The nature of competition has changed in a fundamental way

Some Fundamental Shifts in the Realm of Economic Competition: The New Paradoxes

The shift to hypercompetition is so fundamental that it turns some of the intuitive principles of competition on their heads. Success in a hypercompetitive market is based on the following paradoxes, indicating the need for a new approach to strategy:

  1. Firms must destroy their competitive advantages to gain advantage. Many companies have delayed launching new products because of fear of cannibalizing their existing lines. IBM’s hesitation in entering the personal computer market and Coke’s reluctance to use its brand name on a diet soda both led to missed opportunities and falling be­hind on the escalation ladders. These decisions were based on the ideas that the mainframe market would continue to be a source of advantage and that Coke’s advantage in the cola market wouldn’t erode. Of course, these assumptions proved to be faulty. Since every advantage eventually is outmaneuvered, companies are forced to de­stroy their own competitive advantages to create new ones. The chal­lenge is for companies to get the most out of their existing advantages before destroying them to create new ones.
  2. Entry barriers only work if others respect them. Entry barriers aren’t entry barriers unless the players perceive them as such. Many players who want to overcome them can. So firms can deter competitors from en­tering their markets only if the competitors do not want to enter the market, in which case the entry barrier wasn’t really a barrier at all.
  3. A logical approach is to be unpredictable and irrational. To compete effec­tively, companies take a tough stance and demonstrate an irrational­ity that scares competitors away because of fear that the hypercompetitive firm will go all out. Too much consistency and log­ical thinking can make the firm predictable. So the company must at least appear to be irrational. Yet if the company is too irrational, it can be costly in the short run or spark a strong preemptive strike by a com­petitor to eliminate a wild card. So companies have to appear tough and irrational without being crazy.
  4. Traditional long-term planning does not prepare for the long term. Long­term planning that is based on sustaining an advantage is ultimately shortsighted. As we observed in Part I, advantages are eroding more quickly, so true long-term strategy depends on obsoleting the company’s own advantages and undermining those of its competitors. Long-term success depends not on a static, long-term strategy but rather on a dynamic strategy that allows for a series of short-term ad­vantages.
  1. Attacking competitors’ weaknesses can be a mistake. Traditional ap­proaches such as SWOT analysis (strengths, weaknesses, opportuni­ties, threats) may not work in a hypercompetitive environment. Using the company’s strengths against an opponent’s weaknesses may work once or twice, but not over several dynamic strategic interac­tions. This approach becomes predictable, and over a period of inter­actions, the competitor may practice enough to develop its weakness into a strength. For example, if a tennis player consistently serves to his opponent’s weak backhand, the opponent will eventually be forced to strengthen his backhand. Now the first player faces a tougher opponent, with a strong forehand and strong backhand.
  2. Companies have to compete to win, but competing makes winning more difficult. Companies have no choice but to move the level of competi­tion up the escalation ladder or be left behind. Yet each move up the escalation ladder raises the stakes of the game and makes winning more difficult. Advantages become increasingly difficult to sustain.

Because of the difficulty of recognizing these paradoxes, companies often make mistakes by pursuing a strategy of sustaining advantage in an environment in which every advantage is eroded.

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

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