HYPER COMPETITION

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,
competitive interaction among firms typically goes
through stages
 Strategic Competitive Advantage

Exploitation
Launch Counterattack
Profits from a
sustained
competitive Traditional View
advantage

Time

Firm has already moved to advantage 2

Exploitation
Profits from a Counterattack
series of
actions Hypercompetition

Time
Launch
 Hypercompetition

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

Coke
Price / Ounce

Price / Ounce

Pepsi Coke Pepsi

Perceived Quality Perceived Quality

 Coke vs. Pepsi, Contd.....
◆ 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

Pepsi Coke First move:

Price / Ounce

Pepsi
Price / Ounce Challenge
Youth & Middle
Class Segments 2nd move:
Coke’s Ad war

Perceived Quality Perceived Quality

 Coke vs. Pepsi, Contd.....
◆ 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 / Ounce

Price Price / Ounce

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

Perceived Quality 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
 Firm builds a Tech. Resource Escalating costs &
Base to create advantage risks each cycle

Then moves into a new market

first: Pioneer

Followers imitate products & overcome switching costs

and brand loyalties

Pioneer throws up impediments to imitation First mover moves

downstream into
Followers overcome impediments higher value added
and replicate pioneer’s resource base products

First mover uses a Transformation

First mover uses a Leapfrog
Strategy & abandons product design/
Strategy to a new resource base
technology based approach

Builds resources to match followers

manufacturing skills Cycle of Timing / Know-How
Price War 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 (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
 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)
Introductory
Price Umbrella
$ / Unit
$ / Unit

Price Followers enter

Price competitive
Cost Cost Market
Time 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 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

Walkman
P E
Betamax
I: New product
P Introduced
Trinitron TV E P: Profits from
price umbrella
P E
E: Profit decline
due to new entry
and R&D for
I 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 company’s
core businesses
Strongholds and Entry Barriers

BIC (brook heaven instrument company)

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
Gillette’s stronghold, disposable razors -
giving rise to multi-market competition.
 Build entry barrier around market A Build entry barrier around market B
to exclude competition to exclude competition

Circumvent barriers and attack Short Run: Withdraw from niche

niche in market B or fail to respond

Delayed Response: Barriers to

Entrant breaches barriers
contain entrant to a segment of B
or triggers price war in B
Cycle
restarts with Incumbent’s stronghold in B weak-
entry into a ens as it grows more competitive
new market
Entrant responds in market A or in Long Run:Incumbent attacks
market B entrant’s market A to punish

One firm Standoff until one party gains the Both strongholds erode
builds new upper hand in market A or B or merge into one
STRONG-
stronghold market
HOLDS
Other firm If one firm dominates ARENA
Price War
divests
Shifting know-how in pharmaceutical
industry
Skill Effect Firms

Direct selling to Allowed for the Pfizer / Lederle;

physicians, 1950s effective marketing to Created effective
gatekeepers in differentiation of
economic transactions products among
gatekeepers

“Blockbuster” Single product focus of Glaxo; created a new

marketing, early~mid entire detail force and way to sell; through
80s promotion; effective selling, gave
with narrow product blockbuster potential to
line a chemically indifferent
drug

Specialized selling Specialized salesforce Merck; Specially

for different therapeutic trained and focused
classes / medical units in cardio,
specialities; more focus hospital, etc.
with broad product line

Handling regulatory Speeds drug to market, Merck; Marion: Of

requirements expanding time limited value without
available to patent for competence in
economic profits acquiring new drugs
 New attempt to escalate resources
Deep pocket develops
Buyers or
suppliers develop a

Deep pocket advantage is eliminated or neutralized

Launches attack to
countervailing
drive out small firms
force

Antitrust laws Hostile takeover

invoked - work of large firm
occasionally
Small firm escalates
Small firms forced own resource base Large scale
to outmaneuver alliances form
deep pocket with equally
Cooperative
deep pockets
strategy develops

Cycle of Deep Avoidance strategy

Pockets niching, etc.
Competition
 Kroger becomes Continued M&A in industry
large & powerful
Large wholesalers

Deep pocket advantage is eliminated or neutralized

provide economies
Drops prices to smaller stores

Many takeover attempts

Antitrust suits from outside industry
filed by rivals lead to high leverage

Mergers
Kroger wins Industry
suits consolidation
Acquisitions

Small chains seek

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

Tactics for Disruption

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 Seizing the initiative to
Disruption 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 Key Success Factors Critical 7S

Cost / Quality Understanding S1: Stakeholder

customer needs satisfaction
Cost reduction S3: Speed

Know-how / Timing Foster innovation S3: Speed

Quick market S4: Surprise
penetration S2: Soothsaying

Stronghold creation / Deterrence S6: Signals

invasion Aggression S7: Strategic thrusts

Deep pockets Brute force S7: Strategic thrusts

Out-maneuvering big S5: Shifting rules
opponents
Limitations of the Hypercompetition
Perspective

 Ignores the point that competition and co-

operation can co-exist.
 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