HypercompetitionHypercompetitive RivalriesRichard DAveni and Robert GuntherThe PLC PhaseFocus on the firm andits strategies at differentstages of the PLCSWOT frameworkHypercompetition PhaseFocus on the competitiveinteractions w.r.t. the fourcompetitive arenasC-Q/T-K/S/D frameworkValueNet PhaseFocus on all the playersrelevant to your operationsPARTS frameworkNumber of PlayersComplexity of AnalysisLimitations of traditional viewA 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 stagesStrategic Competitive AdvantageProfits from asustained competitiveadvantageTimeLaunchExploitationCounterattackProfits from aseries of actionsTimeExploitationLaunchCounterattackFirm has already moved to advantage 2Traditional ViewHypercompetitionDECDEC 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.” HypercompetitionFour arenas of competitionCost & Quality (C-Q)Timing and know-how (T-K)Strongholds (S)Deep pockets (D)Coke vs. PepsiCoke: 1886; Pepsi: 18931933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better valueAd jingle “twice as much for a nickel” better known in the US than the Star Spangled BannerPepsiCokePrice / OuncePrice / OuncePepsiCokePerceived QualityPerceived QualityCoke vs. Pepsi, Contd.PepsiCokePrice / OuncePrice / OunceFirst move:PepsiChallengePerceived QualityPerceived QualityuPepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrateuWith 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 campaignuBattle shifted from Price to Quality, with Pepsi targeting the youthuWhat followed was the Pepsi Challenge & “Real Thing” Coke ads Youth & MiddleClass Segments2nd move:Cokes Ad warCoke vs. Pepsi, Contd.Price / OuncePrice / OuncePerceived QualityPerceived QualityuPerceived 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 discountuOther companies moved into the lower left quadrant of the market. But the two major players forced price down to “ultimate value.”uTo break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market.uAttempts to move to next arena via niches in caffeine and sugar substitutesGenericsRC ColaCoke &PepsiPriceSpiralNewCokeActualClassic Coke& PepsiNewCokeIntendedPrice-Quality ManeuversPrice WarFull line ProducersNiching & OutflankingMove to Ultimate ValueAttempt to redefine QualityCommodity like MarketReturn to Price WarsMove to the next ArenaThe Cycle of Price-Quality Competition - MovingUp the Escalation LadderPricePerceived 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 diapersThe Move Towards Offering Ultimate ValueE1DE2E3E4DE5V1V2V3First Value LineNext Value LineUltimate Value LinePerceived QualityPriceThe Fast Food BusinessPerceived QualityPriceM1B1W1W2B2M2UVWendysBurger KingMcDonaldsFirm builds a Tech. ResourceBase to create advantageThen moves into a new marketfirst: PioneerFollowers imitate products & overcome switching costsand brand loyaltiesPioneer throws up impediments to imitationFollowers overcome impedimentsand replicate pioneers resource baseFirst mover uses a TransformationStrategy & abandons product design/technology based approachBuilds resources to match followersmanufacturing skillsPrice WarFirst mover uses a LeapfrogStrategy to a new resource baseFirst mover movesdownstream intohigher value addedproductsEscalating costs &risks each cycleCycle of Timing / Know-HowCompetitionThe First Dynamic Strategic Interaction:Capturing First Mover AdvantagesResponse lags: Obtaining monopoly rentsEconomies of scaleReputation, switching costs and loyaltyAdvertising and channel crowdingUser-base effects: Network size and user base provide funds for the next leapProducer learning / experience effectsPre-emption of scarce assets (McDonalds restaurant locations)First movers needInnovation skillsCustomer knowledgeMarket penetration and marketing skillsFlexible manufacturing skillsThe Second Dynamic Strategic Interaction:Imitation & Improvement by FollowersDiffusion is rapid whenreverse engineering is easyequipment suppliers help transfer key technologies or other business know-howindustry observers, trade associations, etc. help transfer know-howpersonnel move to rival firms frequentlyleaks 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 patentsDominant design paradigm - if follower enters before a dominant design emerges, it has a better shot with own designComplementary assets - marketing, manufacturing, and other skills are needed to produce a new productThe Second Dynamic Strategic Interaction:Imitation & Improvement by FollowersFollower 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 strategyAdding bells & whistlesP&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 airlinesFlanking productsReconceptualized products: Mobike from inexpensive transport to vehicle for fun and recreation to a status symbolRisk reduction: warranties, free samples, etc.Compatible productsThe Third Dynamic Strategic Interaction:Creating Impediments to ImitationDeterrent pricing Secret information (Coke formula, SABRE investment costs)Size economiesContractual relationshipsThreats of retaliationPatentsBundles products (follower does not have access to all components)Switching costsRestrictive (e.g., geographic) licensing (e.g., Sealed Air)Time$ / UnitTime$ / UnitCostCostPriceIntroductoryPrice UmbrellaFollowers enterPrice competitiveMarketThe Fourth Dynamic Strategic Interaction:Overcoming the ImpedimentsDeterrent pricing: No problem if the follower is resource rich; Process innovationsSecret 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 movers capacityContractual relationships: New supplier, vertical integrationThreats of retaliation: Some may not be credible if innovator also losesPatents: Increase imitation costs only by 11%Bundled products: Joint ventures, vertical integrationSwitching costs: Advertising, promotions, etc.; may make market more attractive as follower can reap the benefits once inThe Fifth Dynamic Strategic Interaction:Transformation or LeapfroggingTransformation strategy Compaq - from a premium priced innovator to a low cost manufacturerLeapfrogging strategyCyrix 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 IntelP&G and Ultra thin diapers in JapanMcDonalds leapfrogged over competition by reconceptualizing itself as a restaurant - not just a place for burgers The Fifth Dynamic Strategic Interaction:LeapfroggingTrinitron TVBetamaxWalkmanIPEIPEIPEI: New product IntroducedP: Profits from price umbrellaE: Profit decline due to new entry and R&D for next projectThe Sixth Dynamic Strategic Interaction:Downstream Vertical IntegrationSony entered the software side of the entertainment business with Columbia Pictures - but imitated by MatsushitaIntel and motherboardsProblem is that it ties up resources that could fruitfully be committed to building the companys core businessesStrongholds and Entry BarriersMaxwell 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 BarriersBIC revolutionized the disposable ballpoint pen with its mass merchandising skillsGillette 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 Gillettes stronghold, disposable razors - giving rise to multi-market competition. FedEx vs. UPSUPS 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. “Theyre 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 marketsManagement ChallengesDo 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?Build entry barrier around market Ato exclude competitionBuild entry barrier around market Bto exclude competitionCircumvent barriers and attackniche in market BShort Run: Withdraw from niche or fail to respondDelayed Response: Barriers to contain entrant to a segment of BEntrant breaches barriersor triggers price war in BIncumbents stronghold in B weak-ens as it grows more competitiveLong Run:Incumbent attacks entrants market A to punishEntrant responds in market A or inmarket BStandoff until one party gains theupper hand in market A or BBoth strongholds erodeor merge into onemarketPrice WarOther firmdivestsOne firm builds newstrongholdCyclerestarts withentry into anew marketIf one firm dominatesSTRONG-HOLDSARENAShifting know-how in pharmaceutical industryDeep pocket developsLaunches attack todrive out small firmsAntitrust laws invoked - workoccasionallySmall firms forcedto outmaneuverdeep pocketHostile takeoverof large firmSmall firm escalatesown resource baseCooperative strategy developsAvoidance strategyniching, etc.Large scalealliances form with equally deep pocketsDeep pocket advantage is eliminated or neutralizedBuyers or suppliers develop acountervailingforceNew attempt to escalate resourcesCycle of DeepPockets CompetitionKroger becomeslarge & powerfulDrops pricesAntitrust suitsfiled by rivalsKroger winssuitsMany takeover attempts from outside industrylead to high leverageMergersAcquisitionsSmall chains seekniches. Kroger alsoniches geographicallyto avoid competitionIndustryconsolidationDeep pocket advantage is eliminated or neutralizedLarge wholesalersprovide economiesto smaller storesContinued M&A in industryCycle of DeepPockets CompetitionHypercompetitionuThe new 7S frameworkuSuperior stakeholder satisfactionuStrategic soothsayinguSpeeduSurpriseuShifting rules of competitionuSignaling strategic intentuSimultaneous and sequential strategic thrustsVision for DisruptionIdentifying and creatingopportunities for temporaryadvantage via understandingStakeholder satisfaction Strategic soothsayingto ID new ways to serve current customers better or serve those not being served Capability for DisruptionSustaining the momentum bydeveloping abilities for: Speed Surprisethat can be applied acrossmany actions to builda series of temporaryadvantagesTactics for DisruptionSeizing the initiative togain advantage by Shifting the rules Signaling Strategic thrustswith actions that shape,mould or influencethe direction or nature ofcompetitors responsesMarketDisruptionA 4 Arena AnalysisLimitations of the Hypercompetition PerspectiveIgnores 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 - coopetitionThis requires figuring out the situation the firm is facing and then looking at the firms valuenet