Competitive Analysis: Hypercompetition

1. Competitive Analysis: Hypercompetition

2. 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

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

4. 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

5. 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.”

6. 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 Price / Ounce Pepsi Coke Price / Ounce Pepsi Perceived Quality Perceived Quality

7. 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 First move: Pepsi Challenge Coke Price / Ounce Price / Ounce Youth & Middle Class Segments 2nd move: Coke’s Ad war Perceived Quality Perceived Quality

8. 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

9. 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

11. 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

12. 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.

13. Alpha’s Perceptual Map Ace Keycomp Perceived Price Alpha VEL Customer Perceived Benefits *MIPS *SAS Alpha Computer Company Action: Introduce a computer with better performance than Keycomp at a much lower price.

14. 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.

15. Consumer’s Perceptual Map Ace Keycomp Perceived Price Alpha VEL Customer Perceived Benefits *Compatibility *Reliability *Tech support *MIPS *Documentation *SAS Alpha Computer Company

16. 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

17. Perceived Price VEL Customer Perceived Benefits *Compatibility *Reliability *Tech support *MIPS *Documentation *SAS Alpha Computer Company Repositioned Perceptual Map Ace Keycomp Alpha

18. 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 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.

19. 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.

20. Option 1 MTE Jackson Option 2 PZJtech Perceived Price Labco VEL 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

21. Static Position Map MTE Jackson PZJtech Perceived Price Labco VEL • Customer Perceived Benefits MTE Decision: Introduce the new product with a compromise price increase of 5%.

22. 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%.

23. 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

24. 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.

25. 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

26. Static Position Map: Excess supply Pace Marco Perceived Price Valentine VEL • Customer Perceived Benefits Static Position Map: Tight supply Pace Marco Perceived Price Valentine VEL • Customer Perceived Benefits Pace Paper Company

27. 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.

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

29. 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 pioneer’s 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

30. 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

31. 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

32. 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

33. 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) Introductory Price Umbrella $ / Unit $ / Unit Price Followers enter Price competitive Market Cost Cost Time Time

34. 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

35. 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

36. The Fifth Dynamic Strategic Interaction:Leapfrogging Walkman P E Betamax I: New product Introduced P: Profits from price umbrella E: Profit decline due to new entry and R&D for next project P Trinitron TV E E P I I I

37. 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

38. Shifting know-how in pharmaceutical industry

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

40. 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

41. 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.

42. 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

43. 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?

44. 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 Incumbent’s stronghold in B weak- ens as it grows more competitive Entrant responds in market A or in market B Long Run:Incumbent attacks entrant’s market A to punish Standoff until one party gains the upper hand in market A or B One firm builds new stronghold Both strongholds erode or merge into one market STRONG- HOLDS ARENA If one firm dominates Other firm divests Price War

45. New attempt to escalate resources Deep pocket develops Buyers or suppliers develop a countervailing force Launches attack to drive out small firms Hostile takeover of large firm Antitrust laws invoked - work occasionally Small firm escalates own resource base Deep pocket advantage is eliminated or neutralized Large scale alliances form with equally deep pockets Small firms forced to outmaneuver deep pocket Cooperative strategy develops Cycle of Deep Pockets Competition Avoidance strategy niching, etc.

46. Kroger becomes large & powerful Continued M&A 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

47. Hypercompetition • 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

49. A 4 Arena Analysis

50. 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