What is hypercompetition?

The four arenas and escalation ladders that were discussed in Part I define the bases of competition. Cost and quality, timing and know-how, strong­holds, and deep pockets—these have not changed for decades. Companies continue to move up these ladders and, upon reaching the top, restart competition in them or jump to dormant arenas that have not been the locus of rivalry in the past.

In traditional competition, however, this movement up the ladders oc­curs over long periods of time. The time it took for companies to move from one rung to the next could often be measured in decades or even longer. The time between these jumps or disruptions was thus long enough that the environment appeared relatively stable. Movement up the ladders was sometimes slow enough to be imperceptible, giving the impression that it was possible to sustain advantage.

Companies worked to sustain their position by staying at one rung of the ladder for years. IBM’s strength in mainframes, for example, was an advantage it tried to sustain as long as possible. It tried to protect this market for good reason. Even in 1992 mainframes accounted for 42 per­cent of IBM’s revenues and 60 percent of its profits.1 But technology and aggressive competitors have escalated competition in spite of IBM’s focus. And by clinging to mainframes, IBM has not made a strong showing in the growing personal computer market and is still catching up on work­stations.2 As a Hewlett-Packard executive commented on the difficulty of undercutting current advantages to build new ones, “You almost have to kill your children.”3

When competition was not escalating so rapidly, companies could tai­lor their organization around the environment. Then they could look at “internal fit” within the corporation, to ensure that all parts of the com­pany worked together smoothly toward clearly defined goals that re­mained stable for years. This tended to create a rigid structure and strategy that was appropriate for a relatively stable environment.

In this context, huge changes in strategy, such as Pilkington’s develop­ment of float glass technology, were seen as discontinuities. In response, the players would renew themselves with significant but rare structural re­organizations and strategic reorientations. They would then once again begin seeking sustainable advantage at this new level of competition.

As the process of movement up the escalation ladders has accelerated, however, the stable periods between disruptions have become shorter. Now, instead of stable periods punctuated by disruptions, the environ­ment is one of disruptions punctuated by rare stable periods. Sustainable advantages have been shown for what they were all along—temporary; and they are becoming more temporary every day. This is an environment that we have called hypercompetition.

This difference between traditional competition, used when the envi­ronment stayed stable for years, and hypercompetition is illustrated in Fig­ure 6-1. As shown in the first box of each row of the figure, the strategies needed to succeed in traditional stable environments are very different from those needed to succeed in hypercompetition.

In the old days of stable environments, companies created fairly rigid strategies designed to fit the long-term conditions of the environment. The goal of the company’s strategy was to sustain its strategic advantages by working to slow the movement up the four escalation ladders described in Part I. In other words, the company did not disrupt the status quo of the industry and tried to prevent competitors from doing so. Its goal was to sustain its own advantage and establish competitive equilibrium wherein the less dominant firms accepted their secondary status because they were given the opportunity to survive by a leading firm that avoided competing too aggressively. The nonleaders accepted a permanent secondary status in exchange for leniency from the leader. Under this view, competition either stayed on one rung of the escalation ladder or moved up very slowly. It would never move quickly or reach the top of the ladder.

In hypercompetitive environments this equilibrium is impossible to sus­tain. Here, successfirl companies rely on a different combination of strate­gies and actions to achieve the goal of temporary advantage and to destroy the advantages of competitors through constantly disrupting the equilib­rium of the market. Companies in hypercompetitive environments suc­ceed or fail based on their ability to manage the process of moving up the escalation ladders, jumping from advantage to advantage. When compa­nies realize that their advantages are not sustainable, they consistently seek out new advantages, driving competition up the escalation ladders and contributing to hypercompetition.

Hypercompetition may be viewed, therefore, as just a faster version of traditional competition. But that is like saying that a hurricane is a faster version of a strong wind. The acceleration of the cycles up the escalation ladders has created an entirely different environment, one in which being behind often results in bankruptcy and success depends on a new set of strategies. Strategies for surviving in a hurricane are very different from those that are useful in a strong wind.

It is important to note that if one competitor in an industry acts aggres­sively by moving up the escalation ladders quickly, the others must follow.

In this environment failure to keep up is not met with leniency. The leader continues to move up faster and faster, taking no prisoners. More­over, the nonleaders are not satisfied with being number two, even if the leader is lenient and doesn’t try to crush them. All it takes is just one hypercompetitive firm to force the shift from traditional competition to hypercompetition. Even a small firm that enters an industry can some­times drive the entire industry up the ladder. This hypercompetitive firm forces other companies to ante up or be left behind.

Sometimes even the presence of potential aggressive competitors (i.e., ones that might enter the market) can force the players in a market to behave hypercompetitively. As noted in the earlier discussion of the battle between Coca-Cola and PepsiCo (see Part I, Chapter 5), even though the two giants control three quarters of the soft drink industry, they still be­have very competitively—in part because of a tradition and culture of ri­valry but also because of competition from other beverages and the poten­tial for entrance by beer makers, winemakers, or consumer goods companies. Any large firm with a bottling/distribution network is a threat that forces Pepsi and Coke to stay on their toes.

This cycle of aggressive competitive maneuvering is being fueled by changes in the environment. Consider the changes in technology. Hypercompetitive behavior by computer companies has driven a succes­sion of new products and rapid innovations. These innovations, in tum, have increased the speed of competition by easing communication and increasing flexibility with new forms of information-processing technol­ogy. These changes in the environment have made it possible to increase the speed and aggressiveness of competition in many industries. In sum­mary:

  • Hypercompetition is an environment characterized by intense and rapid competitive moves, in which competitors must move quickly to build advantages and erode the advantages of their rivals. This speeds up the dynamic strategic interactions among competitors. Hypercompetitive behavior is the process of continuously generating new competitive advantages and destroying, obsoleting, or neutral­izing the opponent’s competitive advantage, thereby creating dis­equilibrium, destroying perfect competition, and disrupting the sta­tus quo of the marketplace. This is done by moving up the escalation ladders faster than competitors, restarting the cycles, or jumping to new arenas.
  • Perfect competition, in contrast, is a situation in which no competitor has an advantage in any of the four arenas. Despite the common be­lief that this is an end point, this is a transitional and unstable point of competition as we’ll see below.

Note the irony in these different views of competition. There is no op­portunity to compete ( in the sense of hypercompetition) in a perfectly competitive market. Perfect competition, by definition, excludes hypercompetitive behavior.

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

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