Competition does not always become bloody. Competitors sometimes learn from the signaling process to tacitly divide the turf into different territories. This allows parties to create local monopolies and make profits by avoiding direct competition. But many competitors either don’t consider this or, believing they will win, draw their opponent into battle. They want their home market protected but want access to the opponent’s market. This leads to escalation by forcing the incumbent in the entered market to counterattack.
As already described the two strongholds eventually merge into one, with two competitors slugging it out in a perfectly competitive market without the benefits of entry barriers between them. They use all the hypercompetitive methods based on cost-quality and timing-know-how to avoid perfect competition. The firm that can last the longest in this battle may eventually win out and create dominance over the combined market. If so, the cycle in Figure 3-3 could restart, since this player would logically build entry barriers around this combined marketplace and then look for a new market to invade. As this occurs, firms move from one geo- graphic market to another until they all merge into one. Thus, in an effort to establish dominance over one or more strongholds, firms engage in hypercompetitive behavior that includes moving up the escalation ladder in the stronghold arena faster than competitors or restarting the stronghold creation/invasion cycle in Figure 3-3 when a combined market is created.
FIGURE 3-3
THE CYCLE OF TURF BATTLES AND ENTRY BARRIER COMPETITION
Consider the attacks and counterattacks in the roasted coffee market that moved from city to city, escalating up to a national battle.
Maxwell House was dominant in the East Coast market. Folger’s was strong on the West Coast. After being acquired by Procter & Gamble, Folger’s entered the Cleveland market to increase its eastern penetration. Maxwell countered by attacking in Folger’s stronghold, lowering prices and increasing marketing expenditures in Kansas City. Maxwell also introduced a fighting brand called Horizon, which was similar to Folger’s in taste and packaging. Folger’s then escalated by entering Pittsburgh. Maxwell responded by entering Dallas with the reduced prices. The battle continued until the market was no longer two coastal segments but one national battleground.
Thus, the above patterns of dynamic strategic interactions explain why many industries expand beyond local boundaries to become national and then global in nature. Sometimes these cycles are slowed when the players decide to tacitly cooperate, each with its own protected stronghold. However, this only leads to a temporary respite. Cheating or the arrival of new entrants inevitably ends this period of cooperation. At each step on the ladder, firms continue to move up to the next stage because doing so provides a temporary advantage in this arena of competition based on maintaining control over turf. Failure to seize the initiative and move up cedes the advantage to the other player. Reactive firms, always lagging and responding to the unanticipated moves of competitors, are often the losers in this escalating battle.
1. Hypercompetition When Strongholds Are Built around Industries or Product/Market Segments
Although our discussion of the dynamic strategic interactions focused pri-marily on geographic strongholds, the same patterns can be found in strongholds developed around product or market segments within an industry.
Consider Federal Express. The stronghold of FedEx was in transporting intercity, priority-letter-sized documents. But with the advent of the fax machine, this stronghold was eroded. Letter-sized documents could be faxed easily from city to city in less time and at less cost. FedEx was forced to move from its stronghold into an ill-fated effort in the facsimile market called ZapMail. Later, FedEx moved into bulkier and lower-priority mail that could not be faxed or didn’t need to be. This pushed it into the stronghold of UPS—intercity, nonpriority packages of up to seventy pounds—and the U.S Postal Service—intracity delivery of nonpriority packages and letters. But these attacks brought retaliatory responses by UPS and the postal service, leading to entry into FedEx’s stronghold.
Rather than directly assault UPS’s stronghold, FedEx might have tried to find untapped segments of the UPS market. It could, for example, have concentrated on a specialty such as shipping live animals, blood, or very large packages. But this would have meant entry of markets held by Emery and Purolator. It also could have provided special inventory management services to corporations (which indeed it does today). In any event, UPS, FedEx, and many other players are now engaged in a battle that has escalated to hypercompetitive and sometimes perfectly competitive conditions almost everywhere in the world. The battle is intense at home and abroad. In 1992, after building an expensive hub system in Europe, FedEx pulled out because of slower-than-expected market growth and intense price competition. FedEx continued to serve the region through European partners and retained its leadership in the U.S. market, but only through price wars that shaved more than 4 percent from the company’s yield.44 FedEx employs new technology and new planes to compete more aggressively on cost and quality, but many of these innovations are rapidly duplicated by aggressive competitors. Today, the priority and semipriority package and letter segments have become one integrated market served by the same players on a global basis in many different products throughout the world. Perfect competition is not far behind unless the players continue to be hypercompetitive.
Similarly, the hypercompetitive behaviors in Figure 3-3 may occur across industries. Consider the competition between BIC and Gillette.
BIC revolutionized the disposable ballpoint pen with its mass merchandising skills, but Gillette entered the market for disposable pens, overcoming entry barriers (access to distribution channels, economies of scale in advertising, product differentiation because of brand equity) by using its own considerable skills in mass merchandising. Since this was BIC’s stronghold, it had to respond. So BIC counterattacked by entering Gillette’s stronghold, disposable razors. Today the two industries are merged into one marketplace for small disposable personal items sold in supermarkets, drugstores, discount stores, and stationery stores. Previously each product was purchased through different distribution outlets. Gillette and BIC continue to compete, using several disposal products that were previously made by competitors in separate industries.
These two industries merged because their product characteristics resulted from similar manufacturing technology—molded plastics. Other industries have merged because of such similarities. Once deregulated, several financial services industries merged into one. Insurance, commercial and investment banking, and pension and mutual funds now all overlap into each market because they all share a similar function. They help bring people with money together with people who need money. Thus, they are middlemen for cash. With the rise of health maintenance organizations, the medical industry has seen the merger of private physicians, insurance, and hospitals. In the future several other industries will merge for a similar reason. Consumer electronics, photography, xerography, and computer terminals, among others, all rely upon visual images that can be digitized and stored electronically. When the technology develops further, these diverse industries will become one. The force that will propel them there is the same force that caused the integration of FedEx’s and UPS’s market segments, BIC’s and Gillette’s industries, and the financial services industries. That force is the force that pushes firms to escalate up the ladder described in this chapter—the desire to seek advantage at each rung of the ladder by controlling, protecting, and expanding into new safe havens.
Although we portrayed the escalation ladder (in Figure 3-3) as a sequential process, it may also occur in parallel. Firms may build strongholds in a geographic region, several different regions, a product segment, several product segments, an industry, several industries, or all of these simultaneously. The cycle may proceed differently for each stronghold of a firm. Some cycles skip steps along this ladder. Others may end up frozen at one rung temporarily. Industries proceed up the ladder at different speeds, depending upon the aggressiveness and quirks of competitors in the industry, the types of entry barriers confronted, the trade policies of governments that might influence the industry, and market conditions. Nevertheless, this escalation ladder defines the rungs in a general process that shows how one dynamic strategic interaction leads to the next. But competitors will climb up this ladder in many different ways.
2. The Only Remaining Barrier: Hypercompetitive Behavior
We have seen how the traditional entry barriers have been eroded or circumvented—from economies of scale, switching costs, and other barriers identified by Porter to barriers of government regulations. The strongest barrier in hypercompetitive markets may be the hypercompetitive behavior of the players. In fact, a survey of managers found that a third of the managers who chose not to take active steps to deter entry said the main reason was “existing firms compete so intensely that profit margins are cut so low that entry is extremely unlikely in any case.”45 For example, in the cola market the traditional barriers are marketing skill, bottling and distributor networks, and access to shelf space. But there are many companies that could enter the market. Beer companies such as Anheuser-Busch could take advantage of their existing bottling facilities and distribution networks. Similarly, juice manufacturers could enter the market. A baby food maker or a winemaker could also enter. They all have economies in scale in bottling and advertising, brand image, distribution, and access to shelf space. If it is not these entry barriers, what is keeping these competitors out? Perhaps more than anything else, they are deterred by the vicious hypercompetition in the market. There’s no point in jumping into a snake pit. So perhaps the most significant barrier to entry is now the hyper- competitive behavior of the companies in the market. By making the industry hostile, they make it less attractive to enter.
Since the 1960s the U.S. market for large turbine generators has seemed virtually unassailable. General Electric had created strong barriers to entry in the turbine business due to cost and technology advantages. From 1948 to 1962, GE had a 15 percent cost advantage over Westinghouse and a nearly 30 percent advantage over Allis-Chalmers. Allis-Chalmers was driven out of the market in 1962, demonstrating to would-be entrants the hostility of the market. The only other major player in the market, Westinghouse, was pinned in a less attractive niche in the market.46 This cozy relationship invited foreign entrants with low costs and advanced technology. Some entered during the 1990s by picking up pieces of Allis-Chalmers, which had been virtually driven from the market. Some entrants such as Rolls-Royce and Mitsubishi came in through joint ventures with Westinghouse,47 and others gained a foothold in the replacement/repair market. The market is clearly heating up, and barriers that seemed impenetrable are showing their weaknesses. To paraphrase what J. Richard Stonesifer, Executive Vice- President of GE, said at a 1992 conference in New York City, power generation in the old days was GE versus Westinghouse. Now it’s very different. Now there are Japanese, German, and Swiss companies. It is no longer civil. All competitors are offering high tech, high quality, and high service. These are no longer advantages. There are very few entry barriers, and companies are all competing in each other’s turf. With the market expected to grow rapidly in the years ahead, competition promises to continue to be intense.48
3. Escalation to the Next Arena of Competition
We have seen how these dynamic strategic interactions eventually erode the advantages of strongholds. Once strongholds erode, markets based on product segments and geographic regions merge, and the competitors end up fighting on a global basis. The battle then shifts to who can outlast the other players in this hypercompetitive situation. This often depends on who has the deepest pockets. Since each can attack the other anywhere, the player who can launch the most attacks and sustain the most hits for the longest period of time has an advantage. This deep-pocket advantage is the focus of the next chapter.
Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.