Hypercompetitive Rivalries – Part 3

This third blog post on “Hypercompetitive Rivalries” by Richard D’Aveni addresses entry barriers and how to tackle them in D’Aveni’s Chapter 3 (“How Firms Outmaneuver Competitors that have Built Strongholds Using Entry Barriers”).[i]  Limiting the number of competitors in a market has several benefits.  Companies have more power over buyers if there is a limit on choices and more power over suppliers if there are a limited number of companies buying particular supplies.  Limited competition also leads to tacit cooperation where all competitors cooperate with each other in their pricing schemes.  For example, if a company lowers its prices, then its competitor will follow suit and lower.  Therefore, the two companies tacitly cooperate by leaving their prices the same (most of the time!)

There are many entry barriers that competitors can erect to discourage new entrants from entering a market: economies of scale, strong brand image, investments in capital equipment and research, switching costs (i.e. making it difficult or costly for consumers to switch to other products), government protections, strong distribution channel, access to raw materials, favorable location, and development of know-how as described in my second blog post on this book.  Though these entry barriers can seem daunting to a potential entrant, entry barriers fall over time, and there are ways around entry barriers.  For example, new entrants are typically smaller so they are more nimble and flexible than incumbent competitors.  This can allow them to exploit competitive advantages quickly.  They can add their own varieties to existing products which give buyers for choices.  They can create their own distribution channels, ask the government for assistance and protections, or make complementary products to the incumbents’.  Acquisitions and alliances can offer synergies and resources to compete more effectively.

The following eight dynamic strategic interactions detail the escalating steps of building barriers and tearing them down:

1)      Building Barriers to Create a Stronghold – Companies develop the barriers listed above.

2)      Launching Forays into a Competitor’s Stronghold – D’Aveni outlines several critical success factors for attempting to enter a stronghold:

• Attack incumbent’s weaknesses first or find a blind spot in its strategy
• Concentrate on a single point of entry or find a niche that’s smallest enough to dominate
• Avoid or delay retaliation of the incumbent by launching when an incumbent can’t or won’t respond
• Withdraw quickly if incumbent retaliates and make sure to protect your home base once it is established

3)      Incumbent’s Short-Run Counterresponses to a Guerilla Attack on its Home Turf – Most incumbents don’t react to forays into their strongholds because they either don’t see the entry as a threat or retaliation is too costly.  However, an incumbent can use its entry barriers and advantages to crush competition, erect new barriers, or change the rules of the game.

4)      Incumbent’s Delayed Reaction – Many incumbents will eventually react – even though that reaction may be delayed.  They will generally try non-price retaliation first but usually have to move to price retaliation.

5)      Overcoming the Barriers – Entrants will use the methods described in the introduction of this blog to overcome barriers.  If they have a successful entry, other entrants will enter, and the incumbent will need to use long-term retaliation methods as described in #6 below to stifle competition from new entrants.

6)      Long-Run Counterresponses to the Attack – Incumbents may strengthen barriers, address their own weakness which allowed for the breach in barriers, or exploit a weakness in the entrant.

7)      Slow Learners and the Incumbent’s Reactions to Entrants Who Don’t Get the Message – Entrant may not react to retaliation because it doesn’t want to look weak or the retaliation wasn’t costly enough for the entrant.  At this point, the incumbent may take a much more aggressive position using stronger techniques to eliminate or reduce competition.

8)      Unstable Standoffs – Companies may directly attack each other’s strongholds, but many factors can break this standoff, including entrant by a third competitor, gains in cost, quality, timing, and know-how as described in my previous blog posts on this topic, and several other situations.

An interesting example of the steps in this chapter is Alice.com which is an e-commerce business that sells consumer goods online at similar prices to Target and Walmart but offers free shipping.  It uses a centralized warehouse and deals directly with manufacturers of the products.[ii]  Only time will tell whether Target or Walmart will directly retaliate against Alice.  Netflix is another example of a new entrant who found an online niche (which avoided initial retaliation) to successfully compete against Blockbuster.  Now Netflix (as the incumbent) competes against new entrant, Redbox.  If you have other examples, please feel free to leave a comment with them.