Competitive Analysis: Hypercompetition

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Competitive Analysis Hypercompetition
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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, DAveni notes that competitive
  interaction among firms typically goes through
  various arenas

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Hypercompetition

• Four arenas of competition
• Cost Quality
• Timing and know-how
• Strongholds
• Deep pockets
• Escalation towards hypercompetition
• Within arena
• Across arenas
• Disruption of SCAs

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Strategic Competitive Advantage
Exploitation
Launch
Counterattack
Profits from a sustained competitive advantage
Traditional View
Time
Firm has already moved to advantage 2
Exploitation
Profits from a series of actions
Counterattack
Hypercompetition
Time
Launch
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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 so many (VAX minis), it would
  have been immoral to chase a new market.

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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

Coke
Pepsi
Coke
Price / Ounce
Price / Ounce
Pepsi
Perceived Quality
Perceived Quality
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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 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

Pepsi
First move Pepsi Challenge
Coke
Price / Ounce
Price / Ounce
Youth Middle Class Segments
2nd move Cokes Ad war
Perceived Quality
Perceived Quality
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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 Spiral
Classic Coke Pepsi
NewCoke Actual
Price / Ounce
Generics RC Cola
Price / Ounce
NewCoke Intended
Perceived Quality
Perceived Quality
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The Move Towards Offering Ultimate Value
Price
First Value Line
E5
D
Next Value Line
E4
Ultimate Value Line
E3
V3
E2
V2
D
V1
E1
Perceived Quality
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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
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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.

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Alpha Computer Company
Action Introduce a computer with better
performance than Keycomp at a much lower price.
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Alpha Computer Company

• 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.

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Alpha Computer Company
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Alpha Computer Company

• 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

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Alpha Computer Company
Repositioned Perceptual Map
Ace
Keycomp
Alpha
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Alpha Computer Company

• Results of repositioning
• Able to increase price by 8
• Gained market share
• Increase in price and volume doubled operating
  profits
• Important Considerations
• The consumers 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.

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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.

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MTE
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.
Static Position Map
Customer Perceived Benefits
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MTE
Decision Introduce the new product with
a compromise price increase of 5.
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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
  MTEs 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.

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MTE
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.
Subsequent Position Map
MTE
Jackson
New VEL
Perceived Price
PZJtech
Labco
OLD VEL
Customer Perceived Benefits
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Pace Paper Company

• 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.

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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

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Pace Paper Company
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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 Paces favor.

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Hypercompetition

• Four arenas of competition
• Cost Quality
• Timing and know-how
• Strongholds
• Deep pockets
• Escalation towards hypercompetition
• Within arena
• Across arenas
• Disruption of SCAs

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Escalating costs risks each cycle
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
First mover moves downstream into higher value
added products
Followers overcome impediments and replicate
pioneers resource base
First mover uses a Transformation Strategy
abandons product design/ technology based approach
First mover uses a Leapfrog Strategy to a new
resource base
Builds resources to match followers manufacturing
skills
Cycle of Timing / Know-How Competition
Price War
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The First Dynamic Strategic InteractionCapturing
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

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The Second Dynamic Strategic InteractionImitatio
n 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 InteractionImitatio
n 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
• PG - 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

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The Third Dynamic Strategic InteractionCreating
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)

Introductory Price Umbrella
/ Unit
/ Unit
Price
Followers enter
Price competitive Market
Cost
Cost
Time
Time
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The Fourth Dynamic Strategic InteractionOvercomi
ng 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

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The Fifth Dynamic Strategic InteractionTransform
ation 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
• PG 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 InteractionLeapfrogg
ing
Walkman
P
E
Betamax
I New product Introduced P Profits from
price umbrella E Profit decline due to
new entry and RD for next project
P
Trinitron TV
E
E
P
I
I
I
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The Sixth Dynamic Strategic InteractionDownstrea
m 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

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Shifting know-how in pharmaceutical industry
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Hypercompetition

• Four arenas of competition
• Cost Quality
• Timing and know-how
• Strongholds
• Deep pockets
• Escalation towards hypercompetition
• Within arena
• Across arenas
• Disruption of SCAs

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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 PG, 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
  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 BICs stronghold, it had to respond. So
  BIC counter- attacked by entering Gillettes
  stronghold, disposable razors - giving rise to
  multi-market competition.

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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

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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 of B
Entrant breaches barriers or triggers price war
in B
Cycle restarts with entry into a new market
Incumbents stronghold in B weak- ens as it grows
more competitive
Long RunIncumbent 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 B
Both strongholds erode or merge into one market
One firm builds new stronghold
STRONG- HOLDS ARENA
If one firm dominates
Other firm divests
Price War
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New attempt to escalate resources
Deep pocket develops
Buyers or suppliers develop a countervailing forc
e
Launches attack to drive out small firms
Hostile takeover of large firm
Antitrust laws invoked - work occasionally
Small firm escalates own resource base
Large scale alliances form with equally deep
pockets
Deep pocket advantage is eliminated or neutralized
Small firms forced to outmaneuver deep pocket
Cooperative strategy develops
Cycle of Deep Pockets Competition
Avoidance strategy niching, etc.
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Kroger becomes large powerful
Continued MA in industry
Large wholesalers provide economies to smaller
stores
Drops prices
Many takeover attempts from outside
industry lead to high leverage
Antitrust suits filed by rivals
Mergers
Deep pocket advantage is eliminated or neutralized
Kroger wins suits
Industry consolidation
Acquisitions
Small chains seek niches. Kroger also niches
geographically to avoid competition
Cycle of Deep Pockets 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 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
• 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

• 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
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A 4 Arena Analysis
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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

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The ValueNet
Customers
Company
Complementors
Substitutors
Suppliers
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Valuenet for American Airlines
American, United Mesa are suppliers
Customers
Short Haul (NEW)
British Airways, Iberia Car Rentals
Mesa Air, United
American
Long Haul
Boeing Bombardier
Substitutors/ Complementors
Pilots Association
Airbus
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Intel - A Partial ValueNet
Limit customer power competitor response via
Mother- board manufacture
IBM manufactures AMD
Customers limit dependence - alternative suppliers
HP Compaq IBM
Microsoft HP (Merced) Sun (Solaris
Merced) Compaq (Digital TV standards with MSoft)
NatSem / Cyrix AMD / IBM Microsoft
INTEL
Suppliers
Digital CableTV Standards NetPC Standards Solaris
Compatibility of NetPC design Merced
Limits Microsoft power in ValueNet
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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