The extent of hypercompetition

1. Hypercompetition Is Widespread

As illustrated by the quotes at the opening of this chapter, there is growing evidence of intensifying competition in a wide range of industries. Hypercompetition is not limited to high-tech industries such as comput­ers, but has left its mark on more mundane operations, such as diapers and auto parts. It is not just limited to aggressive Japanese competitors. As noted above, the once-monopolist AT&T has plastered the image of Northern Telecom’s CEO on a poster in a Denver plant, with the declara­tion, “Declare business war. This is the enemy.” This approach to compe­tition is every bit as aggressive as Honda’s declaration of war against Yamaha (“We will crush, squash, slaughter Yamaha!”) Even once compla­cent old U.S. companies have converted to tigers to compete in this envi­ronment.

This intense competitive environment is not just in the United States; it is worldwide. In Europe, for example, there are fierce price and product wars in automobiles, computers, consumer electronics, retailing, and other industries.4

There are few industries in the United States and other parts of the world that have escaped hypercompetition. Consider the following exam-ples:

  • Consumer products Customers expect higher quality and lower prices, putting the squeeze on profits. New products are a necessity, even if they are costly to launch and may cut into existing brands. Retailers are also more demanding as this product proliferation places strains on shelf space and distribution.                                                       ;
  • Aerospace Cuts in defense budgets driven by geopolitical changes have reshaped the industry, which is now faced with converting re-sources from government contracts to consumer market. Former So-viet states are also selling top-of-the-line defense equipment at cutthroat prices to generate hard currency for their struggling gov­ernments.
  • Public utilities Once insulated from competition by regulatory pro­tection, they now face new competition. Independent power pro­ducers, for example, are now allowed to enter the market.
  • High technology Rapid changes in technology and consumer de­mands have created pressures on companies to move faster not only on product innovation but also on serving the needs of customers.
  • Telecommunications New technology, changing regulations, in­creased product lines, and globalization are driving intense competi­tion in this industry. With deregulation many new rivals have gained a foothold in all sectors of this industry, creating intense com­petition.
  • Automotive manufacturing Foreign competitors have driven up lev­els of quality while holding down costs. An influx of new competi­tors has filled the market with options. Declining customer loyalty has also heightened competition. American manufacturers are mak­ing big efforts to become competitive again.
  • Financial services Global markets for financial services and shifting U.S. regulations are heating up competition. New entrants into con­sumer credit markets (such as AT&T and GM) have created greater pressures at the same time that a wave of failures and consolidations has demonstrated the fierce nature of competition in this environ­ment.

Perhaps one might expect intense competition in fields such as finan­cial services or telecommunications, but even industries as prosaic as cat foods and children’s toys provide examples of hypercompetitive behavior:

Competition over the $880 million canned cat-food market has heated up into what one magazine dubbed a “cat fight.”5 Although the overall size of the market has remained relatively stable, it has attracted new entrants lured by the growth of gourmet-style cat foods, which have high profit margins. There is a proliferation of new packaging, new flavors, and new segments such as diet cat foods and foods for certain life stages (kittenhood, for ex­ample). Companies are aggressively expanding into Europe and other for­eign markets. Meanwhile, at the low end of the market, Ralston Purina slashed prices on its Purina 100 discount-priced cat food in 1989. Although the brand is only marginally profitable, Marketing & Media described Purina’s strategy, as to “deplete rivals’ war chests so that they will stay out of categories Purina is strong in.” Approximately one third of all cat food was bought on sale in 1988.

The $9 billion U.S. toy industry is also wound tight. In addition to major com­panies such as Hasbro, Incorporated, and Mattel, Incorporated, there are hundreds of smaller competitors. The lure of creating a new hit toy has drawn a steady stream of competitors to the industry. Low entry costs-as little as $25,000 to break into the stuffed toy business, for example-ensure that there will be many new entrants into the industry. Successes such as Pictionary, Trivial Pursuit, and Cabbage Patch Dolls came from entrepre­neurial inventors. Because of the short lifespan of most toys, companies have to be constantly launching new products. Even if a product lasts for more than one season, it is almost certain to be copied by other compa­nies.6

While there are some industries that are less aggressive, it has become increasingly difficult to find industries that are not in hypercompetition. Those that do not currently face aggressive competitors still have to deal with the threat of aggressive competitors, and this is enough to force them to act hypercompetitively. But is this increasing aggressiveness a tempo­rary adjustment or fad before the level of competition returns to the lower, more stable environment of yesteryear?

2. A Passing Phase?

While acknowledging the intensity of competition in current markets, some observers have seen hypercompetitive environments as a passing stage in the evolution of industries. A study of hostile environments, for example, concluded that “hostility does eventually end” even though it often takes five or ten years or more.7 The study contends that industries become less hostile through the consolidation of players or the growth in customer demand.

It is often argued that increasing consolidation makes collusion more likely and decreases hypercompetition. However, Part I, Chapter 5, has shown the continuing intensity of competition between Coca-Cola and Pepsi, despite their dominance in the soft drink market. As long as one player acts hypercompetitively, the others must follow suit. As demon-strated in Part I, the advantage always goes to the player who is one step ahead on the escalation ladders, so companies have an incentive to break any collusive arrangement that might be developed. And hypercompeti­tive behavior is still rewarded, even among a small number of players. As players gain deeper pockets and have more at stake in the market, they often will compete more aggressively. In addition, new aggressive global competitors are emerging from Asia and will soon do so from the rest of the Third World. In an effort to gain share, they are likely to use their low labor costs and other advantages created by their location to disrupt the status quo of the industry. If the players do not remain aggressive, they will be subject to moves from new competitors from the outside, especially as entry barriers fall, as we discussed in Chapter 3 of Part I.                                                                                                                     :

Similarly, demand growth, while it is a welcome sight in any environ­ment, will not in and of itself bring an end to hypercompetitive behavior.

Again, the soft drink industry illustrates this point. Even where demand growth had skyrocketed, the competition remained intense. Growth offers a new market for competitors to battle over and may also invite new com­petitors into the market. Also, hypercompetitive rivals may develop new ways of meeting the growing demand. The growth of demand therefore does not offer an easy escape from hypercompetition.

A culture of hypercompetition is setting in. One characteristic of the older, more genteel competition in the stable markets of yesteryear was that it involved trust. In these environments a stable equilibrium among the players was sought. Once reached, the dominant player had to be trusted to be lenient. The dominant player restrained itself from aggres­siveness, allowing the secondary firms some room for survival as long as they also behaved cooperatively. But once trust is lost, it is very hard to recapture, especially in global markets where xenophobia makes foreign competitors suspect. Moreover, cultural differences between nations make some competitors more aggressive than others. They can be perceived as untrustworthy, not because they aren’t willing to live up to their agree­ments, but because they are not willing to accept the equilibrium solution.

Hypercompetition is, therefore, here to stay. Competitive actions de­signed to escape hypercompetition by moving aggressively up the escala­tion ladders tend only to drive it forward. So companies will have to learn to live with hypercompetition. The methods by which they can do so are outlined in Chapter 7 and then described in more detail in Part III.

3. Perfect Competition Is Just a Pause in the Hypercompetitiye Action

How is hypercompetition different from perfect competition? The eco­nomic state described as perfect competition is also portrayed as a very aggressive and challenging competitive environment, but it is quite differ­ent from the concept of hypercompetition described here. Perfect compe­tition is viewed as a point at which no competitor has an advantage over the other. The players compete aggressively, squeezed by price competi­tion until margins fall to zero.

In perfect competition no player has an advantage over any other player. In hypercompetition, by contrast, players gain advantages that are rapidly eroded. But instead of remaining in a position of no advantage, companies actively create new advantages. In the model of the four arenas of competition in Part I, points of perfect competition would be temporary and unstable. These points appear when no competitor has an advantage in any arena or when companies have reached the top of the four escala­tion ladders at the same time. They have competed away advantages in cost and quality, timing and know-how, strongholds protected by entry barriers, and deep pockets.

Perfect competition is the hope of some economists and the fear of many corporations. It is the hope of economists because it appears to serve customers best by providing value through low prices and high quality. Unfortunately, this is static thinking. Over a long period of time, a lack of profits may actually mean that companies could not sustain future innova­tions to launch the next generation of products, so customers could ulti­mately be deprived of more advanced products in exchange for short-term lower prices.

Perfect competition is the fear of corporations because it is a state in which it is almost impossible to survive. In perfect competition, supply exactly equals demand and prices fall to marginal costs. There are no strongholds because entry is easy. Competitors have nearly equal resources and know-how. The field is level. Because there is no advantage, there are no winners. And without winners, there are few, if any, profits. A large number of players fight over a fixed pie, so no one wins.

This is a very hostile environment. In Competitive Strategy, Michael Porter discusses some of the industry conditions that lead to more intense competitive rivalry and greater risks. “The greater the number of compet­itors, the more equal their relative power, the more standardized their products, the higher their fixed costs and other conditions that tempt them to try to fill capacity, and the slower the industry’s growth, the greater is the likelihood that there will be repeated efforts by firms to pur-sue their own self interests—- Broadly speaking, both offensive and defen­ sive moves are more risky if these conditions favor intense rivalry.”8

Because perfect competition is so hostile, corporations will not allow it to persist. They will restart the cycles of competition in each of the four arenas, shift the locus of competition to a new arena, or invent entirely new competitive weapons and arenas. As long as there is a way to win, as there always is, corporations have an incentive to find it. Perfect competi­tion is more of a fiction than a reality since firms will use hypercompetitive behavior to avoid it. Thus, perfect competition is not the steady-state equilibrium that some would like it to be, and it makes little sense for antitrust laws to try to force firms toward an equilibrium that they cannot accept or thrive in.

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

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