Hypercompetitive behavior in the cost-quality arena

Hypercompetitive firms attempt to (1) stay ahead of competitors who are attempting to catch up to or overtake them on the escalation ladder and (2) slow down competitors’ efforts to overtake them without slowing down their own advancement up the escalation ladders. These hypercompetitive actions are efforts to avoid perfect competition (where no one has an advantage) by rushing up the escalation ladder in Figure 1-13 or restarting it. Firms failing to be hypercompetitive are always play­ing catch-up so they never define the means of competition in their indus­try.



1. Hypercompetition in the Price and Quality Arena of Two Industries: Watches and Coffeemakers

Hypercompetitive behavior in the price-quality arena seems to be acceler­ating in many industries. From its sleepy roots in the mountains of Swit­zerland, for example, the watch industry has been shaken awake by hypercompetition. The center of watchmaking shifted from Switzerland to Japan in the early 1970s.12 The Japanese producers, capitalizing on a low-paid workforce as well as the better quality of quartz oscillator tech­nology, pursued a low-cost, high-quality strategy. But by the late 1970s Eastern watchmakers had driven up quality, offering low-cost, high- quality watches as well.

Even so, the low-cost, high-quality strategy of the Japanese began to cut into the Swiss market. In response two failing Swiss firms joined to form SMH, whose goal was to regain lost market share and “revitalize the Swiss watch industry.”13 The Swiss company created a manufacturing innova­tion of integrating the quartz movement into a plastic case. This process innovation gave the Swiss a cost advantage over the Japanese. It was used to introduce Swatch watches with an aggressive media campaign, a new type of quality based on fashion, and new distribution channels. Swatch sold fifty million watches in its first five years, switching the center of watchmaking back to Switzerland.

The watch industry remains segmented into premium and differentia­tors and low-cost watches. However, high-end players continue to fight based on reputation, and low-end players compete on both cost and qual­ity. The introduction of Swatch shifted the low end of the curve to lower cost and higher quality. But there continues to be a broad spectrum of competition. One serious obstacle to the move toward a single ultimate value point is that in the watch industry, as in other fashion industries, price is a signal of quality. This factor tends to slow the industry’s move­ment toward a single ultimate value point because a high-quality, low- priced product will still suffer from a lower perceived quality because of its reduced price tag.

The dynamic strategic interactions among the players in the coffeema- ker industry appear to be moving at an even faster pace than in the watch industry. Companies have staked out positions along a full line of products from basic four-cup machines to combined coffeemakers and expresso ma­chines. Companies such as Braun and Krups have staked out the high end of the industry, while others such as Mr. Coffee have taken the low end. Overall, however, the industry has been driven toward the ultimate value point. Because of the high level of variety in the industry, there continues to be competition along a broad spectrum. Coffee-machine buyers are strongly influenced by evaluators such as Consumer Reports, keeping all players on their toes as they compete to produce the highest-quality prod­uct ( usually defined as the largest number of features) for the lowest price. Constantly shifting the rules by defining new levels of quality ( through introducing new features) has become a key strategy in distinguishing competing products. Companies have added clocks, developed iced-tea makers, combined coffee grinders and coffeemakers, and brought out home expresso machines. But because these features are so easily imitated, the competition quickly reverts to price wars. A wide variety of filter shapes can provide opportunities for further sales to existing customers, but many generic brands also make filters. The entire industry faces threats from the outside that include instant coffee and microwave coffee bags. Some companies have found ways to jump out of price competition, at least for some of their sales. Melitta, for example, has found a new dis­tribution channel by offering a custom coffeemaker as a premium for join­ing a Swedish coffee club.

Like many industries in today’s competitive world, product-based ad­vantages are fleeting in watches and coffeemakers. However, hyper­competitive firms continue to maneuver for temporary advantage by mov­ing up the price-quality ladder faster than competitors and by restarting the cycle with new ways to redefine quality or find lower costs. In each of these industries, competitors pass through periods of price wars (perfect competition) for short periods of time but always find new ways to break out of that state. The hypercompetitive firms are the ones who set the price-quality pace that others must follow.

So hypercompetition occurs because it must. Each firm must follow the price-quality leader to survive, and the leader cannot afford to fall behind out of fear of losing its edge. On occasion, a hypercompetitive firm over­takes another on its way up the ladder, and competitors alternate playing leader. However, the truly hypercompetitive firms find ways to maintain their lead through a series of actions that give temporary advantage until others catch up. The alternative is to let others catch up, ending any form of advantage and resulting in a profitless, perfectly competitive industry.

2. Escalation to the Next Arena

Ultimately, as we have shown, this series of interactions drives the indus­try toward perfect competition. In a perfectly competitive environment, all companies offer a similar set of products at each price-quality point so that product features and price are no longer an advantage. To escape this arena of fierce competition on price and quality, companies try to escape by using innovative strategies to enter new markets that are not yet en­gaged in the price-quality maneuvering discussed in this chapter. Thus, hypercompetitive firms must engineer an escape from perfect competition by (1) moving up the escalation ladder in Figure 1-13 faster than compet­itors, so that others cannot catch up with their leading quality or price; (2) restarting the escalation ladder in Figure 1-13 by redefining quality in a way that others do not compete on yet; or (3) by moving to competition in the second arena: timing and know-how. It is in this new arena that they interact by selecting the timing of their entry into new markets with new products based on using the firm’s technological and marketing know-how to innovate or imitate. We will consider this arena of competi­tion and the second escalation ladder in the next chapter.

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

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