostile takeoverof large firm

Small firm escalatesown resource base

Cooperative strategy develops

Avoidance strategyniching, etc.

Large scalealliances form with equally deep pockets

Deep pocket advantage is elim

inated or neutralizedBuyers or

suppliers develop acountervailing

force

New attempt to escalate resources

Cycle of DeepPockets Competition

Kroger becomeslarge & powerful

Drops prices

Antitrust suitsfiled by rivals

Kroger winssuits

Many takeover attempts from outside industrylead to high leverage

Mergers

Acquisitions

Small chains seekniches. Kroger also

niches geographicallyto avoid competition

Industryconsolidation

Deep pocket advantage is elim

inated or neutralizedLarge wholesalersprovide economies

to smaller stores

Continued M&A in industry

Cycle of DeepPockets Competition

Hypercompetition

The new 7S framework Superior stakeholder satisfaction Strategic soothsaying Speed Surprise Shifting rules of competition Signaling strategic intent Simultaneous and sequential strategic thrusts

Vision for DisruptionIdentifying and creating

opportunities for temporaryadvantage via understanding•Stakeholder satisfaction• Strategic soothsaying

to ID new ways to serve current customers better or serve

those not being served

Capability for DisruptionSustaining the momentum by

developing abilities for:• Speed

• Surprisethat can be applied across

many actions to builda series of temporary

advantages

Tactics for DisruptionSeizing the initiative to

gain advantage by• Shifting the rules

• Signaling• Strategic thrusts

with actions that shape,mould or influence

the direction or nature ofcompetitors’ responses

MarketDisruption

A 4 Arena Analysis

Arena Key Success Factors Critical 7S

Cost / Quality Understandingcustomer needsCost reduction

S1: StakeholdersatisfactionS3: Speed

Know-how / Timing Foster innovationQuick marketpenetration

S3: SpeedS4: Surprise

S2: Soothsaying

Stronghold creation /invasion

DeterrenceAggression

S6: SignalsS7: Strategic thrusts

Deep pockets Brute forceOut-maneuvering big

opponents

S7: Strategic thrustsS5: Shifting rules

Limitations of the Hypercompetition Perspective

• Ignores the point that competition and co-operation can co-exist. Examples include the development of Advanced Photo Film, DVD, etc.

• Sometimes it may be in the best interests of players not to jump to the next level of dynamic competitive interaction but into co-operative competition - coopetition

• This requires figuring out the situation the firm is facing and then looking at the firm’s valuenet