Hyper Competition

HYPER COMPETITION

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,

competitive interaction among firms typically goes through 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

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

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 illegalTo 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

BIC (brook heaven instrument company) 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.

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.

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