Hypercompetitive Rivalries – Part 2

This second blog post on “Hypercompetitive Rivalries” by Richard D’Aveni describes timing, know-how, and the escalation ladder outlined in Chapter 2 (“How Firms Outmaneuver Competitors with Timing and Know-How”).[1]  Timing relates to the positions of first mover or second mover in a market.  There are advantages and disadvantages to both, and in many cases, being a close second mover is better than being a first mover.  Know-how relates to the knowledge and capabilities that a company develops that allow it to create new products and services.  The following six dynamic strategic interactions detail the escalating steps using these advantages of timing and know-how:

1)      Capturing First Mover Advantages – First movers have the advantage of time to develop economies of scale, reputation, brand loyalty, distribution and supplier networks, advertising space, and know-how in their functional skills of R&D, marketing, manufacturing, and other areas.

2)      Imitation and Improvement by Followers – D’Aveni gives several examples from a study that demonstrate how a close second mover can benefit over a first mover:

• “60 percent of patented successful innovations were imitated within 4 years”[2]
• “imitator’s development costs were 35 percent less than the innovator’s”[3]
• 65 percent of unpatented innovations were copied in a year or less[4]

However, timing is still important for a second mover.  If the second mover enters too soon, it still has the same costs and risks of the first mover.  If it enters too late, it could be too costly to ramp up and compete with the first mover.  D’Aveni then outlines seven strategies for followers: imitating exactly, adding options, removing options (thus lowering the price), creating a different product with the same use, changing the use of the product, branding, or creating compatible products.

3)      Creating Impediments to Imitation – First movers may construct barriers to entry with low or bundled pricing, economies of scale, patents or secrets, contracts with suppliers and distributors (locking out potential entrants), or switching costs (by making it difficult for consumers to switch to other products).

4)      Overcoming the Impediments – Second movers can take several actions to overcome the barriers in #3 above: enter at low price, reverse engineer first mover’s product, improve product, find new distribution and suppliers, integrate vertically, create joint ventures, license product, and use advertising and discounting.

5)      Transformation or Leapfrogging – Companies at this point can develop new capabilities to improve upon products and services, thus competing directly with competitors (i.e. transformation).  Or companies can use new capabilities to create a new product or focus on a new customer base (i.e. leapfrogging).

6)      Downstream Vertical Integration – Companies can provide services along with products or offer higher quality or more product variety.

Just as Chapter 1’s dynamic strategic interactions created an escalation ladder of competition.  These interactions do as well.  To avoid perfect competition, competitors race up these ladders to find temporary competitive advantages.  Steps may be skipped or rearranged, and if a company leapfrogs to a new product, then the cycle starts over.

We see these interactions in the most competitive industries today.  Look at Apple, Google, and Microsoft in the tablet market.  Apple released its first version of the iPad in April of 2012[5] and has released two new versions since then.  Google and Microsoft have followed suit with their Nexus 7 and Surface tablets, respectively.[6]  Red Bull has been the leader in energy drinks,[7] but Monster, Rockstar, and others are constantly introducing new flavors and trying to topple Red Bull’s market leadership.  There are many, many more examples, so feel free to “leave a comment” below!