Why hypercompetition persists

1. The Negative Consequences of Hypercompetition

Although hypercompetition is not a dead end, as perfect competition is, it is such an intense competitive environment that companies might be ex-pected to avoid it as much as they avoid perfect competition. Hypercompetition forces companies to go through the agonizing process of reinventing themselves, developing new advantages, undermining the advantages of their competitors, and increasing the intensity of competi­tion. This is a costly process compared with the more genteel competition of old days.

Consider consumer electronics, where manufacturers were experienc-ing a surge in sales in the fall of 1992 but found it a mixed blessing. The demand surge was a result of a price war in color televisions, where prices have dropped from $799 to as little as $399 for a twenty-seven-inch set.

More sales did not translate into higher profits. As an electronics industry spokesman noted, “It’s profitless prosperity.”9 Similarly, we saw how Coca-Cola and PepsiCo have increased their sales of soft drinks at the same time their margins have continued to shrink.

Intense competition in price and quality leads to price wars. Intense competition on timing and know-how leads to shorter product cycles. In­tense competition on strongholds leads to rapid entry into new markets.

Intense competition on deep pockets leads to shifts in resources through acquisitions, alliances, and other approaches. None of these developments is particularly beneficial from the corporation’s perspective, except per­haps in the short-term. The companies locked in this competition are forced to develop new advantages (for example, moving into stereo televi­sion or HDTV in the consumer electronics market) to restart competition in a new arena or at a higher level on the escalation ladder.

Other results of hypercompetitive behavior can be perverse for many markets. As quality improves, replacement demand starts to decline. Peo­ple drive their cars longer, and the used-car market begins to compete with the new-car market. Disposable razors destroy the market for blades and cartridges. Fluoride treatments by dentists cut down on the number of cav­ities that need to be filled. Cable television offers so much variety that the networks can’t afford to make as many new shows. Consequently, fewer shows will be available for syndication on cable in the future.

In order to fund their hypercompetitive use of high quality-low cost goods, many Japanese industries have cooperated to charge Japanese con­sumers higher prices at home. Moreover, while some Japanese firms try to ensure full employment and security, their employees work longer hours and experience more job-related stress than American workers. Thus they cannot achieve the same standard of living unless they reduce the produc­tivity of their workers.

2. Drivers of Hypercompetition

With these negative effects, why does hypercompetition persist? Why would any company want hypercompetition? Why don’t firms return to the older, more genteel methods of the past? And if no one wants it, why does it happen?

Traditionally, some companies have sought to escape this intense com­petition by implicit collusion or developing sustainable advantages. Com­petitors would implicitly agree not to upset the status quo. For example, competitors may allow one player to be the price leader and follow that company’s lead in pricing because the price leader never uses its deep pockets to crush the higher-priced followers. Or competitors may tacitly divide up the market, each taking one geographic or customer segment and not attacking the other’s stronghold. This is done even though such tacit collusion may often be in the gray areas of antitrust. This environ­ment was relatively stable for many years.

Sustainable advantages mean that the field is uneven but competitors have no way of reshaping the field. The company with the advantage can charge higher prices and enjoy higher profits. The company can avoid di­rect and aggressive competition with other players because they cannot match its advantage. This also leads to a relatively stable environment in which the company with ‘ the advantage retains its leadership.

Neither advantages nor collusion are very effective in holding competi-tion in check. Part I showed how sustainable advantages are eroding more rapidly. Collusion is also a less viable alternative. Not only do U.S. laws prohibit explicit collusion, but even tacit collusion is now difficult or im­possible to maintain in an environment of aggressive competition. New entrants, particularly foreign competitors, who are not part of the collusive structure of the market can shatter it. Or competitors may choose to break this agreement to make a play for market share.

The evolution of global markets and technology has contributed to this erosion of trust. When primary competitors were next-door neighbors, it was much easier to act on friendly terms and tacitly collude. If Pillsbury took share from General Mills, for example, it would be replacing one U.S. job with another U.S. job. If one moved aggressively, they both would suffer, because layoffs would hurt local property values or put relatives out of work. But now Pillsbury is owned by a multinational firm, and the sta-bility of the system has been upset. Similarly, when the Big Three in De-troit ruled the U.S. auto market, they lived in a state of relative peace and prosperity until foreign competitors started shaking things up. The battle now is over jobs and over which nations have a high standard of living and which don’t. The stakes are much higher. With today’s more fluid global markets, there is less incentive to dampen the aggressive impulses of firms.

Some governments even encourage hypercompetitiveness by their corpo­rations as a way to increase their nation’s wealth.

This leads competitors into a “prisoners’ dilemma.” Both sides would be better off if they cooperated, but neither side can trust the other to sustain the agreement. If a player is first to violate a tacit agreement to avoid es-calation up the ladders, that player would be better off than if it waits for its competitor to move first. So both sides have an incentive to compete aggressively if they lack trust of each other. They both pursue their own best interests—doing worse than if they had cooperated—and moving into hypercompetition.

Recently there has been an increase in cooperation through strategic alliances and other partnerships. Although in some areas these can limit the aggressiveness of competition, in most cases alliances merely circum-scribe the turf in which competition will take place. For example, if com­panies cooperate on developing new technology, they will compete on the applications of that technology. This competition will be just as intense.

Or to take another example, two domestic companies may team up to compete in international markets or two global companies may team up to compete against other companies or groups of companies. Here the part­ners have agreed not to compete with one another but to face off against their rivals. This competition can be just as intense as a market in which none of the players is aligned.

Another reason why companies move into hypercompetition despite its negative effects is that these effects are not immediately apparent. The negative effects may initially be hard to see because competition escalates one step at a time, each one leading to more intense competition. While each step seems logical, if not inevitable, the net result is a competitive environment that none of the competitors would consciously choose. Companies pursue temporary advantages because they can make money for a short period before having to move on to the next advantage. At each new level in the escalation of competition, the costs of playing be­come higher and the opportunities for profits decline. But companies don’t see the long-run effect. They see only the next incremental move. Thus the competitors slide down a slippery slope into hypercompetition, not realizing where they are headed in the long run.

Hypercompetition is also encouraged by market forces that benefit from it. Consumers usually win because competitive escalation in the first three arenas improves quality, prices, innovation, product variety, and choice of vendors to do business with. Also, competitors whose primary goals are to build market share or increase employment rather than generate profits, are willing to sacrifice short-term profits to gain dominance in their indus­tries. The entry into automobile and electronics markets by Japanese firms is an example.

Hypercompetition is also encouraged by those whose ideological view of competition is based on competition as a Darwinian struggle that leads to survival of the fittest. Although U.S. strategy has focused on collusion and developing unique advantages to slow competition, true capitalism in its purest form is based on a free-market ideology that extols the virtues of aggressive competition. Many competitors have made millions by acting in a hypercompetitive manner. This view that intense competition is a way of rewarding the best and the brightest or weeding out the weaker competitors has tended to spur support for hypercompetitive behavior from conservatives.

This escalation into hypercompetition is in some ways similar to an arms race between two countries. Even though the players do not want it to escalate, no one knows how to stop it. The conflict tends to build, even though it would be in the interests of both players to operate in a more stable environment.

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

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