Coke vs Pepsi-1

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HypercompetitionHypercompetitive RivalriesRichard DAveni and Robert Gunther

Complexity of Analysis

ValueNet Phase Focus on all the players relevant to your operations PARTS framework Hypercompetition Phase Focus on the competitive interactions w.r.t. the four competitive arenas C-Q/T-K/S/D framework The PLC Phase

Focus on the firm and its strategies at different stages of the PLC SWOT framework Number of Players

Limitations of traditional viewA key limitation of all the above strategies is that it ignores the dynamics of competition in the marketplace. While the issue of foremost importance for the company is the customer, DAveni notes that competitive interaction among firms typically goes through six stages

Strategic Competitive Advantage

Exploitation Profits from a sustained competitive advantage Launch Counterattack

Traditional View

Time Firm has already moved to advantage 2 Profits from a series of actions Exploitation Counterattack

HypercompetitionTime

Launch

DEC DEC in minicomputers. The company posted a 31% average growth rate from 1977 to 1982 by focusing on the minicomputer. The company clung so tenaciously to its advantage in minicomputer technology that it failed to develop a strong position in the emerging markets for minicomputers and PCs. As CEO Ken Olsen commented in 1984 (Businessweek), We had 6 PCs in-house that we could have launched in the late 70s. But we were selling so many (VAX minis), it would have been immoral to chase a new market.

HypercompetitionFour arenas of competition Cost & Quality (C-Q) Timing and know-how (T-K) Strongholds (S) Deep pockets (D)

Coke vs. Pepsi Coke: 1886; Pepsi: 1893 1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better value Ad jingle twice as much for a nickel better known in the US than the Star Spangled Banner

Price / Ounce

Pepsi

Coke

Price / Ounce

Coke Pepsi

Perceived Quality

Perceived Quality

Coke vs. Pepsi, Contd.....x

x

x x

Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Cokes level giving it a war chest to fuel an aggressive ad campaign Battle shifted from Price to Quality, with Pepsi targeting the youth What followed was the Pepsi Challenge & Real Thing Coke ads

Price / Ounce

Youth & Middle Class Segments Perceived Quality

Price / Ounce

Pepsi

Coke

First move: Pepsi Challenge 2nd move: Cokes Ad war Perceived Quality

Coke vs. Pepsi, Contd.....x

x

x

x

Perceived Quality

Price / Ounce

Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. Pepsi responded with its discounts and by the end of the 80s, 50% of food store sales were on discount Other companies moved into the lower left quadrant of the market. But the two major players forced price down to ultimate value. To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market. Attempts to move to next arena via niches in caffeine and sugar substitutes Coke & Pepsi Price NewCoke Classic Coke Spiral & Pepsi Generics Actual RC Cola NewCoke Intended

Price / Ounce

Perceived Quality

The Cycle of Price-Quality Competition - Moving Up the Escalation LadderMove to the next Arena Return to Price Wars Commodity like Market Attempt to redefine Quality Move to Ultimate Value Niching & Outflanking Full line Producers Price-Quality Maneuvers Price War

Creeping up the line in diapers

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Price

#5 Luvs (P&G)

#4 Huggies (Kimberly-Clark)

#3 Kimbies (Kimberly Clark)

#2 Pampers (P&G)

#1 Low quality (leaky) unbranded & 2 piece diapers Perceived Quality

The Move Towards Offering Ultimate Valuei eL ne

Price E5 D E4 E3 E2 D E1 V1 V2 V3Ni rs F t

alu V

t ex

V

n Li e lu aat m lti U

ee in eL lu

Va e

Perceived Quality

The Fast Food BusinessPrice

Wendys W1 Burger King B1 McDonalds B2 M1 M2 UV W2

Perceived Quality

Firm builds a Tech. Resource Base to create advantage Then moves into a new market first: Pioneer Followers imitate products & overcome switching costs and brand loyalties Pioneer throws up impediments to imitation Followers overcome impediments and replicate pioneers resource base First mover uses a Transformation Strategy & abandons product design/ technology based approach Builds resources to match followers manufacturing skills Price War

Escalating costs & risks each cycle

First mover moves downstream into higher value added products First mover uses a Leapfrog Strategy to a new resource base

Cycle of Timing / Know-How Competition

The First Dynamic Strategic Interaction: Capturing First Mover Advantages Response lags: Obtaining monopoly rents Economies of scale Reputation, switching costs and loyalty Advertising and channel crowding User-base effects: Network size and user base provide funds for the next leap Producer learning / experience effects Pre-emption of scarce assets (McDonalds restaurant locations) First movers need Innovation skills Customer knowledge Market penetration and marketing skills Flexible manufacturing skills

The Second Dynamic Strategic Interaction: Imitation & Improvement by FollowersDiffusion is rapid when reverse engineering is easy equipment suppliers help transfer key technologies or other business know-how industry observers, trade associations, etc. help transfer know-how personnel move to rival firms frequently leaks of secret information are commonplace and not illegal To win, an imitator needs 3 things that fall in these regimes: Appropriability - related to the strength of patents and other legal protection and the difficulty for followers to invent around patents Dominant design paradigm - if follower enters before a dominant design emerges, it has a better shot with own design Complementary assets - marketing, manufacturing, and other skills are needed to produce a new product

The Second Dynamic Strategic Interaction: Imitation & Improvement by FollowersFollower strategies work best when the first mover is unable to keep up with demand (Adidas & Nike - no fortressing), is not satisfying all segments of consumers or all varieties of needs ( flanking) or has a design flaw that can be corrected (aspirin vs. buffered aspirin) Pure imitation strategy Adding bells & whistles P&G - Crest (basic toothpaste); Lever - CloseUp (+freshen breath and whiten teeth) and Aim (gel + fluoride protection); Beecham - AquaFresh (fights cavities + freshens breath + whitens teeth)

Stripping down: Niche airlines Flanking products Reconceptualized products: Mobike from inexpensive transport to vehicle forfun and recreation to a status symbol

Risk reduction: warranties, free samples, etc. Compatible products

The Third Dynamic Strategic Interaction: Creating Impediments to Imitation Deterrent pricing Secret information (Coke formula, SABRE investment costs) Size economies Contractual relationships Threats of retaliation Patents Bundles products (follower does not have access to all components) Switching costs Restrictive (e.g., geographic) licensing (e.g., Sealed Air)

$ / Unit

Price Cost

$ / Unit

Introductory Price Umbrella Followers enter Cost Price competitive Market Time

Time

The Fourth Dynamic Strategic Interaction: Overcoming the Impediments Deterrent pricing: No problem if the follower is resource rich; Process innovations Secret information: Reverse engineering, experimentation (private label colas) Size economies: Process innovations; build scale in one geographic area and expand (Japanese auto builders); No problem if growth exceeds first movers capacity Contractual relationships: New supplier, vertical integration Threats of retaliation: Some may not be credible if innovator also loses Patents: Increase imitation costs only by 11% Bundled products: Joint ventures, vertical integration Switching costs: Advertising, promotions, etc.; may make market more attractive as follower can reap the benefits once in

The Fifth Dynamic Strategic Interaction: Transformation or Leapfrogging Transformation strategy Compaq - from a premium priced innovator to a low cost manufacturer Leapfrogging strategy Cyrix introduced the 486 clone in 18 months, compared to the standard 3 to 4 year industry cycle. And produced it at 4% of Intels initial investment. For a while also hoped to leapfrog Intel P&G and Ultra thin diapers in Japan McDonalds leapfrogged over competition by reconceptualizing itself as a restaurant - not just a place for burgers

The Fifth Dynamic Strategic Interaction: LeapfroggingWalkman Betamax P Trinitron TV P E E P E I: New product Introduced P: Profits from price umbrella E: Profit decline due to new entry and R&D for next project I I

I

The Sixth Dynamic Strategic Interaction: Downstream Vertical Integration

Sony entered the software side of the entertainment business with Columbia Pictures - but imitated by Matsushita Intel and motherboards Problem is that it ties up resources that could fruitfully be committed to building the companys core businesses

Strongholds and Entry BarriersMaxwell house was dominant in the E