Introduction to Hypercompetition


While cost and quality, timing and know-how, strongholds, and deep pockets have always played a role in competition, the difference today is the speed and aggressiveness of interaction in these arenas. Part I of the book will examine patterns of interactions in each arena and show how they have taken on an increased ferocity and speed. This creates an envi­ronment of hypercompetition—an environment in which advantages are rapidly created and eroded.

Microsoft is a hypercompetitive firm. It has moved from a dominance in op­erating systems to a strong position in applications programs. Although Business Week reported that Microsoft held 90 percent of the market for personal computer operating systems in 1992, Microsoft sank $100 million into developing the next generation of programming, Windows.1 Then it moved from that success to developing Windows NT, using an operating system that will replace its own MS-DOS. Instead of trying to protect its ad­vantage with DOS, Microsoft is actively trying to erode it. It knows that if it doesn’t, a fast-moving competitor will. Microsoft realizes that its success with MS-DOS, Windows, and many applications programs doesn’t guaran­tee that it will lead in the next. generation of software. Even though its large size can be an advantage, Microsoft is far from invincible. Critical markets remain in the hands of competitors. Business Week reported that Novell still held 70 percent of the networking market in early 1993.2 In just one year, Clarisworks won 77 percent of the $50 million integrated software market for Apple Macintosh computers, which Microsoft had held virtually by itself, ac­cording to Business Week.3 Microsoft CEO Bill Gates commented in a 1993 interview, “This is a hypercompetitive market. Scale is not all positive in this business. Cleverness is the positive in this business. ”4 Success depends not so much on how large the company is but rather on moving aggressively to the next advantage.

The airline industry is another industry that is clearly in hypercompetition. American Airlines is both a cause of the hypercompetition and one of the most successful players in this environment. It has developed a series of temporary advantages that have made it a leader in the industry. Competi­tors duplicated these services fairly quickly, but American was already mov-ing on to its next innovation. Instead of trying to sustain an advantage, Amer­ican focuses on jumping to new advantages.

In May 1981 the airline launched its frequent-flyer program, AAdvantage, creating a trend that rapidly swept across the industry. American’s SABRE reservation system gave it an advantage in keeping track of bonus miles for the program. It took some time, but other carriers developed their own fre­quent flyer programs. No problem, because American had already moved on to extend its frequent-flyer program to cover rental mileage, hotels, and flights on British Airways. In 1987 American—this time following the lead of other airlines—hooked up with Citibank to offer a credit card that also earned frequent-flyer points. It offered a frequent flyer gold card with addi­tional perks for high-mileage travelers. In 1990 American broke new ground again when it began offering other outlets for frequent-flyer miles, including rebates on cars, computers, jewelry, and financial services. For trans-Atlan­tic flights, American now boasts extra-roomy seats, personal video players, lobster fajitas, and award-winning wines. Even so, there is intense price competition in the industry, some of which was driven by American’s an­nouncement of new fare structures in 1992.

As CEO Robert Crandall commented in a 1992 Business Week article, “This business is intensely, vigorously, bitterly, savagely competitive.”5 American’s success depends on moving quickly from one advantage to the next.

American’s leadership in the industry, like all advantages in hyper­competition, is precarious. Smaller, nimble competitors such as Southwest Airlines and Reno Air used their cost advantages to drive down the price of travel to a point where American could not follow. In 1993, after three years of losses in its airline business, Crandall announced that he was cutting routes, retiring planes, and downsizing the work force. American may have been unable to move quickly enough to its next advantage. According to an article in The New York Times, it appeared that there is “the real possibility that Crandall built the wrong kind of airline for the 1990’s: a high-cost carrier that provides plenty of customer service.”6

While Gates and Crandall perceive their moves as geared to serving customers better, creating new advantages, and surviving in bitterly con­tested markets, their competitors and the government have scrutinized and criticized the actions of both companies as being anticompetitive. Microsoft is the target of a several-year probe of anticompetitive behavior by the Federal Trade Commission.7 American has been sued by competi­tors for predatory pricing, and Crandall had to face a Senate committee to explain American’s actions in 1992.8

These are two divergent views of competition. The government’s view that society is best served by limiting aggressive competition may be out­dated; this question is examined in more detail in the appendix to this book. The traditional approach of limiting aggressive competition no longer creates the benefits it was intended to create. In global markets hypercompetition cannot be stopped or slowed by national regulations. The escalation in the four arenas described in Part I is a market phenom­enon that is inevitable and that cannot be artificially stopped by govern­ment regulation without adverse effects on the competitiveness of America’s best companies. If U.S. companies are forced to compete with one hand tied behind their backs, they will have a much harder time suc­ceeding in a world where they face global competitors whose governments support their hypercompetitive behavior.


It is not just fast-moving, high-tech industries, such as computers, or in­dustries shaken by deregulation, such as the airlines, that are facing this aggressive competition. There is evidence that competition is heating up across the board, even in what once seemed the most sedate industries. From software to soft drinks, from microchips to com chips, from packaged goods to package delivery services, there are few industries that have es­caped hypercompetition. As Jack Welch, CEO of General Electric, com­mented in 1992, “It’s going to be brutal. When I said a while back that the 1980s were going to be a white-knuckle decade and the 1990s would be even tougher, I may have understated how hard it’s going to get.”9

There are few industries and companies that have escaped this shift in competitiveness. Competition is escalating in several arenas of competi­tion described in Part I of this book. Once placid firms are now fighting harder on price and quality, timing of entry and creation of new technical and business know-how, invasion and defense of product/market strong­holds, and the use of deep pockets. Even such seemingly comatose indus­tries as hot sauces or such commodity strongholds as U.S. grain production have been jolted awake by the icy waters of hypercompetition.

Competition on price and quality has intensified across a wide range of markets. Industries such as electric lamps, gasoline engines, refrigerators, paper products, and broiler chickens have faced moderate pressure, with prices dropping at annual rates of 0. 7 percent to 2.8 percent. Industries such as home electronics, microwave ovens, integrated circuits, electronic wristwatches, and computers have faced intense price pressures, with prices falling at an annual rate of as much as 29 percent in the early 1980s.10

Powerful brands, once considered a “sustainable” advantage, have been shaken in the winds of hypercompetition as quality has been driven up and price driven down. This increases the volatility of competition. In 1992 brands such as Kraft Cheese slashed prices 8 percent, Frito-Lay cut prices on snack foods by as much as 15 percent, and Marlboro shocked the indus­try and investors by announcing price cuts. Procter & Gamble lowered its diaper prices by 12 percent as a result of increasing pressure from private- label brands.11

Competition on timing and know-how has intensified. Product life cy­cles and design cycles have been compressed, and the pace of technologi­cal innovation has increased. New models of computers that once had product life cycles of five years now tum over every six months; car models that once were introduced every decade are now changed in five years or less. Design time for new models of cars has been cut almost in half, from 5 1/2 years to 3 years. Even an industry that has seen few product launches in more than a century is suddenly heating up.

The hot-sauce industry—in which Mcllhenny’s Tabasco sauce has had a seemingly unshakable 125-year hold on the market—has been cited as an example of a “slow-cycle” industry and a demonstration that “first-mover ad­vantage is highly sustainable” in some industries.12 But a Wall Street Journal article comments in 1993 that “Tabasco’s hot-sauce hegemony is being threatened as never before.”13 Rival companies are developing new tastes that are weakening Mcllhenny’s hold on the market. The Journal reports that Mcllhenny’s Tabasco’s market share slipped from 32.5 percent during a thirteen-week period in 1989 to 27.5 percent during a comparable period in 1992. Private-label rivals nearly doubled their share of the market in the same period. For the year ending November 1992, second-place Red Hot had gained more than 25 percent of the market compared to 28 percent for Tabasco, and smaller rivals were gaining rapidly.

Entry barriers, which once exerted a stabilizing force on competition, have fallen in the face of the rapid changes of an information age, leaving companies exposed to the full force of hypercompetition. Economies of scale, product differentiation, capital investments, switching costs, access to distribution channels, and government policy have all weakened as bar­riers to competitors, as will be discussed in Chapter 3. Even such seemingly unassailable government-sanctioned monopolies as telecommunications, postal services, and electric power generation have been broken by con­sumer pressure, changes in regulations and shifts in technology.

The international grain industry was once dominated by U.S. growers. But aggressive foreign competitors knocked down U.S. grain exports by 24 per­cent from 1981 to 1991. A combination of farm subsidies by foreign govern­ments, and high-tech advances in new high-yield grains and fertilizers has shifted the rules of competition. The traditional U.S. response to the de­cline—dumping surplus and propping up prices—no longer works in this environment. With growing world grain production, U.S. attempts to control the market had little or no effect—except to reduce American grain produc­tion by 7 percent during the 1980s.14

Market definitions are also shifting. Consulting companies, which are helping other organizations to deal with intensifying competition, are facing similar pressures of their own. Consulting firms are developing know-how that moves them into new markets, and innovations in the scope and struc­ture of consulting companies are rapidly imitated. Andersen Consulting’s computer consulting is facing new challenges from hardware manufactur­ers such as IBM, and Unisys has expanded its consulting to include man­agement consulting and business process reengineering to create an all-in- one consulting practice. This in turn has placed greater competitive pressure on McKinsey & Company and Boston Consulting Group. Andersen faces great risks in redefining itself, and if it succeeds, it will only face a more intense competitive battle against a wider set of big, well-established firms. As a Business Week article comments, “About all Andersen can be sure of is that if it does succeed, there will be plenty of competitors fever­ishly drafting one-stop consulting plans of their own.”15

Deep pockets, which were once a powerful source of advantage, have increasingly been susceptible to being outmaneuvered by rivals. Firms are joining together to create alliances to give them the deep pockets to take on more powerful rivals. Many companies have used such alliances to take on larger, more powerful competitors. Small companies have used such alliances to ride into the Fortune 500. They have also used a variety of other legal and competitive tactics to undermine the advantage of larger companies.

Intel grew to dominate the chip-making industry through its alliance with IBM. Eventually however, it became so powerful that IBM joined forces with Apple and Motorola to work on the next generation of chips. This alliance will help the three companies compete against Intel and also against the Japan­ese companies with deep-pocketed alliances based on keiretsus such as NEC. It is one of many shifting alliances among companies that compete against other groups of firms.

Intense competition is also reflected in the competitive rhetoric of cor­porate leaders. S. Robert Levine, CEO of Cabletron—one of the hottest companies developing and selling computer network technology—report­edly ends his pep talks to sales recruits by plunging a combat knife into a beach ball emblazoned with the name of the company’s rival.16 Fortune reports that Mitchell Leibovitz, CEO of the highly successful auto parts store Pep Boys, bums and buries baseball caps bearing his competitors’ cor­porate logos and videotapes the process to show to his employees.17 He also reportedly keeps a collection of snapshots of rival stores that Pep Boys has helped drive out of various locations. Pep Boys more than doubled its sales to over $1.1 billion between 1986 and 1993.

The presence of just one hypercompetitive firm, or even the threat of entry by just one hypercompetitive firm, is enough to drive the industry into hypercompetition. Other competitors are forced to react to the ad­vances of the hypercompetitive firm. As their advantages are eroded, they must react to create new advantages or lose their position in the market. Their responses then force the initial aggressor to build new advantages. This restarts an endless cycle.

As can be seen from the above discussion, hypercompetition requires a fundamental shift in the focus of strategy. Instead of seeking a sustainable advantage, strategy in hypercompetitive environments now focuses on de­veloping a series of temporary advantages. Instead of trying to create sta­bility and equilibrium, the goal of strategy is to disrupt the status quo.

The need for this shift in strategic direction has been recognized by groundbreaking work on “strategic intent” by Hamel and Prahalad and other researchers on strategy . 18 This work has indicated a new focus for strategy, but it has yet to be shaped into a truly dynamic approach to the creation and destruction of traditional advantages. Nor has it developed into a coherent theoretical framework that ties together competencies, ca­pabilities, and tactics. This is the goal of this book.

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

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