Two competing American approaches to strategy

There are two competing American approaches to competitive strategy. On the one hand is the collusion-based approach. According to this view, companies sustain advantages by using entry barriers and building explicit or implicit agreements with competitors. On the other hand is all-out war. Under this view, companies sustain their leadership through a dynamic movement from one temporary advantage to the next.

1. A Tradition of Avoiding Competition

Cooperation has traditionally been the model of choice. Companies have avoided aggressive head-to-head competition by using cooperative strate­gies to limit competition or divide up the market into safe, uncontested segments. These traditional strategies are designed to build sustainable monopolies or friendly, stable oligopolies. Their goal is to reduce competi­tion and avoid head-to-head competition to win. Companies have used entry barriers to keep out competitors in an industry, thereby reducing the level of competition in the market. They have used differentiation and focus strategies to carve up the market among competitors rather than face off in direct competition. Similarly, firms have sought first-mover strate­gies to move into untapped, uncontested markets.

Under this traditional view of strategy, very aggressive strategies, such as predatory pricing practices, were shunned as head-to-head confronta­tions that caused price wars that hurt the whole industry. Other tactics, such as disrupting the market frequently with major innovations, were also discouraged. Oligopolists found it difficult to maintain stable agreements in which players would live and let live. Disruptions destroyed the status quo and changed the power balance in the industry. Some win and some lose when there is a disruption in the equilibrium sought by strategies de­signed to stabilize markets.

2. A New Reality

Hypercompetition has invalidated the basic assumptions of sustainable monopolies and stable oligopolistic markets that have formed the founda­tion of collusion-based strategies. Today markets are in fact dynamic, and managing the highly dynamic process is of greater strategic importance than creating a static equilibrium that is sustainable for years. The tradi­tional view of good strategy assumed that advantages would be sustainable, so that monopolies would perpetuate themselves for years without govern­ment intervention. It also assumed static markets, so that cooperative oli­gopolistic agreements would remain in effect for long periods of time with­out disruption or dissolution.

3. Cooperation Is Contestable

Cooperation might work in an environment in which there are strong entry barriers because they limit competition to a small number of com­petitors, making it easier to agree to be nice to each other. But, as dis­cussed in Part I Chapter 3, entry barriers are often an illusion, and most markets are contestable. That is, if the current competitors in a market are agreeing to cooperate, there will almost always be an outsider ready to contest the market. It will move in and capture opportunities to create new advantages and profits. If the competition does not come from a do­mestic firm, there will inevitably be a company from a developing country that has the low labor costs, incentives, government support, and re­sources to compete aggressively. Or competitors may move in from an ad­jacent industry (for example, the move by telecommunications companies into computing). Cooperating companies may also cheat on the agree­ment or drop out of it (as discussed in Part II). So even when markets are not under direct attack, all players must anticipate a potential entrant (be­cause it is likely) and stay hypercompetitive.

It would be as if all entrants in a race agreed to run in a pack to prevent the uncomfortable situation in which some win and others lose. Everyone wins as long as all travel at the same speed. If one faster competitor enters the race, however, all the cooperating runners lose. To make the point even more strongly, business races do not have the same rules as a mara­thon. Bystanders cannot enter a marathon with only ten miles left to run. In business, sprinters can jump in at any time, so business races are quite a contest of will and skill. By maintaining an intensely competitive race, runners are forced to stretch themselves and to get out in front of the pack. This process guarantees that they have greater long-term chances of suc­cess in global races such as when they go to the Olympics. So too in busi­ness.

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

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