Title: Competitive Analysis: Hypercompetition
1Competitive Analysis Hypercompetition
2Background
- 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
3Hypercompetition
- Four arenas of competition
- Cost Quality
- Timing and know-how
- Strongholds
- Deep pockets
- Escalation towards hypercompetition
- Within arena
- Across arenas
- Disruption of SCAs
4Strategic 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
5DEC
- 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.
6Competing 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
7Coke 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
8Coke 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
9The 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
10(No Transcript)
11The 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
12Alpha 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.
13Alpha Computer Company
Action Introduce a computer with better
performance than Keycomp at a much lower price.
14Alpha 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.
15Alpha Computer Company
16Alpha 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
17Alpha Computer Company
Repositioned Perceptual Map
Ace
Keycomp
Alpha
18Alpha 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.
19MTE
- 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.
20MTE
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
21MTE
Decision Introduce the new product with
a compromise price increase of 5.
22MTE
- 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.
23MTE
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
24Pace 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.
25Pace 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
26Pace Paper Company
27Pace 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.
28Hypercompetition
- Four arenas of competition
- Cost Quality
- Timing and know-how
- Strongholds
- Deep pockets
- Escalation towards hypercompetition
- Within arena
- Across arenas
- Disruption of SCAs
29Escalating 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
30The 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
31The 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
32The 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
33The 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
34The 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
35The 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
36The 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
37The 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
38Shifting know-how in pharmaceutical industry
39Hypercompetition
- Four arenas of competition
- Cost Quality
- Timing and know-how
- Strongholds
- Deep pockets
- Escalation towards hypercompetition
- Within arena
- Across arenas
- Disruption of SCAs
40Strongholds 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
41Strongholds 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.
42FedEx 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
43Management 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?
44Build 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
45New 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.
46Kroger 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
47Hypercompetition
- The new 7S framework
- Superior stakeholder satisfaction
- Strategic soothsaying
- Speed
- Surprise
- Shifting rules of competition
- Signaling strategic intent
- Simultaneous and sequential strategic thrusts
48- 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
49A 4 Arena Analysis
50Limitations 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
51The ValueNet
Customers
Company
Complementors
Substitutors
Suppliers
52Valuenet 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
53Intel - 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
54How 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