Hypercompetitive Rivalries
Richard D’Aveni and Robert Gunther

Complexity of Analysis

ValueNet Phase Focus on all the players relevant to your operations PARTS framework Hypercompetition Phase Focus on the competitive interactions w.r.t. the four competitive arenas C-Q/T-K/S/D framework The PLC Phase

Focus on the firm and its strategies at different stages of the PLC SWOT framework Number of Players

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 Exploitation Profits from a sustained competitive advantage Launch Counterattack Traditional View Time Firm has already moved to advantage 2 Profits from a series of actions Exploitation Counterattack Hypercompetition Time Launch .

DEC • DEC in minicomputers. “We had 6 PCs in-house that we could have launched in the late 70s. But we were selling so many (VAX minis). 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). it would have been immoral to chase a new market. The company posted a 31% average growth rate from 1977 to 1982 by focusing on the minicomputer.” .

Hypercompetition Four arenas of competition • Cost & Quality (C-Q) • Timing and know-how (T-K) • Strongholds (S) • Deep pockets (D) .

Pepsi: 1893 1933: Pepsi struggling to stave off bankruptcy. making it a better value • Ad jingle “twice as much for a nickel” better known in the US than the Star Spangled Banner Price / Ounce Pepsi Coke Price / Ounce Coke Pepsi Perceived Quality Perceived Quality . Dropped price of its 10c. 12 oz. bottle to 5c.Coke vs. Pepsi • • Coke: 1886.

.. 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. when Pepsi charged its bottlers 20% less for its concentrate With rising ingredient costs.Coke vs. Pepsi.. Contd. x x x x Pepsi keeps price advantage through 60s and 70s. with Pepsi targeting the youth What followed was the Pepsi Challenge & “Real Thing” Coke ads Price / Ounce Youth & Middle Class Segments Perceived Quality Price / Ounce Pepsi Coke First move: Pepsi Challenge 2nd move: Coke’s Ad war Perceived Quality .. Pepsi could no longer offer twice as much for the same price.

Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers.. 50% of food store sales were on discount Other companies moved into the lower left quadrant of the market. Contd. Pepsi. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s... x x x x Perceived Quality Price / Ounce Perceived quality caught up.Coke vs. But the two major players forced price down to “ultimate value..” To break price spiral. Rejected by market. Attempts to move to next arena via niches in caffeine and sugar substitutes Coke & Pepsi Price NewCoke Classic Coke Spiral & Pepsi Generics Actual RC Cola NewCoke Intended Price / Ounce Perceived Quality . Pepsi responded with its discounts and by the end of the 80s.

The Cycle of Price-Quality Competition .Moving Up the Escalation Ladder Move to the next Arena Return to Price Wars Commodity like Market Attempt to redefine Quality Move to Ultimate Value Niching & Outflanking Full line Producers Price-Quality Maneuvers Price War .

. . . Price #5 Luvs (P&G) #4 Huggies (Kimberly-Clark) #3 Kimbies (Kimberly Clark) #2 Pampers (P&G) #1 Low quality (leaky) unbranded & 2 piece diapers Perceived Quality .Creeping up the line in diapers . .

The Move Towards Offering Ultimate Value i eL ne Price E5 D E4 E3 E2 D E1 V1 V2 V3 N i rs F t alu V t ex V n Li e lu a at m lti U e e in eL lu Va e Perceived Quality .

The Fast Food Business Price Wendy’s W1 Burger King B1 McDonald’s B2 M1 M2 UV W2 Perceived Quality .

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 pioneer’s resource base First mover uses a Transformation Strategy & abandons product design/ technology based approach Builds resources to match followers manufacturing skills Price War Escalating costs & risks each cycle First mover moves downstream into higher value added products First mover uses a Leapfrog Strategy to a new resource base Cycle of Timing / Know-How Competition .

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 First Dynamic Strategic Interaction: Capturing First Mover Advantages • Response lags: Obtaining monopoly rents • Economies of scale • Reputation.

marketing. and other skills are needed to produce a new product . an imitator needs 3 things that fall in these regimes: • Appropriability . manufacturing.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. etc. help transfer know-how • personnel move to rival firms frequently • leaks of secret information are commonplace and not illegal To win. trade associations. it has a better shot with own design • Complementary assets .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.

• Compatible products .no fortressing).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 . Lever . buffered aspirin) • Pure imitation strategy • Adding bells & whistles • P&G . Beecham .Crest (basic toothpaste).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. etc. free samples.CloseUp (+freshen breath and whiten teeth) and Aim (gel + fluoride protection). is not satisfying all segments of consumers or all varieties of needs ( flanking) or has a design flaw that can be corrected (aspirin vs.

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. geographic) licensing (e..g.The Third Dynamic Strategic Interaction: Creating Impediments to Imitation • • • • • • • • • Deterrent pricing Secret information (Coke formula. Sealed Air) $ / Unit Price Cost $ / Unit Introductory Price Umbrella Followers enter Cost Price competitive Market Time Time ..g.

build scale in one geographic area and expand (Japanese auto builders).. Process innovations • Secret information: Reverse engineering.The Fourth Dynamic Strategic Interaction: Overcoming the Impediments • Deterrent pricing: No problem if the follower is resource rich. may make market more attractive as follower can reap the benefits once in . 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. etc. promotions. experimentation (private label colas) • Size economies: Process innovations. vertical integration • Switching costs: Advertising. No problem if growth exceeds first mover’s capacity • Contractual relationships: New supplier.

And produced it at 4% of Intel’s initial investment.not just a place for burgers .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. 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 .The Fifth Dynamic Strategic Interaction: Transformation or Leapfrogging • Transformation strategy • Compaq .

The Fifth Dynamic Strategic Interaction: Leapfrogging Walkman Betamax P Trinitron TV P E E P E I: New product Introduced P: Profits from price umbrella E: Profit decline due to new entry and R&D for next project I I I .

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 .The Sixth Dynamic Strategic Interaction: Downstream Vertical Integration • Sony entered the software side of the entertainment business with Columbia Pictures .

After being acquired by P&G. Folgers entered the Cleveland market to increase its eastern penetration. Maxwell also introduced a “fighting brand” called Horizon which was similar to Folgers in taste and in packaging. The battle continued until the market was no longer two coastal segments but one national battleground . Folgers then escalated by entering Pittsburgh.Strongholds and Entry Barriers Maxwell house was dominant in the East Coast market and Folgers was strong in the West Coast. Maxwell responded by entering Dallas with reduced prices. lowering prices and increasing ad expenditures in Kansas city. Maxwell countered by attacking Folgers’ stronghold.

brand equity. So BIC counter.giving rise to multi-market competition. economies of scale in advertising.) by using its own considerable skills in mass merchandising. . disposable razors .attacked by entering Gillette’s stronghold.Strongholds and Entry Barriers BIC revolutionized the disposable ballpoint pen with its mass merchandising skills Gillette entered the market for disposable pens (PaperMate). etc. overcoming entry barriers (access to distribution channels.

Both companies have web sites where consumers can order merchandise and businesses can track shipments. UPS • UPS – Dominant in ground based parcel delivery service.leader in two-day delivery. Federal (Express) has introduced some time-deferred. i. betting on those largely untapped markets . “They're beginning to diversify further into each others' core markets. • Now. where FedEx is king (60%). UPS has developed (the) express air-based ability of their company.FedEx vs. “At the same time." • The fevered rush to capture business has also spread to the Internet. wants to move into the overnight business." Rockel said. ground-based capabilities. • Companies are taking the battle to the others' turf. • FedEx grabbed market share of air-borne delivery. Even more importantly.. UPS is launching an all-out attack to garner a bigger chunk of the lucrative overnight business.e. • United States Postal Service . both UPS and FedEx are investing billions of dollars to build distribution systems in Europe and Asia. such as department store parcels. overnight service.

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 A to exclude competition Circumvent barriers and attack niche in market B Entrant breaches barriers or triggers price war in B Build entry barrier around market B to exclude competition Short Run: Withdraw from niche or fail to respond Delayed Response: Barriers to contain entrant to a segment of B Incumbent’s stronghold in B weakens as it grows more competitive Cycle restarts with entry into a new market Entrant responds in market A or in market B One firm builds new stronghold Other firm divests Standoff until one party gains the upper hand in market A or B If one firm dominates Long Run:Incumbent attacks entrant’s market A to punish Both strongholds erode or merge into one STRONGmarket HOLDS ARENA Price War .

S ill k Shifting know-how in pharmaceutical industry E c ffe t F s irm A w dfo th llo e r e e c e m rk tin to ffe tiv a e g g te e p rs in a ke e e o o ic tra sa tio s cnm n c n S g p d c fo u o in le ro u t c s f e tire d ta fo e a d n e il rc n p m tio . o ita tc Mrc . c a da n w la o re te e w ytose th u h a ll. e . o cs w b a p d c lin ith ro d ro u t e S e d d gtom rk t. S e ia e k p c lly tra e a dfo u d in d n c se u its in n c rd . e c e ro o n ffe tiv w n rro p d c ith a w ro u t lin e S e ia e p c liz d sa sfo e le rc fo d re t th ra e tic r iffe n e p u c sse / m d a la s e ic l sp c litie m re fo u e ia s. p e s ru a e e p n in tim xad g e a a b top te t fo v ila le a n r e o o ic p fits c n m ro P e/ fiz r L d rle ee . Mrio : O e k a n f lim dv lu w o t ite a e ith u c m e n e in o p te c a q irin n wd g c u g e ru s D c se gto ire t llin p y ia s. C a de c e re te ffe tiv d re tia no iffe n tio f p dc a og ro u ts m n g te e p rs a ke e G x . a io h sp l. a e b c b ste p te tia to lo k u r o n l a c e ic llyin iffe n hm a d re t d g ru Mrc . ro g se g g v llin . a e g e rly m a ~ id 8s 0 S e ia e se g p c liz d llin H n lin re u to a d g g la ry re u m n q ire e ts . 1 5 s h sic n 9 0 “ lo k u r” B c b ste m rk tin .

etc. Deep pocket advantage is eliminated or neutralized Large scale alliances form with equally deep pockets Cycle of Deep Pockets Competition .work occasionally Small firms forced to outmaneuver deep pocket New attempt to escalate resources Buyers or suppliers develop a countervailing force Hostile takeover of large firm Small firm escalates own resource base Cooperative strategy develops Avoidance strategy niching.Deep pocket develops Launches attack to drive out small firms Antitrust laws invoked .

Kroger also niches geographically to avoid competition .Kroger becomes large & powerful Continued M&A in industry Large wholesalers provide economies to smaller stores Many takeover attempts from outside industry lead to high leverage Mergers Deep pocket advantage is eliminated or neutralized Drops prices Antitrust suits filed by rivals Kroger wins suits Acquisitions Industry consolidation Cycle of Deep Pockets Competition Small chains seek niches.

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

mould or influence the direction or nature of competitors’ responses .Vision for Disruption 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 Capability 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 Market Disruption Tactics for Disruption Seizing the initiative to gain advantage by • Shifting the rules • Signaling • Strategic thrusts with actions that shape.

A 4 Arena Analysis Arena Cost / Quality Key Success Factors Understanding customer needs Cost reduction Foster innovation Quick market penetration Deterrence Aggression Brute force Out-maneuvering big opponents Critical 7S S1: Stakeholder satisfaction S3: Speed S3: Speed S4: Surprise S2: Soothsaying S6: Signals S7: Strategic thrusts S7: Strategic thrusts S5: Shifting rules Know-how / Timing Stronghold creation / invasion Deep pockets .

coopetition • This requires figuring out the situation the firm is facing and then looking at the firm’s valuenet . etc. DVD.Limitations of the Hypercompetition Perspective • Ignores the point that competition and co-operation can coexist. Examples include the development of Advanced Photo Film. • 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 .

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