PNR Paper

Is Hypercompetition Making the Best of Times Shorter?

Schumpeter’s Ghost: Is Hypercompetition Making the Best of Times Shorter? by Wiggins RR. & Ruefli (2005) — Strategic Management Journal, 26: 887–911

Executive Summary

In this paper, the authors found the following results that support Schumpeter’s economic theory of disequilibrium and the presence of hypercompetition:

  1. The duration of sustained competitive advantage, and superior economic performance have shortened over time.
  2. The phenomenon is not limited to specific industries like high technology but applies to a wide range of sectors.
  3. Managers react to this hyper-competitive by switching from building and sustaining a single advantage over time to a series of short-term advantages that can be concatenated over time.

Schumpeter’s Creative Destruction

Joseph Schumpeter (1883–1950) was an economist and one of the 20th century’s greatest intellectuals. He is best known for the theory of dynamic economic growth known as creative destruction. Creative destruction is defined as the “incessant product and process innovation mechanism by which new production units replace outdated ones.”

Source: Strategically Escaping Price Compression: A Summary of D’Aveni’s Hyper-competition — The Wiglaf Journal

However, the key to Schumpeter’s theory is the role that profit plays in motivating innovation which leads to creative destruction. To paraphrase Schumpeter, “profit is the premium put upon successful innovation. It is temporary by nature and will vanish in the process of competition and adaptation.” Thus, creative destruction should create a disequilibrium in which most businesses are “threatened and put on the defensive as soon as they come into existence.”

Source: Strategically Escaping Price Compression: A Summary of D’Aveni’s Hyper-competition — The Wiglaf Journal

D’Aveni Hypercompetition

Richard D’Aveni defines hypercompetition as “an environment characterized by intense and rapid competitive moves, in which competitors must move quickly to build advantage and erode the advantage of their rivals.” Hypercompetition is present because of the spread of information technology across industry which enables better sources of information, faster communications and higher levels of internal flexibility. Furthermore, managers who observed and learned different strategies in more dynamic industries may import such strategies into other more traditional industries.

Source: Strategically Escaping Price Compression: A Summary of D’Aveni’s Hyper-competition — The Wiglaf Journal

Managers should think about this quote from D’Aveni if they want to strive in this hypercompetitive world: If companies are not seeking a sustainable competitive advantage, what is the goal of strategy in hypercompetitive environments? The primary goal of this new approach to strategy is disruption of the status quo, to seize the initiative through creating a series of temporary advantages.”

Source: Strategically Escaping Price Compression: A Summary of D’Aveni’s Hyper-competition — The Wiglaf Journal

Conclusion

Companies should start to think more seriously about strategies that newer entrants like Snap are executing. As explained in this excellent post by Ben Thompson, Snap do not believe in long-term moats. Rather they are constantly innovating by funding future products and take risks to try to improve their camera platform, even at the risks of sacrificing short-term engagement. The payoff is a series of short-term and temporary products advantages with the goal of capturing high-value users, drive engagement and dramatically increase the average revenue per user. This is what Ben Thompson defined as the “Gingerbread Man strategy”:

Run, run, run as fast as you can.
You’ll never catch me, I’m the gingerbread man.