In addition to its use in analyzing the dynamics of strategic interaction between rivals over long periods of time, as in the case of the soft drink industry, the four arena framework can also be used by a company to analyze and interpret a single action by a competitor. By examining the impact of this event on each of the arenas, companies can develop a more detailed view of the strategic implications of a competitor’s moves. It can also identify a fuller set of possible responses involving all of the arenas.
To examine how this analysis works, consider the introduction of the commercial laser printer as viewed by the manufacturer of dot matrix printers. Hewlett-Packard introduced the first laser printer for the mass market in 1984 (the Laser Jet) with a price tag of$3,750. The new printers slowly gained share from dot matrix printers as prices fell, but dot matrix printers still held half the printer market in 1992.
1. Through the Cost-Quality Lens
The introduction of the laser printer, from the perspective of a dot matrix producer, tended to drive up the quality of products in the industry and put even the best dot matrix printers in the low-cost, low-quality position. Unless they wanted to remain at this low position and watch the laser printer makers continue to drive down prices, dot matrix producers had a choice of either reducing costs or increasing quality. They, in fact, did both.
Laser printers first entered the cost-quality arena at what would appear to be the differentiator’s position. They defined the high end of the price- quality spectrum, offering much higher quality (higher resolution, lower noise, faster printouts) but for a higher price. Both ends of the market began moving toward higher levels of value. Laser printers, which started with high quality, worked to drive prices down, shaving them by more than half in less than a decade. Manufacturers of dot matrix printers moved in the other direction. Starting with lower costs, they worked to increase quality—speed of the printers (up to four pages per minute), resolution, and quietness. At the low end, prices of dot matrix printers have been driven down to about $300 for a twenty-four-pin dot matrix or under $200 for some models compared to the $1,000 to $1,500 price tag for laser printers (although some have now cracked the $1,000 ceiling). Although there are still differences in price and quality between dot matrix printers and laser printers, the gap is closing and both are moving toward ultimate value. As a 1991 article speculated, prices below$1,000 may mean the end of the domination of dot matrix printers.22
2. Through the Timing-Know-How Lens
The technological advance of inexpensive laser printing created several advantages for its manufacturers. They could offer customers a higherresolution printout and many options such as scalable fonts and paper trays. This placed even the most advanced dot matrix printer at a technological disadvantage and led to a series of innovations in the dot matrix market.
Epson America combated the laser printer by trying to incorporate advanced know-how into its dot matrix units, where it is the market leader. In early 1992 it continued to introduce new scalable fonts for dot matrix printers to enable them to compete more directly with low-end laser printers.
Epson also imitated HP by moving into laser technology along with forty other manufacturers. Compaq introduced a new printer with a multitray paper mechanism that can draw in different-sized sheets to gain an advantage over Hewlett-Packard. Innovations in color printing have also been used to give companies a technology advantage.
3. Through the Stronghold Lens
Some dot matrix printer companies sold their products directly to retailers or customers. Others sold them to OEMs (original equipment manufacturers) that made computers. The OEMs either put their own name on these printers or sold the printers with the brand name still on them as part of a bundled system containing the computer and peripheral equipment. Some dot matrix printer manufacturers built strong, long-lasting relationships with high-volume OEMs, relationships that were both lucrative and low risk since the large OEMs guaranteed large sales. Once established in such an arrangement, printer companies fought to defend their relationships with the OEMs, considering them the cornerstone of their business. To protect their core markets, printer companies tried to establish barriers to entry, thereby creating strongholds in the OEM market. Epson was particularly successful at this.
The introduction of laser printers undermined the OEM-based strongholds of dot matrix producers. Unless competitors such as Epson could introduce their own laser printers or comparable high-quality printers, they might lose any advantages they had in bundling the printer with computers. They could also lose their access to OEMs.
Initially, dot matrix printer manufacturers were confident that the technology would hold its share of the market because of the high cost for laser printers (over $3,000) compared with that for dot matrix printers. But shifts in both users and uses of computers (from data processing to increasingly high quality text processing) broadened the market for more expensive, high-quality outputs provided by the laser printer. Further, new graphics programs added to the demand for quality outputs.
With a new set of users and new user demands, customer loyalty to the old dot matrix brands was weaker, making it easier for new competitors to enter the OEM supply business. As customers became increasingly informed about computers and peripherals, differences between laser and dot matrix printers could be emphasized by OEMs, and new players had a better chance of success with OEMs seeking to satisfy their customers.
Some OEMs even entered the printer market. HP’s easy entry into the printer market and that of the many companies that followed it there are an indication of how few barriers to market entry really existed there. Even the laser printer segment was vulnerable to attack. With aggressive competition in price and quality, timing and know-how, and new entrants, PC World reports that Hewlett-Packard’s share of the laser printer market fell from 60 to 46 percent in 1991.23 HP still dominated the market for fifteen- to thirty-page-per-minute laser printers, and none of the other competitors in the industry held more than 10 percent of the market. Its first arrival in the market and continuous innovation gave HP a powerful hold, but the market is wide open to entry by computer companies and other office-equipment manufacturers in the United States and abroad. These companies used their existing strongholds in these areas to develop their markets for printers. Compaq, for example, could sell its new laser printer through its existing computer sales network by bundling computers and printers.
4. Through the Deep-Pockets Lens
OEMs like Hewlett-Packard had deep pockets that could be used to threaten the manufacturers of dot matrix printers. Competitors responded by using several strategies. They have used niching—producing printers just for Apple computers rather than going head-to-head with Hewlett- Packard on IBM compatibles. They have drawn on deep pockets from other businesses to finance their entry into the market—for example, Apple and Compaq have used their deep pockets to take on HP in price wars over printers. Companies have also formed alliances to overcome deep-pocket advantages of HP. For example, Apple and Adobe allied to produce a printer with a better “language” for producing graphics than HP’s proprietary printer language.
5. Implications of the Four Lens Analysis
It is clear that the entry of laser printers had a major impact on dot matrix printers. But when the laser printers were introduced, the implications of the move were not clear, and no framework existed for analyzing those implications.
The Four Lens analysis provided above illustrates that it would be easy to ignore some of the options available to the dot matrix manufacturers. The four lenses suggest that the dot matrix companies must do an analysis of
- how to position dot matrix printers in the price-quality arena given the expected trajectory of matrix printers on price and quality.
- the types of know-how that a dot matrix printer might need. The alternatives are to acquire laser technology or other know-how to improve the speed, quality, and cost of dot matrix printers.
- how to protect strongholds like the OEM-supplier segment of the market.
- the need to build deep pockets through alliances.
Would the entry of laser printers trigger all of these? Perhaps the more savvy companies might have known all of these intuitively. But the Four Lens analysis provides a formal framework that ensures that no stone will be left unturned.
Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.