Richard A.

DAveni

Waking Up to the New Era of Hypercompetition

rom microchips to corn chips, software to soft drinks, and packaged goods to package delivery services, executives have watched the intensity and type of competition in their industries shift during the last few years. Industries have changed from slow moving, stable oligopolies to environments, characterized by intense and rapid competitive moves, in which competitors strike quickly with unexpected, unconventional means of competing. They now confront hypercompetitors who continuously generate new competitive advantages that destroy, make obsolete, or neutralize the industry leaders advantages, leaving the industry in disequilibrium and disarray. The problem of hypercompetitive markets has spread to the airline, pharmaceutical, financial services, health care, consumer electronics, telecommunications, broadcasting, auditing, automotive, and computer industries, among many others. As Jack Welch, chief executive officer of General Electric, said in 1992 in describing future competitive practices, Its going to be brutal.1 The new realities of this era shock even the most seasoned executives. For decades firms sought to sustain a competitive advantage, seen as the holy grail of strategy, but they find this impossible in hypercompetitive environments. The frequent rise of rapid imitators and leapfrog strategies has devastated long-time players. In the past, firms would often try to increase profitability by legally restraining the level of competition in an industry. They avoided price wars, segmented the market to avoid head-to-head competition, and tried to keep
Richard A. DAveni, J.D., Ph.D., C.P.A., is a professor of strategic management at Dartmouth College. He won the A.T. Kearney Award and is a World Economic Forum Fellow. He is a consultant to several Fortune 500 firms and is the author of Hypercompetition (Free Press, 1994). Copyright 1997 by Richard A. DAveni The Washington Quarterly 21:1 pp. 183195. T HE WASHINGTON QUARTERLY
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the number of competitors low by putting up entry barriers around their industries. Yet, many firms have learned they cannot successfully follow such strategies in todays markets. The fundamental forces driving hypercompetition so overwhelm them that no company has the power to stop it.

Shoveling Sand Against the Tide

Hypercompetition is not the result of global or national recessions. It is not the result of global overcapacity in most industries. It will not go away on its own. It cannot be stopped by the wishful thinking of executives longing to return to the good old days. Even industry giants like General Motors, IBM, and Kodak have been unable to stop it. Four well-known, fundamental driving forces have conspired to heat up markets all around the world. First, consumers expect a great deal more value in the products they buy. They are no longer content to get what they pay for. They want more, they want it their way, and they want it now. Even well-recognized and well-respected brand-name products cannot escape the pressure. Marlboro, Kraft, Gerber, Tampax, and many other world-renowned brands have fallen victim to lower-priced, private-label goods of equal quality. Todays world is a buyers market. The second fundamental driving force is technology. Technological revolutions have caused paradigm shifts affecting almost every industry. In computers, for example, the power of new microprocessors has caused the whole industry to deconstruct. Personal computers have the power of yesterdays mainframes, opening the door to a new social order among computer makers. IBM has lost its leadership. Software designers and chip manufacturers captured most of the value IBM once offered, forcing Big Blue to look for a major new strategic direction to recapture its former dominant position. In retail distribution, home shopping networks and the potential for electronic markets over the Internet threaten established retailing outlets. Aggressive upstarts, not inhibited by years of investment in potentially obsolete networks of brokers and seats on the traditional financial exchanges of Wall Street and elsewhere, have the power to revolutionize even the trading of options, commodities, stocks, and bonds. The third force driving hypercompetition is falling entry barriers, both those around nations and those around industries. The General Agreement on Tariffs and Trade (GATT), the integration of countries into regional trading blocs, and the end of communism have caused barriers around nations to fall. McDonalds in Moscow was unthinkable just a few years ago. Now the question is how many franchises the Moscow market can support. Fewer and fewer safe havens remain. Former fortresses no longer remain the
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private domain of domestic firms. Technological revolutions, especially in information processing, have caused industry entry barriers to fall. Competitors now invade the formerly private playgrounds of established firms. Financial services firms from previously different industries invaded each others markets after deregulation. Whether they began in the commercial, retail, or investment banking sector, and even if they started as insurance companies, mutual funds, or consumer credit companies, financial services firms realized they do the same thing: They collect information on people with money and people who need money. Who would have thought just a few years ago that Citibanks main U.S. challengers in credit cards would be the worlds largest telephone company (AT&T) and the worlds largest car company (GM)? Industry boundaries have become almost meaningless. The fact is, tomorrows competitors do not even register on most firms radar screens. With entry barriers so weak, the unconventional player can attack suddenly from outside the industry with unexpected methods, often with devastating effects. omorrows To make matters worse, a fourth driving force underlying hypercompetition is the use competitors do not of deep pockets. Competitors often stage even register on those devastating attacks with the backing of most firms radar Big Money, even Really Big Money. In the good old days, firms competed one-on-one. screens. Today, they compete against keiretsus, groupings of hundreds of firms in the same vertical supply chain that work to aid each other. And, even more troubling, these keiretsus are embedded in informal zaibatsu s, groups of companies from many industries, usually with a large bank at the center, that can cross-subsidize each other, often with government help, when they get into trouble. Although formal zaibatsus were outlawed in Japan after World War II, they still exist there in a more watered-down form. These informal industrial and commercial groups, again centered around a large bank, often have the strategic will and financial resources to lose money indefinitely until a competing Western firm backs off or folds under the pressure. With todays trend toward strategic alliances, even U.S. and European firms have formed their own versions of keiretsus and zaibatsus. Many Western firms also receive government subsidies, just as their Japanese counterparts do. Thus, the battle between firms has escalated to battles between alliances, like the Axis versus the Allies in World War II. These supposedly

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cooperative alliance agreements have not defused hypercompetition. Quite the contrary, they have escalated the war to global proportions. The four forces driving hypercompetition have crashed against Western shores like a tsunami, and firms will have to learn to ride the resulting waves. Trying to stop them is like trying to shovel sand against the tide.

Dynamic Maneuvering in Four Arenas of Competition

With ever-escalating levels of hostility, turbulence, and uncertainty in hypercompetitive markets, many firms fear they cannot turn a profit. They fear that hypercompetition will degenerate to perfect competition, where no one wins. Fortunately, a complete understanding of the mechanisms of hypercompetitionthe process and patterns of strategic maneuveringdispels this notion. Unlike perfect competition, in which firms become so similar that no one has any competitive advantage over anyone else, hypercompetition involves the constant struggle to achieve temporary advantages in four different ways or arenas of competition. A firm can win in hypercompetition by mastering the art of dynamically repositioning itself in these arenas, a difficult but not impossible shift to maneuver. If a firm executes the moves correctly, it can achieve long-term dominance of an industry even though long-term sustainable advantage is impossible. The struggle to achieve a superior position rests on four arenas of competition: the pricequality arena, the know-how/timing arena, the stronghold creation/invasion arena, and the deep pockets arena. The struggle in each arena corresponds to one of the four fundamental driving forces of hypercompetition. Moreover, the struggle involves an attempt to create a series of temporary advantages that add up to long-term dominance, even though no single advantage is sustainable. In the pricequality arena, a struggle exists to offer superior value to customers as a means of coping with the rising tide of consumer expectations. Here, competitors escalate the level of competition by progressing through a series of competitive positions, or rungs on an escalation ladder. They compete aggressively on pricequality combinations, at first providing a range of products from low-priced, low-quality goods to high-priced, high- quality goods. Traditional generic strategieslow-cost (and lowquality) producersoccupy different segments of the market than do differentiators, who sell high-priced, high-quality goods. New entrants attack the upper and lower ends of the market and look for niches between the various pricequality points the established players have staked out. Eventually, someone figures out how to make a high-quality, low-priced
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product and starts a price war. If this continues, the market will deteriorate until perfectly competitive. To escape this outcome, truly hypercompetitive firms seek to redefine quality in a way that allows the entire escalation cycle to start again. Consider the U.S. auto market. In the 1960s, GM provided a full range of cars based on size and engine power, from the Chevrolet (low-priced small car) to the Buick to the Oldsmobile to the Cadillac (high-priced large car). Ford and Chrysler did the same. Foreign competitors attacked the low end (Volkswagen, Honda, and so forth) and the high end (Mercedes Benz, RollsRoyce, and the like). Eventually, aggressive hypercompetitors attacked many niches in between the existing pricequality points. In the 1970s, the definition of a good car switched from biggest and most powerful to fuelefficient, so some foreign players excelled while the traditional U.S. car companies faltered. Just as the U.S. car producers caught ypercompetition up on fuel efficiency, foreign competitors again redefined quality in the 1980s, compethas crashed ing instead on reliability and durability. And against Western again the U.S. car companies faltered. By the shores like a 1990s, however, the tide turned. Aided by the strong yen, U.S. car companies began to retsunami. take share in their home market. They substantially caught up on reliability, but redefined quality to their advantagesafety. Using antilock brakes, air bags, crash tests, and stronger body designs, they caught the foreign manufacturers off-guard. The foreign firms were still perfecting reliability beyond the point of diminishing returns for consumers. In the future, a new definition of quality will emerge: No one knows what, but the company that invents it will seize the initiative from its rivals. Similar jockeying for position takes place in the three other arenas of competition, focusing on competitive maneuvering around the three other types of advantages. In the second arena, firms compete to attain temporary advantages in their know-howtheir technological base or business acumenand in the speed with which they can use this knowledge to create new products, services, and internal processes. Firms escalate the level of competition by imitating each other, learning their competitors secrets, and improving on them. If this process continues, as in the first arena, the market deteriorates into perfect competition; however, truly hypercompetitive players do not allow this to happen. They look for a new knowledge base from which to build and they restart the cycle. Consider how Mercks purchase of Medco changed the critical knowledge base in

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pharmaceuticals. Escalating costs meant drug development would risk becoming prohibitively expensive were the U.S. government to intervene in the health care industry. Merck therefore shifted the important underlying knowledge base of the industry from understanding drug invention and testing to understanding distribution, managed care, and drug efficacy in actual use. In sum, one can see patterns of competitive maneuvering in the know-how arena and, similar to the pricequality arena, an escalation ladder as well. In the third arena, firms compete to establish strongholds around geographic or product markets by creating entry barriers. Yet, clever hypercompetitors use the fundamental driving forces of hypercompetition to breach these barriers and enter markets (as illustrated in the earlier section on driving forces). The battle then escalates as the defender fights to protect its turf and perhaps even invades the attackers stronghold. The battle between U.S. and French tire producers typifies this escalation. When French maker Michelin entered the formerly localized U.S. tire market, it met fierce resistance but refused to back off. Therefore, U.S. firms attacked the French market in return. Now the tire market has no national boundaries. With such limits gone, however, firms seek different boundaries upon which to create strongholds, such as those based on product characteristics. For example, one competitors strength may lie in radial tires, anothers in nonradials. This, of course, simply restarts the cycle of creating, invading, and defending strongholds. In the fourth arena of competition, firms ypercompetition compete for the deepest pockets. Small firms should stimulate try to neutralize the advantage of big firms useconomic growth. ing antitrust laws. If that fails, they may decide to restrict their operations so they become no more than a fly on an elephants backside. Yet despite the flys relative agility and speed, this position can also be vulnerable. So many small firms join alliances. Smaller firms can also redefine their size relative to competitors by diversifying out of the industry, creating even more financial clout. CocaCola once dominated Pepsico in size, but Pepsico expanded into the restaurant industry. Now the two corporations are equal in size, even though Coke has a larger share of the global soft drink market. Now Pepsico has had to adjust its strategy once more. As its fast food restaurant business grew, it required more cash. Instead of providing more financial clout to Pepsicos soda business, it diminished it. Thus today, Pepsico is selling its restaurant operations so it can redeploy its assets to further escalate the global cola war

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against Coke. On a positive note, hypercompetitive behavior should stimulate a great deal of economic growth. The soft drink market demonstrates that, when firms offer consumers more value, new products, and wide product variety available anywhere on the planet, domestic consumption and global markets will expand. Consequently, on the national economic level, hypercompetition has created the near perfect situation in America of growth without inflation.

Managing the Dynamics of Strategic Maneuvering

Of course, I have simplified these characterizations of the moves and countermoves in each arena. Yet, when looked at in their totality, three disturbing lessons emerge: First, no advantage is sustainable. Firms can sustain advantages only as long as their competitors will allow. In hypercompetitive markets, firms respond quickly to their competitors innovations. Moreover, counterattacks have become faster and more frequent. Thus, hypercompetitors must preposition themselves to generate many advantages, not just one. Second, firms can do little to de-escalate the rising tide of competition in most markets. Competitors often meet a firms attempts to signal price increases by enacting price cuts of their own to take advantage of the firms apparent weakness. Hypercompetitors view any attempt to lessen the competitive escalation in any of the four arenas as a lack of strategic intent to win, which opens a window of opportunity the hypercompetitive firm can exploit. Thus, old-model strategies that emphasize reducing competition and the maintaining stable oligopolies are based on the fantasy that we can return to the past. Third, hypercompetitors moves (up the escalation ladders) in each of the arenas seem to form a pattern with repeating cycles. Clearly, the hypercompetitive firms that can race up the escalation ladders faster than others will win, because they force the others to play catch-up: They set the pace. They move first, destroying the markets status quo and forcing their rivals into a reactive mode. A firm can sustain industry dominance or leadership only by launching and obtaining a series of short-term advantages before competitors can catch up. Thus, the winners do not try to constrain competition. They escalate it to ever-higher levels and they do it faster and more frequently than their competitors. This may seem a frightening prospect, but Intel, Microsoft, HewlettPackard, Coca Cola, Procter & Gamble, Circuit City, Lucent Technologies, Southwest Airlines, Caterpillar Tractor, Gillette, and numerous other U.S.
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companies have managed to flourish in this environment. They do so by taking new, dynamic approaches to strategy, by viewing all advantages as temporary, by being flexible, and by creatively disrupting their marketplaces and themselves. They make the most devastating moves in their industriesthe ones that stun their competitors into temporary paralysisbecause they know they can extend an unsustainable advantage only by delaying the competitors counterattack.

Creative Disruption
Hypercompetitive behavior, therefore, involves using the driving forces that cause hypercompetition to disrupt the market. But some forces cause greater disruption than others. Because advantages are only temporary, a firm will want to use the disruptive force of its new advantage(s) to stun its rivals and thus delay their counterattacks. Firms that creatively restart the cycle of competition in each arena or change the arena of competition cause the most disruption. For years, Coke and Pepsi battled for market share in the U.S. cola market, until they changed the arena of competition from redefining price and quality to redefining know-how and improving timing. Using new knowledge about how to create different flavors, they introduced a series of new products, including several uncolas such as lemon-lime drinks, iced tea, and juice-based soda products, thus shifting competition to the second arena. Moreover, at first it took years for Coke o advantage and Pepsi to imitate each other. But by the time Coke added aspartame in 1984, Pepsi is sustainable. took only six weeks to do the same. As the futility of introducing new products set in, the two hypercompetitors shifted to other arenas, seeking global strongholds (like Coke in Western Europe and Pepsi in the former Soviet Union). These strongholds have begun to crumble, though, as Pepsi has launched a second front, attacking Cokes strongholds outside the United States, and Coke has moved aggressively into the future growth markets of China, India, and Russia. In sum, a pattern emerges: These two hypercompetitors will play out each arena until competition becomes almost futile. Then, just before the market becomes perfectly competitive, they shift to a new arena of competition where they can find or create new advantages.

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The New 7 Ss: Antidote for a Deadly Distraction

Some guidelines or strategic principles for developing and selecting among potential disruptive actions exist. In the past, academics and consultants urged firms to use the McKinsey 7 Ss to create fit among a firms style, structure, staffing, systems, skills, superordinate goals, and strategy. Unfortunately, this static approach to strategy means that the greater the fit among these characteristics, the less flexibility a firm has. The organization becomes very good at todays strategy, but not at generating the next advantage. This is deadly in a hypercompetitive environment. Instead, firms need guidelines that provide a vision for generating the next market disruption. The guidelines must build the capabilities and tactics necessary to carry out the vision. The New 7 Ss provide such guidelines.

VISION FOR DISRUPTION

The first two Ss help set a vision for the firms creative disruption of the market. Stakeholder satisfaction (the first S) is the key to winning each dynamic interaction with competitors. Customers, the ultimate arbiters, decide if a move creates a new advantage. Employeesthe frontline workers who know what customers need in todays environmentare important stakeholders as well. Senior managers rarely propose the truly creative ideas about how to serve customers better, for they do not interact with the customers. For a firm to achieve these new ideas, then, management must empower workers to generate new processes, methods, and products for serving the customer. Yet it is not enough to know what todays customers want. Firms must understand the future customer as well. The second S, strategic soothsaying, involves seeking new knowledge for predicting what customers will want in the future. It helps to create self-fulfilling prophecies, because companies use their knowledge to open new windows of opportunity. With customer satisfaction and employee empowerment as goals and with the new knowledge created by strategic soothsaying, firms can undertake four types of disruptive activities: rapid evolutionary competitionserving existing customer needs with frequent, incremental improvements in existing products or services that the customer does not currently expect; revolutionary competitionserving existing customer needs with radically new methods the customer does not currently expect; niche creationcreating new customer needs that the firm can serve with frequent incremental improvements in existing products or services; and
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market creationcreating new customer needs that the firm can serve with radically new methods. When a strategic move satisfies the stakeholders of the future, the hypercompetitor creates the future, especially if it does so by delighting the stakeholders in ways they never anticipated or even knew they wanted.

CAPABILITIES FOR DISRUPTION

But firms need more than a vision of the future. They need organizational capabilities to carry out that vision, and the ability to create the next visiona vision that will look beyond the immediate to the distant future. The next two Ss, capabilities for speed and surprise, are crucial to these efforts. With speed, a firm can take advantage of opportunities and respond to counterattacks by competitors. Speed enhances the firms ability to serve customers and to choose the timing of market entry, whether as a first mover or a fast follower. Surprise enhances the firms ability to stun the competitor, to build a superior position before the competitor can counterattack. It requires organizational flexibility and creativity because firms achieve true surprise only when their move is completely unexpected. A firm must surprise not only the competitor, but also itself; otherwise, a competitor may anticipate the move by looking at what the firm already does well. Thus, surprise requires a firm to leverage off its weakness, not just its core competencies.

TACTICS FOR DISRUPTION

Once a firm has a vision of how to disrupt the marketplace and it has the capabilities to do so constantly, it must select among various tactics that enhance the effectiveness of the disruption. The remaining three Ss identify effective tactics for punching and counterpunching in a dynamic environment: signals, moves that shift the rules of the game, and simultaneous or sequential strategic thrusts. A firm can use signalsverbal announcements of strategic intent to dominate a marketplaceto manipulate its rivals future moves. Product announcements often force competitors to rethink their plans or redesign their products. Intels frequent announcements of new chips, for example, forces competitors to redefine their product offerings in the microprocessor market. Announcements can also create uncertainty that erodes the will of rivals, putting doubt in their minds about the value of entering a market. Shifting the rules is another important tactic. Gilette shifted the rules in the razor market in 1990 by introducing the Sensor. The firm thus transformed the market from products offering convenience, such as electric and
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disposable razors, to a product offering both convenience and a premium quality shave similar to that provided by the sharp, straight razors popular four decades earlier (but without the same risk of facial injury). At different times, watch makers shifted the rules, initially from Swiss mechanical watches to Japanese-made digital and quartz technology. The Swiss later responded by shifting the rules to fashion with Swatch watches. Shifting the rules (especially about how things are made or what the product does for the customer) can stun competitors, at least temporarily. The last S, simultaneous or sequential strategic thrusts, illustrates the final tactic that firms can use to confuse competitors. A sports analogy may best illustrate the power of this tactic. In American football, teams may run with the ball several times in a row, forcing the defense to protect against the run play and opening up an opportunity to pass the ball. Or, during a single play, a football team might order its running backs to run to the left but pass or run the ball to the right, misdirecting the defenses attention. In business, simultaneous or sequential product introductions or geographic market entries can have the same effect of confusing or misdirecting the competition. In sum, the only sustainable advantage lies in the knowledge provided by the New 7 Ss about how to manage dynamic strategic interactions with competitors. Firms will compete to get better at one or many of the New 7 Ss until they no longer provide an advantage. In the meantime, companies must launch multiple unsustainable advantages that neutralize, make obsolete, or invalidate the advantages of industry leaders. To win over the long run, they must also be prepared to use the New 7 Ss to neutralize, make obsolete, or invalidate their own advantages before competitors disrupt them. The new golden rule is Do unto yourself before others do unto you.

Disrupt or Die
Many managers have learned this lesson the hard way, and now the stock market recognizes this too. Once the market punished industries where the competitors acted like Neanderthalsusing aggressive price, product, research and development (R&D), and advertising wars as a means of constantly disrupting each other and renewing themselves. Today it sees the shareholder value created by hypercompetitive firms that can stimulate domestic consumption and international expansion by constantly disrupting the market and escalating rivalry. In a 1996 study of 3,000 firms in 200 U.S. industries, based on National Bureau of Economic Research data, L. G. Thomas of Emory University
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found that the stock market has shifted fundamentally in its valuation of industries.2 During the 1950s to 1970s, the average industry stock prices fell when price, R&D, advertising, or product wars occurred. But in the 1980s and 1990sthe era of growing hypercompetitionthe opposite has occurred. When industries become more rivalrous, the average price increased, even adjusting for the effects of the bull market! The stock market knows a world-class industry when it sees one and it rewards those who have the best chance of surviving the global price, product, R&D, and advertising wars of the twenty-first century. Thomas discovered one other important implication of hypercompetition: Even though the industrys average stock price rises, so does the variance within the industry. Thus, some firms win big and others lose big. Some disrupt well, others are disrupted. Clearly, not everyone is good at disruptive hypercompetition and the new 7 Ss.

Chivalry Is Dead
In summary, the means of competition and levels of conflict have changed. The methods of modern total warfare have advanced beyond the chivalry of seventeenth century European battlefields, where soldiers lined up neatly on open fields and never harmed noncombatants. Likewise, in the industrial battles of the twenty-first century, competition will involve destroying competitors advantages and disrupting markets in ways that surprise rivals with lightning speed and devastating effects. For competitors facing hypercompetitive environments, it will be a tough, brutal world. Firms can not afford to be left behind. As Andrew Grove, chief executive officer of Intel, said in 1993, History ... is filled with the cadavers of companies that lived for awhile and are no longer around. I drive up and down this [Silicon Valley] and see the buildings of companies that are now on their third owner. The previous owners are gone. I have daily reminders of the mortality rate when you live in the fast lane.3 Firms may find it difficult to relinquish the security of less aggressive, defense-oriented strategies like building entry barriers and sustaining advantage, vestiges of a more stable, gentler past. But defensive moats and castle walls will not stop missiles and tanks that use blitzkrieg tactics. We cannot afford to define hypercompetitive, blitzkrieg strategies as strong arm tactics that force the little guy out of the market. Firms must be free to offer the best products at the lowest prices with the most convenience and service possible, even if some firms flounder or fail under the pressures of hypercompetitive markets. The West may have to change its antitrust laws, especially those that prohibit predatory practices to protect
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smaller or weaker firms. Moreover, governments should review many other policiessuch as securities regulations, taxes, product liability laws, and research fundingto see if they have a chilling effect on the aggressiveness, speed, surprise, and flexibility with which corporations can act. Otherwise, Europes and Americas best and strongest hypercompetitors will face distinct disadvantages when competing against their Asian and Latin American counterparts. Given the unstoppable forces of technology, information diffusion, globalization, and rising consumer power, the total war of hypercompetition is inevitable. Thus, we must learn to live with and compete in a hypercompetitive world. The tigers roars have only now begun to awaken the sleeping corporate giants of Europe and the United States. Just look at the slogan Honda used in its motorcycle war with Yamaha: Yamaha o tsubusu! (Annihilate, destroy, and crush Yamaha!). Or consider tractor-maker Komatsus motto: Maru C (Encircle Caterpillar). Clearly, in business, chivalry is dead. Western firms, having begun the process of becoming lean, must now become mean. Welcome to the new era of hypercompetition.

Notes
1. 2. Stratford Sherman, How to Prosper in the Value Decade, Fortune , November 30, 1992, p. 91. L. G. Thomas III, The Two Faces of Competition: Dynamic Resourcefulness and the Hypercompetitive Shift, Organization Science 7, no. 3 (MayJune 1996), pp. 221242. Robert Wrubel, Scorch, Burn and Plunder, Financial World , February 16, 1993, p. 28.

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