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.
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.
- 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.
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