hyper compt n

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Hypercompetition

Hypercompetitive RivalriesRichard DAveni and Robert Gunther


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The PLC Phase

Focus on the firm and

its strategies at different

stages of the PLC

SWOT framework

Hypercompetition Phase

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

competitive arenas

C-Q/T-K/S/D framework

ValueNet Phase

Focus on all the playersrelevant to your operations

PARTS framework

Number of Players

Complexityof

Analysis


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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, DAveni notes that competitive interaction

among firms typically goes through six stages


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Strategic Competitive Advantage

Profits from a

sustained

competitive

advantage

Time

Launch

Exploitation

Counterattack

Profits from a

series of

actions

Time

Exploitation

Launch

Counterattack

Firm has already moved to advantage 2

Traditional View

Hypercompetition


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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 somany (VAX minis), it would have been immoral to chase a

new market.


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Hypercompetition

Four arenas of competition

Cost & Quality (C-Q)

Timing and know-how (T-K)

Strongholds (S)

Deep pockets (D)


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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

Price/Ounce

Price/Ou

nce

Pepsi

Coke

Perceived Quality Perceived Quality


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Coke vs. Pepsi, Contd.....

Pepsi Coke

Price/Ounc

e

Price/Ounce

First move:

PepsiChallenge


Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers20% 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 Cokes 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:

Cokes Ad war


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Coke vs. Pepsi, Contd.....

Price/Ounc

e

Price/Ounce


Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a pricewar 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 induceswitching among Pepsi buyers. Rejected by market.

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

GenericsRC Cola

Coke &

PepsiPriceSpiral NewCoke

Actual

Classic Coke& Pepsi

NewCokeIntended


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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 - Moving

Up the Escalation Ladder


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Price

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


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The Move Towards Offering Ultimate Value

E1

D

E2

E3

E4

D

E5

V1

V2

V3

Perceived Quality

Price


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The Fast Food Business

Perceived Quality

Price

M1

B1

W1

W2

B2

M2 UV

Wendys

Burger King

McDonalds


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Firm builds a Tech. Resource

Base to create advantage

Then moves into a new market

first: Pioneer

Followers imitate products & overcome switching costs

and brand loyalties

Pioneer throws up impediments to imitation

Followers overcome impediments

and replicate pioneers resource base

First mover uses a Transformation

Strategy& abandons product design/

technology based approach

Builds resources to match followers

manufacturing skills

Price War

First mover uses a LeapfrogStrategyto a new resource base

First mover movesdownstream into

higher value added

products

Escalating costs &

risks each cycle

Cycle of Timing / Know-How

Competition


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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 thenext leap

Producer learning / experience effects

Pre-emption of scarce assets (McDonalds restaurant locations)

First movers need Innovation skills

Customer knowledge

Market penetration and marketing skills

Flexible manufacturing skills


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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


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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 allsegments 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 vehiclefor fun and recreation to a status symbol

Risk reduction: warranties, free samples, etc.

Compatible products

h hi d i i i


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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

$/Unit

Time

$/Uni

t

Cost Cost

Price

Introductory

Price UmbrellaFollowers enter

Price competitiveMarket


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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 growthexceeds first movers 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


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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 Intels initial investment.

For a while also hoped to leapfrog Intel

P&G and Ultra thin diapers in Japan

McDonalds leapfrogged over competition by

reconceptualizing itself as a restaurant - not just a

place for burgers


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The Fifth Dynamic Strategic Interaction:

Leapfrogging

Trinitron TV

Betamax

Walkman

I

P E

I

P

E

I

P E

I: New productIntroduced

P: Profits fromprice umbrella

E: Profit decline

due to new entryand R&D fornext project


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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 becommitted to building the companys core businesses


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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


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Strongholds and Entry Barriers

BIC revolutionized the disposable ballpoint pen withits mass merchandising skills

Gillette entered the market for disposable pens(PaperMate), overcoming entry barriers (access todistribution channels, economies of scale inadvertising, brand equity, etc.) by using its ownconsiderable skills in mass merchandising.

So BIC counter- attacked by entering Gillettesstronghold, disposable razors - giving rise tomulti-market competition.

F dE UPS


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FedEx vs. UPS

UPSDominant 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 todiversify fur ther 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 abil i ty 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 businessescan 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


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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 players

stronghold? What competitive response do you anticipate?

Who and what are setting the pace of escalation down the

strongholds ladder in your industry? Why?


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Build entry barrier around market A

to exclude competition

Build entry barrier around market B

to exclude competition

Circumvent barriers and attack

niche in market B

Short Run: Withdraw from niche

or fail to respond

Delayed Response: Barriers to

contain entrant to a segment ofBEntrant breaches barriers

or triggers price war in B

Incumbents stronghold in B weak-

ens as it grows more competitive

Long Run:Incumbent attacks

entrants market A to punish

Entrant responds in market A or in

market B

Standoff until one party gains the

upper hand in market A or BBoth strongholds erode

or merge into one

market

Price WarOther firm

divests

One firm

builds new

stronghold

Cycle

restarts withentry into a

new market

If one firm dominates

STRONG-

HOLDS

ARENA


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Shifting know-how in pharmaceutical industry

Skill Effect Firms

Direct selling tophysicians, 1950s Allowed for theeffective marketing to

gatekeepers in

economic transactions

Pfizer / Lederle;Created effective

differentiation of

products among

gatekeepers

Blockbuster

marketing, early~mid

80s

Single product focus of

entire detail force and

promotion; effective

with narrow product

line

Glaxo; created a new

way to sell; through

selling, gave

blockbuster potential to

a chemically indifferent

drug

Specialized selling Specialized salesforce

for different therapeutic

classes / medical

specialities; more focus

with broad product line

Merck; Specially

trained and focused

units in cardio,

hospital, etc.

Handling regulatory

requirements

Speeds drug to market,

expanding time

available to patent for

economic profits

Merck; Marion: Of

limited value without

competence in

acquiring new drugs


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Deep pocket develops

Launches attack to

drive out small firms

Antitrust laws

invoked - work

occasionally

Small firms forced

to outmaneuver

deep pocket

Hostile takeover

of large firm

Small firm escalates

own resource base

Cooperative

strategy develops

Avoidance strategy

niching, etc.

Large scale

alliances form

with equally

deep pockets

De

eppocketadvantageiseliminatedorneutralize

d

Buyers or

suppliers develop a

countervailingforce

New attempt to escalate resources

Cycle of DeepPockets

Competition

K b


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Kroger becomes

large & powerful

Drops prices

Antitrust suits

filed by rivals

Kroger wins

suits

Many takeover attempts

from outside industry

lead to high leverage

Mergers

Acquisitions

Small chains seek

niches. Kroger also

niches geographically

to avoid competition

Industry

consolidation

De

eppocketadvantageiseliminatedorneutralize

d

Large wholesalers

provide economies

to smaller stores

Continued M&A in industry

Cycle of DeepPockets

Competition


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Hypercompetition

The new 7S framework

Superior stakeholder satisfaction

Strategic soothsaying

Speed

Surprise

Shifting rules of competition

Signaling strategic intent

Simultaneous and sequential strategic thrusts


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Vision for D isruption

Identifying and creating

opportunities for temporary

advantage via understanding

Stakeholder satisfaction Strategic soothsaying

to ID new ways to serve current

customers better or serve

those not being served

Capabil i ty for Disruption

Sustaining the momentum by

developing abilities for: Speed

Surprise

that can be applied across

many actions to build

a series of temporary

advantages

Tactics for Disruption

Seizing the initiative to

gain advantage by

Shifting the rules

Signaling

Strategic thrusts

with actions that shape,

mould or influence

the direction or nature of

competitors responses

Market

Disruption


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A 4 Arena Analysis

Arena Key Success Factors Critical 7S

Cost / Quality Understanding

customer needs

Cost reduction

S1: Stakeholder

satisfaction

S3: Speed

Know-how / Timing Foster innovationQuick market

penetration

S3: SpeedS4: Surprise

S2: Soothsaying

Stronghold creation /

invasion

Deterrence

Aggression

S6: Signals

S7: Strategic thrusts

Deep pockets Brute force

Out-maneuvering big

opponents

S7: Strategic thrusts

S5: Shifting rules


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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 firms valuenet

hyper compt n

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