Who’s affraid of a big bad wolf? Introduction to Internet competition

Radical innovations create economic growth in the long term while some of the well established firms decline. In Internet world no leadership position is secure or sustainable.

Schumpeter & the Austrian school described the innovation as a process of creative destruction. Innovation is a dynamic market process by which firms engage in a race to get ahead of one another. Creative destruction imply that:

• innovative actions undermine the competitive advantage of established competitors 
• firms commit resources to develop new products, new technologies and distribution channels 
• the success of these innovations provokes competitive responses from existing firms and new entrants 

Competitive Actions

Are the primary mechanism that the firms deploy to establish and protect their advantage, as well as erode the advantage of competitors

Competitive action can be defined as all action that are taken in the pursuit of discovered profit opportunity

As a rule, a leader that carry out more actions will exploit more opportunities and, hence, close the potential for challengers. Firms undertaking more competitive actions have superior performance. Continous innovation may be more important to competitive advantage than protection of assets.

Competition

Internet market is always in disequilibrium. Large firms are swept into a turbulent competitive rivalry that creates winners and losers. We can observe an inevitable destruction of the competitive status quo through new competitive moves by rivals. They can embrace innovation or immitation. Either or, the leaders will lose to more aggresive rivals if they not undertake any aggressive actions of their own.

Hypercompetition

According to D’Aveni hypercompetition results from the dynamics of strategic maneuvering amongst competitors. It can easily be observed in a fast-paced industries. In hypercompetitive environment all advantages are temporary and no industry position is secure. Competitors can easily copy an advantage from the other firms; it simply becomes the cost and risk of doing business.

Firm performance is an outcome of a continous series of competitive actions. Speed allows companies to disrupt the status quo, because it creates new advantages before competitors are able to preempt these moves. Speed is negatively correlated with complexity, thus there is a danger of simplicity. Simple actions become predictable and can be easily immitated.

Successful firms ”hit” competitors from several different directions at once. Market-leader choosing a complacent strategy may lose its position, being vulnerable to more aggressive challengers.

Competitive Dynamics

The interplay of actions and response and their implications on firms’ performance is defined as competitive dynamics

Firm aggressiveness is the outcome of three factors:

• Timing/speed 
• Frequency 
• Range/complexity 

Timing of action

A company that is first to introduce a new product/service, or first to enter a market, may gain competitive advantage. The advantage may be derived from:

• Monopolistic profits 
• Technological leadership 
• Establishment of brand loyalty 
• Establishment of buyers’ switching costs 
• Economies of scale 
• Learning and experience 

The durability of such advantages is largely determined by the speed of imitation by the competitors. According to Lee et al (2000), "the faster a firm introduces a product, relatively to its rivals, the greater is the impact on shareholders’ wealth". However these advantages can be completely eroded by the sum effect of early and late imitations. Ferrier et al (1999) says that the "industry leaders were more likely to maintain their market share by acting fast against challenges". Challengers who act faster than leaders tend to gain market share.

What about the second mover?

In some cases it is actually the second mover or the imitator who has a better performance. The reason for that is the learning from the first mover mistakes and the ability to create a better product/service through reverse engineering or other methods.

It is very important to note that though the theory stresses the importance of quick reaction/imitation, it is undeceive regarding the benefits of being a pioneer.

Number of actions

Firms take actions in the pursuit of profits and untapped market opportunities. Generally, firms taking more actions are expected to exploit more opportunities and have better performance.

According to Ferrier et al (1999) "market-share leaders were more likely to be dethroned by challengers or to lose market share when they are less competitively aggressive". We expect aggressive firms, those carrying out more competitive actions than rivals, to have better performance than their competitors.

Competitive repertoire

To gain advantage, firms should constantly develop new types of actions. Firms carrying out a broader variety of actions are expected to perform better because they will be perceived as more capable and may be less predictable. On the other hand, a simple repertoire of actions may be too predictable and may erode a firm’s competitive position.

As Ferrier et al (1999) has found in his research "market leaders using a narrower set of actions (relatively to their challengers) experienced market share erosion and dethronement".

A new ecology of competition

"For most companies today, the only truly sustainable advantage comes from out-innovating the competition" 

-- James F. Moore

Moore (1993) suggests to perceive a firm as part of a business ecosystem that crosses a variety of industries.

Successful businesses are those that are innovating heavily. Yet this innovation is not created in a vacuum. Firms co-evolve capabilities around an innovation. They work cooperatively and competitively.

Every business ecosystem develops in four distinct stages:

1. Birth of Business Ecosystem 
2. Expansion 
3. Leadership 
4. Self-renewal or death 

How do firms achieve and sustain competitive advantage?

That was and still is the fundamental question of strategic management. It is even more important in the times of rapid technological change.

Dynamic capabilities approach
Teece, Pisano & Shuen (1997) have created a framework that explains how companies can achieve and sustain their competitive advantage. According to this framework - a dynamic capabilities approach - the wealth creation in regimes of rapid technological change depends on improving internal technological, organizational and managerial processes inside the firm. 

Firms can improve that by: 

• identifying new opportunities and organizing effectively and efficiently to embrace them
• exploiting firm specific competences to address changing environments

Knowledge of the firm

According to Kogut and Zander (1992) firms exist because they create conditions under which individuals integrate their specialized knowledge. These conditions allow the mechanisms for both transferring and creating knowledge to work and to create social communities that can transform individual and social expertise into economically useful products and services. What firms do better than markets is sharing and transferring of the knowledge of individuals and groups within an organization.

Why do firms exist? Theory Overview

In the contemporary business literaure you can find 4 main approached to the fundamental question: Why do firms exist? Below, I've put together an overview of main views that put pinpoint different market's and firm's characterisitcs and capabilities.

The Market Power Approach

According to this approach firm should exist in the industries with high overall profitability. Porter's Five Forces Model is the best example of the market power approach. It determines the competitive intensity and therefore attractiveness of a market. It is worth noting that the overall industry attractiveness doesn’t imply that every firm in the industry will have the same returns.