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Hypercompetitive Rivalries
Richard DAveni 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, DAveni 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



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.

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

Price / Ounce



Price / Ounce

Coke Pepsi

Perceived Quality

Perceived Quality

Coke vs. Pepsi, Contd.....


x x

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 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

Price / Ounce

Youth & Middle Class Segments Perceived Quality

Price / Ounce



First move: Pepsi Challenge 2nd move: Cokes Ad war Perceived Quality

Coke vs. Pepsi, Contd.....


Perceived Quality

Price / Ounce

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 Coke & Pepsi Price NewCoke Classic Coke Spiral & Pepsi Generics Actual RC Cola NewCoke Intended

Price / Ounce

Perceived Quality

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

Creeping up the line in diapers


#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

The Move Towards Offering Ultimate Value

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Price E5 D E4 E3 E2 D E1 V1 V2 V3
i rs F t

alu V

t ex

n Li e lu a
at m lti U

e in eL lu

Va e

Perceived Quality

The Fast Food Business


Wendys W1 Burger King B1 McDonalds 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 pioneers 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

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 (McDonalds 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)

$ / Unit

Price Cost

$ / Unit

Introductory Price Umbrella Followers enter Cost Price competitive Market Time


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 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

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

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

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 companys 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 Gillettes 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 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 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 Incumbents 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 entrants 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

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H n lin re u to a d g g la ry re u m n q ire e ts

Deep pocket develops Launches attack to drive out small firms Antitrust laws invoked - 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, etc.

Deep pocket advantage is eliminated or neutralized

Large scale alliances form with equally deep pockets

Cycle of Deep Pockets 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. Kroger also niches geographically to avoid competition

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

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, mould or influence the direction or nature of competitors responses

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

Limitations of the Hypercompetition Perspective

Ignores the point that competition and co-operation can coexist. 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