hyper-competition

What is hyper-competition?

Business / By / October 16, 2023

Hyper-competition describes competition in a market that is rapid and dynamic and characterized by unsustainable advantage. In short, technology, changing consumer behaviors, lower entry barriers, and cheap capital might be enabling many companies to get started, thus creating a context of hyper-competition, where it’s hard to establish market dominance.

AspectExplanation
Concept Overview– Hyper-competition is an advanced stage of competition characterized by intense rivalry among firms, where competitors aggressively seek sustainable competitive advantages and continuously challenge one another. It is a concept introduced by management scholars Richard A. D’Aveni and Robert Gunther and signifies a rapid and dynamic form of competition beyond traditional market competition. In hyper-competition, firms constantly innovate, adapt, and disrupt to gain an edge in the market.
Key Characteristics– Hyper-competition is marked by several key characteristics: 1. Short Product Lifecycles: Products or services have very brief lifespans, making innovation and speed to market critical. 2. Frequent Strategic Moves: Firms frequently change strategies, alliances, and tactics in response to market shifts. 3. Continuous Innovation: Ongoing innovation is essential to maintain competitiveness. 4. Market Fragmentation: Markets become fragmented as niche players emerge. 5. Globalization: Competition extends beyond local and national boundaries. 6. Technological Disruption: Rapid technological advances continually reshape industries. 7. Increased M&A Activity: Firms engage in frequent mergers and acquisitions to gain advantages.
Drivers of Hyper-competition– Several factors contribute to the emergence of hyper-competition: 1. Technology: Technological advancements, especially digital technology, enable rapid innovation and global connectivity. 2. Globalization: The ease of global trade and communication expands the competitive landscape. 3. Information Flow: Access to real-time data and information empowers firms to make quick decisions. 4. Customer Expectations: Evolving customer preferences and demands drive firms to adapt swiftly. 5. Regulatory Changes: Changes in regulations can disrupt established market structures. 6. Competitive Aggressiveness: A proactive competitive stance by firms fuels rivalry.
Strategies in Hyper-competition– In a hyper-competitive environment, firms adopt various strategies to thrive: 1. Continuous Innovation: Rapid product development and innovation to stay ahead of competitors. 2. Strategic Alliances: Forming partnerships and alliances to access resources and capabilities. 3. Cost Leadership: Achieving cost efficiencies to maintain competitive pricing. 4. Market Niche Focus: Concentrating on specific customer segments or niches. 5. Agility: The ability to adapt quickly to changing conditions and seize opportunities. 6. Disruptive Technologies: Leveraging emerging technologies to disrupt existing markets. 7. Customer-Centricity: Focusing on delivering exceptional customer experiences.
Challenges and Risks– While hyper-competition offers opportunities, it also poses challenges and risks: 1. Resource Drain: Constant competition can strain resources and lead to burnout. 2. Short-Term Focus: Firms may prioritize short-term gains over long-term sustainability. 3. Market Saturation: Markets can become saturated with products and offerings. 4. Regulatory Issues: Rapid changes may lead to regulatory challenges. 5. Uncertainty: The dynamic nature of hyper-competition introduces uncertainty. 6. Competitive Turbulence: Frequent changes in competitive landscapes can be disruptive.

Understanding hyper-competition

In many industries, there has been a general shift in the nature of competition in recent years.

Once the domain of slow-moving, stable oligopolies, these industries are now comprised of companies who strike quickly and unconventionally as a means of gaining competitive advantage.

Indeed, so-called “hypercompetitors” have upset the status quo by generating a competitive advantage that destroys, neutralizes, or makes obsolete the advantage enjoyed by industry leaders.

This results in unstable and volatile markets where competitive advantage frequently changes hands.

The fundamental driving forces of hyper-competition

The driving forces of hyper-competition are so overwhelming that no business has the power to stop them.

Following is a look at four major drivers of hyper-competitive industries:

Consumers have become accustomed to high-value products

This has created a buyer’s market where consumers expect more for less and in a timely fashion.

Well-known brands such as Tampax, Gerber, and Kraft have fallen victim to low-priced, private-label goods of similar quality.

Technology is causing paradigm shifts in almost every industry

In computing, IBM has lost market leadership to software designers and chip manufactures who now capture most of the value the company used to offer.

The ubiquitous convenience of eCommerce continues to threaten the market share and very existence of traditional retail brands.

Diminishing entry barriers within nations or industries

Before the collapse of the USSR, a McDonald’s restaurant in Moscow was impossible.

Now it is a case of how many fast-food franchises the city can support. Industry entry barriers have also fallen because of advances in information processing.

Financial services are one example where competitors can easily disrupt an established player – regardless of their background or expertise.

After enjoying success in the U.S. credit card market, Citibank now has to contend with a telecommunications company (AT&T) and an automobile company (GM) as its primary competitors.

Money is the last driver of hyper-competition

Disrupters often make their moves backed by Big Money or as a collection of hundreds of different firms in the same supply chain.

Some companies opt to enter into partnerships with companies in a different industry with a large bank at the center.

When profits are down, they simply cross-subsidize each other – often with governmental assistance.

How can businesses manage a hyper-competitive market?

In the previous section, we noted that the driving forces of hyper-competition could not be overcome. 

However, there are several ways that decision-makers can manage a hyper-competitive market and stay competitive for longer:

Think carefully about pricing strategy

What is the appropriate cost for customer acquisition?

What are the downstream implications for low costs?

Businesses who undercut a competitor to gain an edge invariably end up in a price war that isn’t sustainable.

Find and then dominate the most profitable market segments

That is, which are the segments with high revenue per user and low churn rate?

Finding these segments allows the business to double down on profitable opportunities that a competitor will find extremely difficult to penetrate. 

Use capital as a competitive weapon

Capital is an effective differentiator in a market because every product that can be copied will be copied.

Invariably, gaining a competitive advantage comes down to which company can raise the most funds.

Key takeaways

  • Hyper-competition describes competition in a market that is rapid and dynamic. As a result, competitive advantage is unsustainable for any one company.
  • Hyper-competition is driven by four forces that have the power to overwhelm even the largest organizations. They include a consumer preference for high-value products, advancing technology, diminishing entry barriers, and Big Money.
  • Hyper-competition can be managed to some extent. Businesses in competitive markets should consider their pricing strategies and endeavor to identify the most profitable market segments.

Key Highlights

  • Hyper-Competition Overview:
    • Hyper-competition refers to rapid and dynamic competition in a market, where sustaining a competitive advantage becomes challenging.
    • Traditional stable industries have transformed into volatile markets with quick and unconventional moves by hypercompetitors.
  • Driving Forces of Hyper-Competition:
    • Consumer Expectations: Consumers demand high-value products at lower costs, challenging established brands.
    • Technological Paradigm Shifts: Technology disrupts industries, shifting value and leadership. E.g., IBM’s market position changed due to software and chip manufacturers.
    • Lower Entry Barriers: Entry barriers within industries and nations have diminished, enabling new competitors to disrupt established players. Advances in information processing contribute.
    • Financial Influence: Disruptive moves are often backed by significant capital. Companies form partnerships across industries and use capital as a competitive advantage.
  • Managing Hyper-Competitive Markets:
    • Pricing Strategy: Businesses should carefully consider pricing strategies, avoiding unsustainable price wars that harm profitability.
    • Target Profitable Segments: Identify and dominate high-revenue, low-churn market segments to focus on profitable opportunities.
    • Capital as a Weapon: Capital becomes a key differentiator, as replicable products require financial support. Competitive advantage often hinges on fundraising capabilities.

Connected Economic Concepts

Market Economy

market-economy
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

positive-and-normative-economics
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

how-does-inflation-affect-the-economy
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

asymmetric-information
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

autarky
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

demand-side-economics
Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

supply-side-economics
Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

oligopsony
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

paradox-of-thrift
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

circular-flow-model
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

trade-deficit
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

rational-choice-theory
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

conflict-theory
Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

peer-to-peer-economy
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.

Knowledge-Economy

knowledge-economy
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

labor-unions
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

bottom-of-the-pyramid
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Glocalization

glocalization
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

market-fragmentation
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

l-shaped-recovery
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

comparative-advantage
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

easterlin-paradox
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

economies-of-scope
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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