All successful companies know that it is very windy at the top. In recent years, however, the wind has increased and quickly reached near-hurricane strength. Retaining a leading position and creating sustainable success appears to be more and more difficult. The length of time that an American company stays on Standard & Poor’s list of the top 500 corporations in the USA has shrunk from 60 years in the 1950s to about 20 years today.1 And the prognosis is that this time will decrease further to only ten to 15 years by 2030. That means that old giants are being beaten and new ones are emerging very quickly. It is no longer a question of trivial competition in a local market, but about hyper competition like nothing we have ever seen.
Few industries are safe. A study of nearly 7,000 companies showed that hyper competition is not only hitting technology companies: it is a general trend that is affecting all industries.2 For many companies, competition from IT-based startups has been particularly severe. In some industries, their new contribution has become completely dominant. Airbnb is now the world’s largest actor in the hotel industry, Amazon is largest in retail sales, Uber is largest in taxis, Netflix is largest in film, Google is largest in advertising and Facebook is largest in media. None of these companies existed 25 years ago.
Being an IT-based startup is, however, no guarantee of success. Hyped companies like the recruiting app Selfiejobs, the food app Waitress (that was supposed to make it easy to order lunch), the app Airdine (like Airbnb but for homemade food) and the streaming service Voddler (like Spotify, but for film) are all examples of firms that have gotten a brutal taste of how difficult it is to succeed, and who all were forced to throw in the towel despite help from heavy investors.3
One explanation for hyper competition is that the competitive advantages of a company are very quickly chipped away.4 Traditionally, companies have been able to depend on the competitive advantages that they have established – such as price, quality and innovation capacity – lasting a long time. Companies have also been able to rely on industry entry barriers or having superior financial resources.
We no longer live in a time of perpetual competitive advantages. We live in a time that requires cunning, agility and courage. | Richard D’Aveni, Bakala Professor of Strategy, Tuck School of Business
Today, rapid technological development in combination with increased globalization result in products and services constantly getting cheaper and better. Massive investments from both companies and nations on research and development also make it more difficult to maintain a head start with respect to knowledge, innovation and new product development. China has long been seen as a low-price country, but it no longer competes only in the manufacture of cheap clothing and gadgets but even in research, product development, business development and design. Chinese universities and colleges graduate about eight million students per year: ten times more than ten years ago.5 In the annual programming competition ICPC, where universities compete against each other, countries like China, Russia, Poland and South Korea top the list.6
One cannot rely on different types of barriers to entry. Globalization has made markets more open and trade barriers have gradually been removed, despite the increasing protectionist tendencies of recent years. Even markets that have traditionally been perceived as domestic have been exposed to international competition. In the Swedish construction industry, for example, foreign entrepreneurs are becoming increasingly common.
The thresholds for starting a company have also become lower. The financial requirements are often limited and cheap labor is available in the global labor market. Advanced offers can be created, packaged and marketed quickly with the help of cloud services, apps, and social media. According to Upfront Ventures, it is roughly a thousand times cheaper to start a technology-based company in the USA today than it was in the year 2000, largely due to open source code and cloud services. When small newcomers arrive on the market they are often dismissed by established market actors that are skeptical and don’t take them seriously. But when the small companies have grown large it can be difficult for the established companies to catch up.
Competition can also come from unexpected places, when established actors seek new opportunities and markets. For those with strong brands, there are large opportunities for finding new growth areas in which to broaden their business. Grocery chains sells insurance, pharmacies offer energy massage and health services, DIY stores offers product installation services and IKEA is entering the hotel industry. Software companies offer education and consultation services more-or-less for free, in order to get customers to pay for long-term licenses. Thus, unexpected competition is emerging from previously unthinkable industries. This industry drift is challenging existing territorial lines and has created a need to redraw market maps.
Drift also occurs in the value chains of many industries with the consequence that middlemen are hard pressed. The more middlemen there are who want a piece of the pie, the more expensive it is for the final customer. When suppliers begin selling online directly to retailers or the final customer, B2B companies are forced to justify their existence. Increased pressure on prices is a natural consequence and results in increased focus on costs. Margins become smaller for many companies, which in turn requires increased professionalism at every stage. For those who fail, being pushed out of the market becomes a reality when value chains collapse.
On the whole, companies are faced with a tough situation when the demands of today greatly exceed those of yesterday. Regardless if one is selling telephone switchboards or consulting services, hyper competition means that the advantages that one manages to achieve must be seen as temporary. The more rapidly the business world changes, the more illusory lasting competitive advantages become. And all the higher the demand becomes to continuously adapt one’s business over time.
1 Anthony S.D, Viguerie S.P., Schwartz E., och Van Landeghem J. (2018). 2018 Corporate Longevity Forecast: Creative Destruction is Accelerating. Downloaded 2018-10-22 from: https://www.innosight.com/insight/creative-destruction/
2 Wiggins R.R. & Reufli T.R. (2005). Schumpeter’s ghost: Is hypercompetition making the best of times shorter? Strategic Management Journal 26 (10). 887–911.
3 Estman, L (2018, 5 June). Här är 7 startups som gått i graven senaste året – trots hajp och superinvesterare. Veckans affärer. Available: https://www.va.se/nyheter/2018/06/05/har-ar-7-startups-som-gick-i-graven-under-det-senaste-aret--trots-hajp-och-superinvesterare/
4 D’Aveni, R.A. (1994), Hyperkonkurrens. Studentlitteratur, Lund.
5 China Daily. (2016). China expects 7.95 million college graduates in 2017. Downloaded 2018-10-22 from: http://www.chinadaily.com.cn/china/2016-12/01/content_27533725.htm
6 ICPC. (2017). ACM-ICPC resultat 2017. Downloaded 2018-10-22 from https://icpc.baylor.edu/worldfinals/results