Hypercompetitive Rivalries – Part 4

This fourth (and final) blog post on “Hypercompetitive Rivalries” by Richard D’Aveni addresses competition against competitors with deep pockets as detailed in D’Aveni’s Chapter 4 (“How Firms Outmaneuver Competitors with Deep Pockets”).[1]  After the previous three escalation ladders have been ascended, firms have only one option which is competing with the extra resources of the company.  Companies with extra resources or deep pockets can withstand price wars and economic losses for longer timeframes, reduce risk with multiple locations, use several strategies simultaneously, recruit the best talent, monitor competitors more effectively, influence government, and have a wider margin of error.  However, competing with deep pockets is not sustainable.  Smaller companies may gain their own deep pockets, and companies with deep pockets in other industries may decide to compete in that industry.  D’Aveni outlines five dynamic strategic interactions to compete with deep pockets:

1)      Drive ‘Em Out – Firms with deep pockets may act more aggressively to drive out competition.  Once driven out, the firm must erect barriers of entry; otherwise, new entrants will continue to try and penetrate the market.

2)      Smaller Competitors Use Courts/Congress to Derail Deep-Pocketed Firm – Small competitors may file lawsuits claiming antitrust or predatory pricing or may apply for government subsidies.  They can also launch a public relations campaign against the company.

3)      Large Firm Thwarts Antitrust Suit – Sometimes lawsuits work but sometimes they are baseless.  Large firms have more resources to fight a lawsuit, and they can operate in another country where those laws aren’t applicable.  Governments may also support the large company, especially if that company operates in an area that affects national security.

4)      Small Firms Neutralize the Advantage of the Deep Pocket – Small companies can develop their own deep pockets through mergers and acquisitions or can form alliances and joint ventures with the large firm or with other firms.  They can focus on a niche market as described in the other escalation ladders and do it so well that the large firm can’t compete effectively against them.

5)      The Rise of a Countervailing Power – When a large company has little competition, it has power over consumers and suppliers.  Those consumers and suppliers can try to gain power and put pressure on the large company by forming consortia or merging.

The bottom line is that deep pockets aren’t sustainable.  Companies must find temporary competitive advantages using all four ladders of escalation in order to compete in this new hypercompetitive world.