There is growing evidence that companies are at a loss as to how to deal with hypercompetition. There have been recent waves of mergers followed by waves of divestitures. The failure of effective management strategy has led to the dominance of financial strategies, measuring success by quarterly profits because the strategies that lead to long-term success are so difficult to identify. And as the conclusion to the book will examine, countries may also be responding ineffectively to this competitive environment. National policies and antitrust regulations, designed to encourage perfect competition or eliminate “unfair” practices that are hypercompetitive in nature, may be counterproductive and unnecessary in today’s environment.
Companies make strategic mistakes in responding to hostile environments, including errors due to setting goals for high profits that lead to failure to protect market share.10 Some companies expect to always earn high profits, and when competitors cut into their returns they exit. But industries with high returns inevitably attract new entrants, and this leads to lower margins. So seeking high returns through high prices rather than cutting costs will lead to the very competition most companies want to avoid. Many once high-profit industries that have attracted competitors— including airlines, calculators, and copiers—have become “tomorrow’s sick businesses.”11
As margins are squeezed by intense competition, companies then make the mistake of believing that they can move to a smaller niche where they can enjoy larger margins in a smaller market. But these higher margins draw entrants into this niche. We saw this when Honda and other Japanese firms entered the U.S. motorcycle market, and European motorcycle companies abandoned the low end of the market to migrate upscale to larger bikes. It was not long before the Japanese cycle makers followed the Europeans into this market. This type of strategic retreat will result in no less than the gradual liquidation of the entire U.S. economy as more and more industries become hypercompetitive.
This focus on profit maximization leads to a related common mistake in hypercompetitive environments. Companies are so intent on maximizing their profits that they keep their price above their costs and fail to protect market share. If they don’t aggressively lower costs and price, this process allows low-priced competitors to make inroads into the market. When these competitors have gained sufficient share, prices are driven down anyway.
When incumbents are forced to drop prices, they then make additional mistakes by not keeping up on features and benefits demanded by customers, including product features and quality. In addition, companies try to squeeze additional concessions out of their suppliers or sales force. All of these strategies undermine the company’s competitive position, driving away customers and destroying sales or supply channels. This failure then leads to internal consolidation, as well as mergers of the inefficient firms, as companies seek to cut overhead. This move is designed to reduce margin pressure, but because it merely shifts the capacity of the industry, it does little to relieve the pressure imposed by more efficient hypercompetitive rivals.
One concept that underlies mistakes in hypercompetitive markets is the belief that hostile markets are temporary and will eventually become benign. This can lead to a wait-and-see attitude, whereas successful companies actively work to build new advantages and destroy the advantages of their competitors.
Some of the strategies above can delay the inevitable for a while, but they are not enough. Effective firms become hypercompetitive, shifting to use of a series of short-term advantages to stay ahead. The doomed stick to what worked during the earlier period of genteel competition and discover that they have been outmaneuvered.
1. Lost Advantages
Success is just as likely, and perhaps more likely, to breed failure as it is to lead to further success. Successful companies often try to sustain the advantages that led to their success, becoming fat and lazy, and making themselves susceptible to attack by smaller rivals. Like Coca-Cola, many companies are distracted from their own progress by competitors’ moves. These companies, instead of pursuing their next advantage, try to hold on to their old advantages for too long or merely respond to competitors’ actions. These tactics often prove damaging or deadly in hypercompetitive markets.
Many of the firms held up as examples of “excellent” companies in Tom Peters and Robert Waterman’s 1982 book In Search of Excellence were losing ground just a few years later as many markets shifted into hypercompetition. Whether or not the key characteristics of the excellent companies identified by Peters and Waterman are in fact key ingredients for success (and some of them may be of questionable value in today’s hypercompetitive world), the companies cited were characterized by very successful performance. Yet these successful and respected firms hit trouble spots.
The strategic mistakes made by these and other companies point to some of the weaknesses and blind spots of current strategic approaches in today’s competitive environment. They also illustrate the need for the strategic approaches embodied in the New 7-S’s, which are proposed and discussed in the remainder of this book. Consider some of the weaknesses that caused these companies to stumble:
- Losing touch with customers Hewlett-Packard’s traditional focus on entrepreneurship and decentralization became difficult to manage as it grew bigger. In the early 1980s, it faced troubles in the markets for super-minicomputers, engineering workstations, and personal computers. Business Week commented in 1984 about HP’s decline, “To regain its stride, HP is being forced to abandon attributes of excellence for which it was praised. Its technology-driven, engineering- oriented culture, in which decentralization and innovation were a religion and entrepreneurs were gods, is giving way to a marketing culture and growing centralization.”12 At this point, it appeared that Hewlett-Packard had lost its ability to satisfy customers better than its competitors did in markets such as personal computers, according to Business Week. As will be discussed in Part III, HP may have lost sight of the first of the New 7-S’s—superior stakeholder satisfaction.
- Lack of strategic soothsaying What may be one of the fatal flaws in Peters and Waterman’s eight characteristics of excellent firms is the one that urges companies to “stick to the knitting.” A study of the fourteen “excellent” companies that fell behind found that almost all lacked the ability to adapt to change. They focused on sticking to their past rather than envisioning a new future. They “were inept in adapting to fundamental changes in their markets. Their experiences show that strict adherence to the eight commandments— which do not emphasize reacting to broad economic and business trends—may actually hurt a company.”13 This points to the need for mechanisms to understand and anticipate strategic changes in the marketplace—the second of the New 7-S’s, strategic soothsaying.
- Lack of speed Texas Instruments was slowed by a complicated management structure and a financial orientation. Business Week reports that Tl’s home computer launch was a failure, contributing to a $660 million operating loss and write down in 1982 and its first corporate loss in 1983. Business Week comments that the problems were due, at least in part, to an “overly complex management system—including matrix management and numbers-dominated strategic planning— that tended to smother entrepreneurship. Tl’s confusing reporting structures, for instance, delayed the design and production of key new products like large-scale computer memory chips.”14 It failed to develop the characteristics and structures that allow it to position itself for the third of the New 7-S’s, one that is key for success in hypercompetition—speed.
- Lack of surprise Levi Strauss and Company’s great strength was its production. It focused on pumping out a high volume of jeans with high product quality. Year after year, Levi Strauss did the predictable thing. It made standard blue jeans, and it did so for decades. But the predictable Levi Strauss lost its footing in the early 1980s when competitors outmaneuvered it. New and fashionable apparel arrived on the scene. Marketing became more important than production. Once it lost its spot in the fashion market, Levi’s also lost the opportunity to take advantage of the market for other sportswear. Its earnings declined for three years beginning in 1980, and then after stabilizing for one year, earnings fell by 72 percent in 1984 according to Business Week.15 Because it lacked creativity and flexibility, Levi’s became too predictable. It failed to use the fourth of the New 7-S’s, surprise.
- Inability to shift the rules Sears, Roebuck and Company built its business as a pioneer of catalog sales to rural families, shifting the rules from traditional retailing or traveling peddlers. But after 107 years, Sears discontinued the catalog because other competitors had shifted the rules for selling to rural areas, both through the introduction of Wal-Mart stores and the fast pace of change in mail-order marketing to upscale families. Sears kept its approach essentially the same (not even accepting phone orders until very late in the game) and fell victim to the inevitable changes of competitors because it did not launch any attack to shift the rules back to those that favored Sears. It failed to use the fifth of the New 7-S’s, actions that shift the rules of competition.
- Failure to use signaling effectively and falling victim to simultaneous and sequential strategic thrusts With the rise of the personal computer and networked systems, the computer market in the 1980s offered many new opportunities for initiative, but Digital Equipment Corporation failed to seize these opportunities. As founder and president Kenneth Olsen commented in a 1984 Business Week article, the PC and work station markets are “the kind of high-growth business we are trying to get out of.”16 This may have signaled to competitors that they would not face serious opposition from DEC if they moved into these new markets. Instead of warning them away, DEC’s signal actually invited companies to come in. It didn’t read the signals of its competitors or use signaling to outwit them. It was an open book.
DEC not only signaled that it would stay put, but an even more dangerous mistake may have been that it actually didn’t pursue these new markets aggressively. Instead, it fell victim to attacks on all sides by other competitors. DEC’s top-heavy management structure reportedly slowed the release of new products, according to Business Week.11 The company, sticking to its knitting, looked to the past while other players launched several simultaneous or sequential attacks, outmaneuvering mainframe and minicomputers with not just
one product but several—personal computers, microcomputers, and superminis. DEC was stunned and forced to become reactive. While these other competitors attacked on different fronts with these simultaneous and sequential strategic thrusts, DEC continued to focus on a single approach to the market, minicomputers. It did so even as its core market was eroded by competitors’ innovations. DEC’s slow and predictable strategy worked well from 1977 to 1982, when DEC posted “spectacular” annual earnings growth, according to Business Week.18 But in the hypercompetitive environment of the late 1980s, its profit margins plummeted. DEC failed to use the sixth and seventh of the New 7-S’s, signals and simultaneous and sequential strategic thrusts.
Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.