The deep-pockets escalation ladder: deep pockets turned inside out

There is no question that deep pockets are a vital strategic weapon. But they do not last forever. As we have just seen, clever competitors can cir­cumvent a deep-pocket advantage. Even the firm with the deepest pockets has limits to how much it can throw its weight around without self- destructing because of customer or supplier reactions.

Like the young man born into old money, the firm with substantial re­sources has great opportunities and a leg up on competitors. But, contrary to the old days, this resource-rich firm does not have a clear path to suc­cess. Street-smart small firms often end up outmaneuvering the deep- pocketed firm and pushing the competitive conflict up the escalation lad­der shown in Figure 4-2. Thus, a deep-pockets advantage isn’t sustainable forever.

1. Hypercompetitive Behavior in the Deep-Pockets Arena

The cycle begins when a firm with deep pockets launches an assault against its smaller competitors in an attempt to drive them out of the in­dustry. The small firms counter by invoking antitrust laws or other forms of government intervention. If these don’t work, small firms are forced to try to outmaneuver the large firm by hostile takeover, escalating their own resource bases, cooperative strategies, or avoidance through niching and other approaches. Thus, the small firms resort to the hypercompetitive techniques discussed in Chapters 1, 2, and 3. By restarting the cycles in the other arenas of competition, they continue to push large competitors toward hypercompetition in a never-ending process of escalation. Mean­while, buyers and suppliers may develop a countervailing force that under­mines the large firm’s advantage. At each step of the cycle, firms move to the next step as a way to gain a temporary advantage. The result of all these interactions is the neutralization or elimination of the deep-pockets advantage and the creation of an environment of perfect competition.

Competition among food retailers has been characterized by the develop­ment of deep pockets and their subsequent erosion or circumvention. Be­fore the 1960s most supermarkets were either single stores or small local chains. Then consolidation and the development of chains upped the ante.

By the mid-1980s it cost $5 million to open a single superstore. To support these larger stores, distribution systems and warehouses had to be main­tained. With the purchase of A&P by the Tengelmann Group in 1980, the most recent deep-pockets race in supermarkets began. Chain Store Age Executive reported in 1988 that A&P had spent over $500 million on acqui­sitions and that American Stores Company, which owned the Star Market, Alpha Beta, Osco Drug, and Jewel companies, attempted to purchase Lucky Stores for $2.5 billion, a move which would have made it the largest supermarket chain in America. But the purchase was blocked as anti­competitive. These and many other reorganizations of the industry, with Kro­ger emerging as the only supermarket chain to fight off the advances of unwanted suitors, led to an uncertain result. The large firms, after all their acquisitions and aggressive competition, are so deeply in debt that they can’t be considered to have deep pockets. Smaller chains have been launching their own price wars.34 See Figure 4-3 for an example of Kroger’s apparent hypercompetitive behavior in this industry.






In an attempt to end this level of hypercompetition, some firms may again try to gain an even-deeper-pocket advantage. Through alliances and mergers, one firm or another will try to get the upper hand, restarting the deep-pocket cycle all over again.

We even see this in the international arena. Before World War I Ger­many was bigger than France, so France allied with Imperial Russia to bal­ance the equation. In response, Germany allied with the Austro-Hungar­ian Empire. Britain was expected to weigh in on the French side (when Belgium was invaded), so Germany also allied with the Ottoman Empire. And so it went until a tangled web of alliances locked nations into a world war. In business too, so it goes. And hypercompetition results, with each cycle ratcheting up the conflict level to new heights.

Although we portray this cycle (in Figure 4-2) as sequential, it may also be parallel. For example, the competition for deep pockets may be thought of as occurring corporate-wide (e.g., as PepsiCo versus Coca-Cola Corpo­ration). Or it may be thought of as occurring at the subsidiary level (e.g., at the soft drink division level in PepsiCo and Coca-Cola Corporation). This is an important distinction because, to make up for the lack of its deep pockets in soft drinks, PepsiCo has diversified outside of soft drinks to increase its size. In soft drinks Coke is much larger than Pepsi, but PepsiCo is now bigger than Coca-Cola Corporation in total size. Thus, Pepsi has neutralized the deep-pocket advantage of Coke in soft drinks by escalating its resources at the corporate-wide level, a trick that many “number twos” use to prevent the “number ones” from bullying them.

In addition, we portray this escalation ladder as a set of steps, each fol­lowing the previous one. However, some companies skip steps along this ladder or end up frozen at one rung. Industries proceed up the ladder at different speeds, depending upon the aggressiveness and quirks of compet­itors in the industry, how long firms can stay beyond the reach of the U.S. government, 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, inventing new hypercompetitive ways to rush up the ladder, restart the cyle, or jump to a new arena before perfect compe­tition is reached.

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

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