Hypercompetitive Rivalries – Part 1

For my last strategy class at Indiana University, we read the book, “Hypercompetitive Rivalries”, by Richard D’Aveni.  The first four chapters describe ladders of escalation of competition and the dynamic strategic interactions that occur at each step.  The fifth chapter describes hypercompetition in more detail while the sixth chapter outlines a New 7-S model for developing competitive strategy.  It was a pleasure to read, and I find myself looking at industries, companies, and competition through the lens of this book.

The first four chapters were my favorites and since they have some meaty information in them, I’ll break this blog post into four separate posts.  Below are my takeaway points and applications for Chapter 1 – “How Firms Outmaneuver Competitors with Cost-Quality Advantages”.[1]

The chapter begins by discussing Michael Porter’s traditional view of cost and quality by reviewing the strategies of Cost Leadership, Differentiation, and Focus.  Unfortunately, these strategies don’t consider what the competition is doing.  They also are more focused on the company’s present state as opposed to what the future holds.

In order to present his ideas appropriately, D’Aveni takes a moment in the chapter to discuss the definition of quality, how it changes over time, and how it is perceived differently by individuals.  Then D’Aveni moves into outlines of seven dynamic strategic interactions that occur in regards to cost and quality.

1)      Price Wars – If there is no differentiation in quality, then the only determinant is cost.  Therefore, price wars can occur, and since no one wins in price wars, competition quickly attempts to escalate to the second dynamic strategic interaction – Quality and Price Positioning

2)      Quality and Price Positioning – In this step, companies attempt to develop within-segment and between-segment positioning based on quality and cost.  For example, Mercedes and Cadillac fight for price and quality in their differentiated position while Stanza and Yugo fought for price and quality in their differentiated position.  Those segments also can compete against each other as one takes a cost leadership role and the other takes a differentiation role.

3)      The Middle Path – Some companies try to take the middle path by being between cost leadership and differentiation but this path is unstable due to the fourth dynamic strategic interaction – Cover All Niches

4)      Cover All Niches – Companies attempt to eliminate the Middle Path by offering a complete line of products.  But this method is difficult because the company’s capabilities for being a cost leader or differentiator are different and can be conflicting.

5)      Outflanking and Niching – Even if a full line of products is possible, there is still room for entry into niches.  But companies must beware… small niche competitors can flex and stretch into other segments, stealing away market share.

6)      The Move Toward Ultimate Value – Then the market moves into the ultimate value, aka perfect competition where companies try to provide high quality with low cost.  But in perfect competition, there are no profits and thus no winners.

7)      Escaping from the Ultimate Value Marketplace by Restarting the Cycle – Since no one wins in perfect competition, companies must restart the cycle.  They can do this by shifting competition to cost leadership or differentiation again, redefining perceived quality, switching from products to service, masscustomizing, extending product lines, or moving into a completely new industry or niche.

In order to escape perfect competition, companies attempt to move up the stages in this escalation ladder faster than competitors.  They may also restart the escalation ladder by redefining quality or moving competition into another arena that I’ll discuss in my next blog post.

In the course, we discussed the Old Rip Van Winkle Distillery who makes high-end aged bourbon that takes around 25 years to make.[2]  Its long lead time and limited supply allow the company to differentiate itself from other bourbon manufacturers and charge more for its high quality and exclusivity.  Thus it has successfully found a niche for those willing to buy – and wait for – high quality aged bourbon.

In addition to this company, I can think of so many examples where these stages occur.  Just look at the cereal aisle or chip aisle in the grocery store.  Every company is trying to differentiate themselves with varieties of flavors, packaging, and ingredients to avoid perfect competition.  Occasionally, Pepsi and Coke will enter into a price war and then quickly use marketing or new product extensions to differentiate themselves again.  Toyota has a full line of products offering the Yaris at $14,000[3] to the Lexus LFA at $375,000[4] which squeezes out the middle path discussed in stage 3.  They also have used niching and product extensions with their Scion, Daihatsu, and Hino Motors brands.[5]  Fashion lines range from Gucci and Armani on the differentiated segment to clothing lines sold at Walmart on the cost leadership segment.  Evidence of cost and quality competition is all around us, and D’Aveni has successfully outlined the stages in this competitive arena.