Competitive Analysis: Hypercompetition. Background Most analyses of competition focus on aspects such as 5-forces analysis, competitive benchmarking or

Competitive Analysis: Hypercompetition

Background

• Most analyses of competition focus on aspects such as 5-forces analysis, competitive benchmarking or competitive intelligence

• Some or all of these topics have been covered in the Strategy class

• Here we will focus on a framework that is interested in studying how competition evolves in the market place.

• This provides us with a tool for anticipating where the market may move in the future.

• A key limitation of the Porter-based strategies is that it tends to ignore 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 various arenas

Hypercompetition

• Four arenas of competition

• Cost & Quality

• Timing and know-how

• Strongholds

• Deep pockets

• Escalation towards hypercompetition

• Within arena

• Across arenas

• Disruption of SCAs

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

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 so many (VAX minis), it would have been immoral to chase a new market.”

Competing to Provide Value: 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


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 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

The Move Towards Offering Ultimate Value

E1

D

E2

E3

E4

D

E5

V1

V2

V3

First V

alue Line

Next V

alue Line

Ultimate

Value Line

Perceived Quality

Price

Price - Actual Quality Map

50

60

70

80

90

100

0 100 200 300 400 500 600 700

Grams of Absorbency

Pric

e in

Yen

Merries Moony

New Pampers

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

Alpha Computer Company

• Company – Manufacturer of minicomputers used for network servers. Prides itself on

engineering skills and ability to provide high performance at a reasonable price.

• Customer– Choice of minicomputers based on MIPS (millions of instructions per

second), SAS (secondary access speed from disk drives, etc.), and price.

• Competition– Two competitors: Ace and Keycomp

– Ace manufactures a computer with the highest MIPS and SAS, and highest price.

– Keycomp manufactures a computer with medium performance and a somewhat high price.


KeycompAce

Alpha

Alpha’s Perceptual Map

Customer Perceived Benefits*MIPS*SAS

VEL

Perc

eive

d P

rice

Action: Introduce a computer with better performance than Keycomp at a much lower price.


• Expectation: Massive increase in market share at the expense of Keycomp.

• Result: Market share actually declined

• Response: Market research to confirm hypothesis about the importance of MIPS and SAS. Sixty buyers were questioned about the relative importance of several attributes.

• Findings: Processor speed and secondary access speed were ranked only fourth and sixth in importance. Software / hardware compatibility, reliability, and quality of technical support all ranked above MIPS, and quality of documentation ranked above and SAS.

• Other findings: While Alpha was rated higher on MIPS and SAS, Keycomp was rated higher on the other attributes, which customers considered more important.


Customer Perceived Benefits*Compatibility*Reliability*Tech support*MIPS*Documentation*SAS

Keycomp

Ace

Alpha

Consumer’s Perceptual Map

VEL

Perc

eive

d P

rice


• Response to Research Findings

– Rewrite operating system and redesign hardware configuration to improve compatibility

– Introduce a marketing campaign to demonstrate improved reliability.

– Increase number of service representatives and toll-free access lines

– Redraft user documents


Keycomp

Ace

Alpha

Repositioned Perceptual Map

Customer Perceived Benefits*Compatibility*Reliability*Tech support*MIPS*Documentation*SAS

VEL

Perc

eive

d P

rice


• Results of repositioning

– Able to increase price by 8%

– Gained market share

– Increase in price and volume doubled operating profits

• Important Considerations

– The consumer’s perception of attributes and the relative importance they place on them drive the purchase decision.

– Non-technical attributes, such as perceived reliability and technical support, are often more important than technical features.

MTE

• Company– Manufactures high-quality medical diagnostic equipment. The

premium supplier in the market for blood diagnostic equipment, with the highest prices and benefits. Considered the most innovative firm.

• Customer• Competition

– Three other competitors• Jackson produces a machine with the second highest price and benefits.• PZJtech produces a machine with the third highest price and benefits.• Labco produces a machine with the lowest price and lowest benefits

– The Market is stable, with all firms located on the VEL.

MTE

Customer Perceived Benefits

Static Position Map

Action: Introduce new model with significantly higher benefits.

Dilemma: Increase price by 10% and keep market share, or hold price constant and increase market share.

Perc

eive

d P

rice

VEL

MTE

JacksonPZJtech

Labco

Option 1

Option 2

MTEPe

rcei

ved

Pri

ce

VEL

MTE

JacksonPZJtech

Labco


Static Position Map

Decision: Introduce the new product with acompromise price increase of 5%.

MTE

• Initial result

– The consumers recognized the great increase in benefits and the small increase in price meant that the new machine was an even better value than the old machine. Sales were strong and MTE’s market share increased.

• Competitor response

– Since the increase in market share for MTE came at the expense of its competitors, they retaliated by lowering their prices by 5%.

MTE

Perc

eive

d P

rice

OLD

VEL

MTE

JacksonPZJtech

Labco


Subsequent Position Map

New V

EL

Result: The market wide price cut reset the old VEL to a another VEL, 5% lower than the first. Market shares returned to their former levels, but margins were greatly reduced. Profits suffered accordingly.

• Company– Manufactures high-grade paper for business forms, brochures, etc.

Quality and consistency are unsurpassed and delivery is quite consistent.

• Customer– Regional and national printing companies.

– Demand tends to vary “wildly” with the economic cyclical.

• Competition– Two competitors: Marco Paper and Valentine Paper.

Pace Paper Company

Pace Paper Company

• Problem– Market share increases in down markets, i.e. during times of excess

supply, but then decrease in up markets, i.e. during times of tight supply.

• Cause– The relative importance of different attributes to consumers changes

during the business cycle. This causes the relative benefits to change, which in turn influences the value associated with each brand.

• Importance ranking during loose supply– 1. Paper quality / consistency

– 2. Order lead time

– 3. Order fill rate

• Importance ranking during tight supply– 1. Order lead time

– 2. Order fill rate

– 3. Paper quality / consistency

Pace Paper Company

Per

ceiv

ed P

rice

VEL


Pace

Marco

Valentine

Static Position Map: Tight supply

Static Position Map: Excess supply

Per

ceiv

ed P

rice

VEL


Pace

Marco

Valentine

Pace Paper Company

• Response

– Pace responded by decreasing consistency slightly in tight markets, to decrease lead times and increase fill rates. During softer markets Pace increases consistency to maintain its traditional advantaged position.

• Result

– Market share stabilizes in Pace’s favor.

Hypercompetition


• Cost & Quality


• Strongholds

• Deep pockets


• Within arena

• Across arenas


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 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 (Niconil)

• 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

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

Hypercompetition


• Cost & Quality


• Strongholds

• Deep pockets


• Within arena

• Across arenas


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, but 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. Since this was BIC’s stronghold, it had to respond. So BIC counter- attacked by entering Gillette’s stronghold, disposable razors - giving rise to multi-market competition.

FedEx vs. UPS• UPS rested on its laurels in the 1980's as FedEx and the United States Postal Service

grabbed market share. Now, UPS is launching an all-out attack to garner a bigger chunk of the lucrative overnight business."We used to see a very large growth in our ground business," said UPS Vice Chairman John Alden. "It is now more significant in the air business which requires us to lease planes for a short period of time to meet a significant spike in our air business."

• Competition is mounting. The United States Postal Service, leader in two-day delivery, wants to move into the overnight business. FedEx, with 60 percent of the overnight business, is going after the UPS-style ground service, such as department store parcels.

• Transportation analyst Douglas Rockel of Furman Selz, explained 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 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 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

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. 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 firm’s valuenet

The ValueNet

Customers

Company

Suppliers

ComplementorsSubstitutors

Valuenet for American Airlines

Customers

American

Boeing

Bombardier

British Airways,IberiaCar Rentals

Mesa Air,United

Long Haul

Short Haul(NEW)

American, United & Mesa are suppliers

Substitutors/Complementors

Pilots Association

Airbus

Intel - A Partial ValueNet

HP; Compaq; IBM

INTEL

Suppliers

MicrosoftHP (Merced)Sun (Solaris + Merced)Compaq (Digital TV standards with M’Soft)

NatSem / CyrixAMD / IBMMicrosoft

IBM manufactures AMD

Digital CableTV StandardsNetPC StandardsSolaris Compatibility of NetPC design & Merced Limits Microsoft power in ValueNet

Limit customerpower & competitorresponse via Mother-board manufacture

Customers limitdependence - alternativesuppliers

How can the game be changed?

The game can be changed by changing

• Players

• Added value

• Rules of the game

• Tactics employed

• Scope of the game

Documents

Competitive Analysis: Hypercompetition. Background Most analyses of competition focus on aspects such as 5-forces analysis, competitive benchmarking or