Analyzing Competition Using the Four Arenas

1. Two Types of Uses for the Four Arenas

This chapter develops two analytical tools based on two radically different views of how competitive escalation moves across these four arenas. The chapter introduces two approaches for using all four arenas to analyze competition and market conditions, approaches that look at dynamic stra­tegic interaction over long periods of time. This analysis can help firms assess their competitive situation, predict competitors’ moves, and identify the locus of competition; that is, which arena is the current or future bat­tleground.

The first approach is a Four Arena analysis; it looks at the evolution of competition over time across the four arenas to identify trends and pat­terns of dynamic strategic interactions between competitors. The second approach is a Four Lens analysis; it looks at a single competitive move and analyzes its impact on each of the four arenas of competition.

A Four Arena analysis of competition in the soft drink industry (pre­sented below) shows how competition in the four arenas has played out historically, how the arenas are interrelated, and how competition has in­tensified. This analysis offers a framework that strategists can use to antic­ipate strategic opportunities and likely actions of competitors in each of the arenas.

A Four Lens analysis of the computer printer industry illustrates how the impact of a single competitive action can be gauged by its effect on each of the four arenas. In one case ( presented below) the introduction of the laser printer influenced competition in the cost and quality, timing and know-how, strongholds, and deep-pocket arenas. By analyzing the ac­tion through these four lenses, strategists can anticipate the moves of com­petitors and plan their next actions. They can also analyze the full impli­cations of a competitor’s move.

1. Hypercompetitive Markets Involve a Tangled Web of Complexity

The Four Arena analysis and Four Lens analysis are based on a simplifica­tion of the dynamics of competitive interactions that breaks reality into its component pieces. In reality, the arenas are not quite so distinct, the pro­gression is not quite so clear, and the nature of dynamic strategic interac­tion is not so predictable or easily labeled.

The complexity of dynamic strategic interactions in the four arenas may blur the boundaries of the arenas, for example. The lines between two arenas can blur because some actions span more than one arena. Several actions may play out in different arenas at the same time. For example, building quality can be seen as playing itself out in the cost-quality, the timing-know-how, and stronghold arenas. Improving quality can be the basis for building or overcoming a “differentiation” entry barrier in the stronghold arena or the means a follower uses to compete with a first mover in the timing-know-how arena.

Another action that spans different arenas at the same time is the use of advertising. For example, a company that uses a massive advertising cam­paign to launch a product in opposition to a competitor’s existing product may be operating in all four arenas simultaneously. The aggressor may be using its deep-pocket advantage to pay for the campaign. It may be creat­ing entry barriers to future players by differentiating its product. It may be using the advertising to overcome the advantage of the first mover. Fi­nally, the advertising campaign may be used to shape an image of higher perceived quality among customers.

Although thus far Part I has described competition as moving from the first through the fourth arena in succession, this is not always the case. In particular, the cost and quality arena and the timing and know-how arena present a chicken-and-egg question. The jump to the timing and know­how arena has been viewed as a way of breaking out of cost-quality com­petition. But before companies can compete on cost and quality, they must first introduce products or services, which come from the timing and know-how arena.

Finally, several cycles could occur simultaneously within a single arena. For example, deep pockets may be developed at a corporate level or sub­sidiary level. Or though two firms might be of equal size at the corporate level, one may have much larger market share in the soda business than the other. A second example based on the cost-quality arena is one in which firms compete on four or five different types of quality simulta­neously.

These four arenas, therefore, are conceptual arenas. They are a way of emphasizing the strategic moves of competitors. Real competition, partic­ularly in today’s hypercompetitive environment, is much more complex. It resists being wrapped in neat packages. But it is only by breaking it down into such packages that we can understand it and begin to take charge of it.

2. The Four Arenas Are Actually Frameworks to Understand Market Processes

Although some aspects of competition within these four arenas are well known, the escalation ladders and cycles presented here are new concepts. The escalation ladders, the sequences of moves and countermoves, help explain the process of how competition evolves over time. These ladders are actually cycles that can be restarted by actions of the firm. At each step of the ladder, companies move up a rung to gain advantage. Competitors are then forced to react to these moves, further escalating competition. If competitors do not react, if they fall behind on the ladder, they die. In sum, the four arenas are a way to view the market process; that is, the sequences and complexities of maneuvering for position that have never been articulated explicitly before.

These four escalation ladders—cost and quality, timing and know-how, stronghold creation/invasion, and deep pockets are, therefore, a concep­tual way to understand market processes that occur naturally due to the competitive instincts of rivals. Part I has shown how advantages in each of these areas are eroded by a process involving a series of moves and coun­termoves. It has also shown how the escalation moves up each ladder and from one arena to another as each of the traditional sources of advantage is repeatedly destroyed and recreated momentarily. Here and in subse­quent parts this book will illustrate how the four arenas can be used as an analytical tool to describe a competitive maneuvering over time or to an­alyze a single action affecting more than one arena at the same time.

Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.

Leave a Reply

Your email address will not be published. Required fields are marked *