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Hypercompetition Hypercompetitive Rivalries Richard D’Aveni and Robert Gunther. ValueNet Phase Focus on all the players relevant to your operations PARTS framework. Complexity of Analysis. Hypercompetition Phase Focus on the competitive interactions w.r.t. the four competitive arenas

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ValueNet Phase

Focus on all the players

relevant to your operations

PARTS framework

Complexity of Analysis

Hypercompetition Phase

Focus on the competitive

interactions w.r.t. the four

competitive arenas

C-Q/T-K/S/D framework

The PLC Phase

Focus on the firm and

its strategies at different

stages of the PLC

SWOT framework

Number of Players

limitations of traditional view
Limitations of traditional view

A key limitation of all the above strategies is that it ignores the dynamics of competition in the marketplace. While the issue of foremost importance for the company is the customer, D’Aveni notes that competitive interaction among firms typically goes through six stages


Strategic Competitive Advantage




Profits from a




Traditional View


Firm has already moved to advantage 2


Profits from a

series of






  • DEC in minicomputers. The company posted a 31% average growth rate from 1977 to 1982 by focusing on the minicomputer. The company clung so tenaciously to its advantage in minicomputer technology that it failed to develop a strong position in the emerging markets for minicomputers and PCs. As CEO Ken Olsen commented in 1984 (Businessweek), “We had 6 PCs in-house that we could have launched in the late 70s. But we were selling so many (VAX minis), it would have been immoral to chase a new market.”


  • Four arenas of competition
      • Cost & Quality (C-Q)
      • Timing and know-how (T-K)
      • Strongholds (S)
      • Deep pockets (D)
coke vs pepsi
Coke vs. Pepsi
  • Coke: 1886; Pepsi: 1893
  • 1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better value
  • Ad jingle “twice as much for a nickel” better known in the US than the Star Spangled Banner


Price / Ounce



Price / Ounce


Perceived Quality

Perceived Quality


Coke vs. Pepsi, Contd.....

  • Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate
  • With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Coke’s level giving it a war chest to fuel an aggressive ad campaign
  • Battle shifted from Price to Quality, with Pepsi targeting the youth
  • What followed was the Pepsi Challenge & “Real Thing” Coke ads


First move:




Price / Ounce

Price / Ounce

Youth & Middle

Class Segments

2nd move:

Coke’s Ad war

Perceived Quality

Perceived Quality


Coke vs. Pepsi, Contd.....

  • Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. Pepsi responded with its discounts and by the end of the 80s, 50% of food store sales were on discount
  • Other companies moved into the lower left quadrant of the market. But the two major players forced price down to “ultimate value.”
  • To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market.
  • Attempts to move to next arena via niches in caffeine and sugar substitutes

Coke &




Classic Coke

& Pepsi



Price / Ounce


RC Cola

Price / Ounce



Perceived Quality

Perceived Quality


The Cycle of Price-Quality Competition - Moving

Up the Escalation Ladder

Move to the next Arena

Return to Price Wars

Commodity like Market

Attempt to redefine Quality

Move to Ultimate Value

Niching & Outflanking

Full line Producers

Price-Quality Maneuvers

Price War


Creeping up the line in diapers




#5 Luvs (P&G)


#4 Huggies (Kimberly-Clark)


#3 Kimbies (Kimberly Clark)


#2 Pampers (P&G)

#1 Low quality (leaky) unbranded

& 2 piece diapers

Perceived Quality


The Move Towards Offering Ultimate Value


First Value Line



Next Value Line


Ultimate Value Line








Perceived Quality

the fast food business
The Fast Food Business




Burger King








Perceived Quality


Escalating costs &

risks each cycle

Firm builds a Tech. Resource

Base to create advantage

Then moves into a new market

first: Pioneer

Followers imitate products & overcome switching costs

and brand loyalties

Pioneer throws up impediments to imitation

First mover moves

downstream into

higher value added


Followers overcome impediments

and replicate pioneer’s resource base

First mover uses a Transformation

Strategy & abandons product design/

technology based approach

First mover uses a Leapfrog

Strategy to a new resource base

Builds resources to match followers

manufacturing skills

Cycle of Timing / Know-How


Price War

the first dynamic strategic interaction capturing first mover advantages
The First Dynamic Strategic Interaction:Capturing First Mover Advantages
  • Response lags: Obtaining monopoly rents
  • Economies of scale
  • Reputation, switching costs and loyalty
  • Advertising and channel crowding
  • User-base effects: Network size and user base provide funds for the next leap
  • Producer learning / experience effects
  • Pre-emption of scarce assets (McDonald’s restaurant locations)

First movers need

  • Innovation skills
  • Customer knowledge
  • Market penetration and marketing skills
  • Flexible manufacturing skills
the second dynamic strategic interaction imitation improvement by followers
The Second Dynamic Strategic Interaction:Imitation & Improvement by Followers

Diffusion is rapid when

  • reverse engineering is easy
  • equipment suppliers help transfer key technologies or other business know-how
  • industry observers, trade associations, etc. help transfer know-how
  • personnel move to rival firms frequently
  • leaks of secret information are commonplace and not illegal

To win, an imitator needs 3 things that fall in these regimes:

  • Appropriability - related to the strength of patents and other legal protection and the difficulty for followers to invent around patents
  • Dominant design paradigm - if follower enters before a dominant design emerges, it has a better shot with own design
  • Complementary assets - marketing, manufacturing, and other skills are needed to produce a new product
the second dynamic strategic interaction imitation improvement by followers17
The Second Dynamic Strategic Interaction:Imitation & Improvement by Followers

Follower strategies work best when the first mover is unable to keep up with demand (Adidas & Nike - no fortressing), is not satisfying all segments of consumers or all varieties of needs ( flanking) or has a design flaw that can be corrected (aspirin vs. buffered aspirin)

  • Pure imitation strategy
  • Adding bells & whistles
      • P&G - Crest (basic toothpaste); Lever - CloseUp (+freshen breath and whiten teeth) and Aim (gel + fluoride protection); Beecham - AquaFresh (fights cavities + freshens breath + whitens teeth)
  • Stripping down: Niche airlines
  • Flanking products
  • Reconceptualized products: Mobike from inexpensive transport to vehicle for fun and recreation to a status symbol
  • Risk reduction: warranties, free samples, etc.
  • Compatible products
the third dynamic strategic interaction creating impediments to imitation
The Third Dynamic Strategic Interaction:Creating Impediments to Imitation
  • Deterrent pricing
  • Secret information (Coke formula, SABRE investment costs)
  • Size economies
  • Contractual relationships
  • Threats of retaliation
  • Patents
  • Bundles products (follower does not have access to all components)
  • Switching costs
  • Restrictive (e.g., geographic) licensing (e.g., Sealed Air)


Price Umbrella

$ / Unit

$ / Unit


Followers enter

Price competitive






the fourth dynamic strategic interaction overcoming the impediments
The Fourth Dynamic Strategic Interaction:Overcoming the Impediments
  • Deterrent pricing: No problem if the follower is resource rich; Process innovations
  • Secret information: Reverse engineering, experimentation (private label colas)
  • Size economies: Process innovations; build scale in one geographic area and expand (Japanese auto builders); No problem if growth exceeds first mover’s capacity
  • Contractual relationships: New supplier, vertical integration
  • Threats of retaliation: Some may not be credible if innovator also loses
  • Patents: Increase imitation costs only by 11%
  • Bundled products: Joint ventures, vertical integration
  • Switching costs: Advertising, promotions, etc.; may make market more attractive as follower can reap the benefits once in
the fifth dynamic strategic interaction transformation or leapfrogging
The Fifth Dynamic Strategic Interaction:Transformation or Leapfrogging
  • Transformation strategy
      • Compaq - from a premium priced innovator to a low cost manufacturer
  • Leapfrogging strategy
      • Cyrix introduced the 486 clone in 18 months, compared to the standard 3 to 4 year industry cycle. And produced it at 4% of Intel’s initial investment. For a while also hoped to leapfrog Intel
      • P&G and Ultra thin diapers in Japan
      • McDonald’s leapfrogged over competition by reconceptualizing itself as a restaurant - not just a place for burgers

The Fifth Dynamic Strategic Interaction:Leapfrogging





I: New product


P: Profits from

price umbrella

E: Profit decline

due to new entry

and R&D for

next project


Trinitron TV







the sixth dynamic strategic interaction downstream vertical integration
The Sixth Dynamic Strategic Interaction:Downstream Vertical Integration
  • Sony entered the software side of the entertainment business with Columbia Pictures - but imitated by Matsushita
  • Intel and motherboards
  • Problem is that it ties up resources that could fruitfully be committed to building the company’s core businesses
strongholds and entry barriers
Strongholds and Entry Barriers

Maxwell house was dominant in the East Coast market and Folgers was strong in the West Coast.

After being acquired by P&G, Folgers entered the Cleveland market to increase its eastern penetration.

Maxwell countered by attacking Folgers’ stronghold; lowering prices and increasing ad expenditures in Kansas city. Maxwell also introduced a “fighting brand” called Horizon which was similar to Folgers in taste and in packaging.

Folgers then escalated by entering Pittsburgh.

Maxwell responded by entering Dallas with reduced prices. The battle continued until the market was no longer two coastal segments but one national battleground

strongholds and entry barriers24
Strongholds and Entry Barriers

BIC revolutionized the disposable ballpoint pen with its mass merchandising skills

Gillette entered the market for disposable pens (PaperMate), overcoming entry barriers (access to distribution channels, economies of scale in advertising, brand equity, etc.) by using its own considerable skills in mass merchandising.

So BIC counter- attacked by entering Gillette’s stronghold, disposable razors - giving rise to multi-market competition.

fedex vs ups
FedEx vs. UPS
  • UPS – Dominant in ground based parcel delivery service, such as department store parcels.
  • FedEx grabbed market share of air-borne delivery, i.e., overnight service.
  • Now, UPS is launching an all-out attack to garner a bigger chunk of the lucrative overnight business, where FedEx is king (60%).
  • United States Postal Service - leader in two-day delivery, wants to move into the overnight business.
  • Companies are taking the battle to the others' turf. “They're beginning to diversify further into each others' core markets. Federal (Express) has introduced some time-deferred, ground-based capabilities," Rockel said. “At the same time, UPS has developed (the) express air-based ability of their company."
  • The fevered rush to capture business has also spread to the Internet. Both companies have web sites where consumers can order merchandise and businesses can track shipments. Even more importantly, both UPS and FedEx are investing billions of dollars to build distribution systems in Europe and Asia, betting on those largely untapped markets
management challenges
Management Challenges
  • Do you base your strongholds on geographic areas (Folgers) or product markets (FedEx)? How do competitors define strongholds?
  • Where are your strongholds vulnerable to attack?
  • What barriers do you use to protect your strongholds? What barriers are used by your competitors?
  • How can you respond to an attack from outside?
  • How will you make the move into another player’s stronghold? What competitive response do you anticipate?
  • Who and what are setting the pace of escalation down the strongholds ladder in your industry? Why?

Build entry barrier around market A

to exclude competition

Build entry barrier around market B

to exclude competition

Circumvent barriers and attack

niche in market B

Short Run: Withdraw from niche

or fail to respond

Delayed Response: Barriers to

contain entrant to a segment of B

Entrant breaches barriers

or triggers price war in B


restarts with

entry into a

new market

Incumbent’s stronghold in B weak-

ens as it grows more competitive

Entrant responds in market A or in

market B

Long Run:Incumbent attacks

entrant’s market A to punish

Standoff until one party gains the

upper hand in market A or B

One firm

builds new


Both strongholds erode

or merge into one





If one firm dominates

Other firm


Price War


New attempt to escalate resources

Deep pocket develops

Buyers or

suppliers develop a



Launches attack to

drive out small firms

Hostile takeover

of large firm

Antitrust laws

invoked - work


Small firm escalates

own resource base

Deep pocket advantage is eliminated or neutralized

Large scale

alliances form

with equally

deep pockets

Small firms forced

to outmaneuver

deep pocket


strategy develops

Cycle of Deep



Avoidance strategy

niching, etc.


Kroger becomes

large & powerful

Continued M&A in industry

Large wholesalers

provide economies

to smaller stores

Drops prices

Many takeover attempts

from outside industry

lead to high leverage

Antitrust suits

filed by rivals


Deep pocket advantage is eliminated or neutralized

Kroger wins





Small chains seek

niches. Kroger also

niches geographically

to avoid competition

Cycle of Deep





  • The new 7S framework
  • Superior stakeholder satisfaction
  • Strategic soothsaying
  • Speed
  • Surprise
  • Shifting rules of competition
  • Signaling strategic intent
  • Simultaneous and sequential strategic thrusts

Vision for Disruption

  • Identifying and creating
  • opportunities for temporary
  • advantage via understanding
  • Stakeholder satisfaction
  • Strategic soothsaying
  • to ID new ways to serve current
  • customers better or serve
  • those not being served
  • Tactics for Disruption
  • Seizing the initiative to
  • gain advantage by
  • Shifting the rules
  • Signaling
  • Strategic thrusts
  • with actions that shape,
  • mould or influence
  • the direction or nature of
  • competitors’ responses
  • Capability for Disruption
  • Sustaining the momentum by
  • developing abilities for:
  • Speed
  • Surprise
  • that can be applied across
  • many actions to build
  • a series of temporary
  • advantages



limitations of the hypercompetition perspective
Limitations of the Hypercompetition Perspective
  • Ignores the point that competition and co-operation can co-exist. Examples include the development of Advanced Photo Film, DVD, etc.
  • Sometimes it may be in the best interests of players not to jump to the next level of dynamic competitive interaction but into co-operative competition - coopetition
  • This requires figuring out the situation the firm is facing and then looking at the firm’s valuenet