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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
Perceived Quality Perceived Quality
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 Perceived Quality
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