Strategic Supremacy through Disruption and Dominance

When Gillette introduced its Mach3 razor in 1998, with an investment of more than $1 billion in development and advertising, it was attempting to redefine the rules of competition. The move forces competitors to play catch-up against a powerful new en-hancement of the value proposition. It means Gillette continues to dictate the rules in an industry in which it has created the world’s number one shaving system.1 It also suggests that Gillette’s intention is to disrupt the market periodically, implying that Gillette will eventually replace the Mach3 standard with another breakthrough product.

Through a series of major new product launches, driven by technology and branding innovations, Gillette has sustained leadership in defining the shaving game. In the 1970s, however, Bic’s disposable razors threatened to shift the dominant value proposition to low-cost convenience. Bic grew a small niche into a mass, worldwide market, cannibalizing Gillette’s cartridge approach by continually lowering the cost and increasing the value of its razors to attract customers from cartridges and stimulate new demand. The new rules were so foreign to Gillette that one executive commented, “We’d get samples and I would try them and wonder why anybody would compromise their shave to save a little money.”2 But consumers were willing to make this compromise.

For Bic, the move transformed the game to one that it knew how to play well, with its low-cost plastic manufacturing and efficient distribution for pens, lighters, and other products. At the same time, the shift threatened to transform Gillette’s heavy R&D investments from an advantage to a burden.

At first, Gillette was forced to play by Bic’s rules. Although Bic beat Gillette in the European market, Gillette quickly pushed a disposable in the United States before Bic could launch its own razor there. Gillette’s Good News razor captured 60 percent of the market by 1982. But margins were thin, and the company’s sagging profits forced it to fight off four takeover attempts in the mid-1980s.

Instead of complying with Bic’s rules, Gillette redefined the rules. With the introduction of the Sensor in 1989, Gillette shifted the rules of winning to brand image and shaving quality. Here, the muscular R&D that had slowed its profits in disposables became an asset. Bic could not compete in this environment. (Although disposables didn’t go away completely, they no longer defined the market, with cartridge usage growing at the expense of disposables.) Meanwhile, Gillette continued to disrupt the environment and perfect its game of shaving closeness with the introduction of the Sensor Excel and Mach3 razors, establishing a pattern of stability punctuated by disruptions.

Whereas competition once focused primarily on outplaying competitors at a fixed game (like making a better or cheaper disposable razor than Bic), now the central focus of strategy is on understanding the relationship between an environment’s turbulence and the company’s choice of strategy. In an environment in which quality is defined by technological progress and branding, Gillette wins and achieves strategic supremacy.

Strategic Supremacy

The concept of strategic supremacy offers a unifying view of strategy. There has been a lack of appreciation for the relationship between an environment’s turbulence and strategic paradigms. Too little attention has been paid to the differences between the strategies of dominant incumbents (maintaining the current environment) and the strategies of challengers (disrupting the current environment). Studies of what I call hypercompetition have provided important insights into the inextricably intertwined relationships among disruption, patterns of turbulence, the rules of competition, and the definition of the playing field.

By understanding the interaction between strategy and the environment, managers can better tailor the strategies to their environment — or change the environment to their advantage. This process begins with an analysis of the current competitive environment. The next step is to understand the appropriate strategic paradigm for that industry (the rules of the game). If a firm lacks the capabilities to succeed in the environment or wishes to challenge the status quo to improve its position, it might consider shifting to a new one.

The ability to establish the rules of the game at any given point in time and control evolution is part of strategic supremacy. The firm with strategic supremacy determines the rules by using different patterns of discontinuities. Merely “adaptive” firms focus on learning the new rules that are appropriate for an environment that others have created. In contrast to Gillette, many old industry leaders do not want to change, so new entrants that can use disruptive strategies often find that frequent disruption of the game’s rules is an advantage.

The redefinition of rules is different from a niche strategy, although the “new rules” market may start off as a small segment of the old market. Gillette and Bic are not focused on merely creating small niches within the market, but rather on shifting the dominant definition of value and how it is delivered throughout the industry. Whereas niche players do not force others to play by their rules, the player with strategic supremacy shapes the field and basis of competition for its rivals.

In the process of changing the rules, Gillette also changed the competitive environment. Where the environment during the 1960s had been one of relative equilibrium as fairly stable players pursued strategies that continued to build on their existing competencies in stainless steel double-edged blades, Bic’s move shook the stability. Gillette, realizing it could not go back to the stable environment, has pursued a strategy that creates periods of stability interrupted by its own disruptions. After each disruption, it then consolidates its gains around the new standard.

Hypercompetitive Markets

Why is this change in the environment important? A key insight in the study of the intensely disruptive and turbulent environment of hypercompetition is that the strategic paradigms that work well in one environment don’t work at all in another. In fact, some paradigms that are successful in fairly stable environments are a liability in unstable ones. For example, leading firms in stable environments use Michael Porter’s “five forces” to erect entry barriers, reduce buyer and supplier power, strike oligopolistic bargains, and eliminate substitutes to keep stability and profitability going.3

One goal is to stabilize the environment by precluding or removing all disruptive forces from the industry, so a few players can continue to dominate the market. The other goal is to establish the rules of competition — how the players win or profit. In this case, the players create wealth through monopoly and monopsony power over buyers and suppliers. But this strategic paradigm may not be successful when a disruptive challenger tries to create a dynamically changing environment. Building barriers to entry, for example, can be equivalent to building castle walls when the opponent is flying over with jet fighters or using radio broadcasts to foment revolution. General Motors spent millions of dollars over several decades to build a barrier to entry based on 6,000 service dealers. The Japanese simply designed a car that didn’t need service. Toyota and others continued to disrupt Detroit with numerous discontinuities based on revolutionary new manufacturing techniques and design.

Several empirical studies of hypercompetitive environments have indicated that increasingly rivalrous and fast-changing environments have led to a fundamental shift in the competitive rules of winning and the norms of behavior. For example, in a broad, revealing study of hypercompetitive shift, L.G. Thomas used National Bureau of Economic Research data from 3,000 North American firms across more than 200 industries to examine the overall trends in the relationship between increasing competitive rivalry (indicated by price wars, advertising wars, and R&D wars) and industry performance.4 In the more stable period from 1950 to 1979, the stock market rewarded industries for their ability to decrease rivalry. But, in the 1980s and 1990s, there was a dramatic shift and the stock market rewarded industries for increasing rivalry. The market recognized the growth opportunities and wealth created when the companies that knew how to take advantage of the new environment by behaving disruptively shifted the basis of competition, as Gillette and Bic did.

Thomas’s results held even when adjusted for the effects of bear and bull markets. He also found that some industries made the shift in the performance/rivalry relationship earlier because their knowledge intensity (e.g., the percentage of professional workers) or their globalization (percentage of imports and exports) accelerated sooner than other industries.5 Others lagged, but Thomas found that, over time, more industries became knowledge intensive and globalized. This resulted in a dramatic hypercompetitive shift in which rivalry was rewarded because disruptive behavior stimulated growth in demand and revitalized the industries’ basis of competition. When the environment changed, it changed the rules of winning, so some players could win by providing a radically new type (or significantly greater level) of value to customers.

An important implication of Thomas’s study is that different approaches to rivalry have radically different impacts on performance in different environments. The strategy of controlling and muting competition produced better returns in the more stable (less knowledge-intensive, less globalized) environment of the 1950s to 1970s but worse results in the more turbulent 1980s and 1990s, when competitiveness became more important. The increasing turbulence of the 1990s also led to a growing gap between winners and losers. In more stable environments, the winners and losers in Thomas’s study had fairly similar levels of performance. In the 1990s, however, the more rivalrous the companies’ behavior was, the greater the gap between the winners and losers.

Some companies can take advantage of the turbulence created by knowledge intensity and globalization to change the rules of competition to their advantage, while others cannot. Based on other research and observations, I suggest that this is because some companies understand how to pursue strategic supremacy in different environments. The battle is between those companies that doggedly try to dampen competitive intensity and sustain old norms and behaviors and those that want to disrupt the status quo. In hypercompetitive environments, attempting to dampen rivalry is difficult. Leaders from the old stable markets would prefer to return to an environment that they controlled. My own research suggests that there are tremendous profits to be made in rivalrous industries.6 Whereas profits previously depended on stability and lack of rivalry, profits in hypercompetitive environments result from increased rivalry, if it is focused on defining a new basis of competition for customers.

Environments of Varying Turbulence

Extending the insights from hypercompetitive markets suggests that turbulence creates different competitive environments characterized by different patterns of disruption. Different patterns are determined by the frequency of the disruptions and the competence-destroying or competence-enhancing nature of the disruptions.

Competence-destroying disruptions are created by shifts in customers’ tastes and needs, technological substitution or obsolescence of a competence, imitation or licensing and widespread diffusion of a competence, or a competitor’s active attempts to destroy, neutralize, or cripple a firm’s ability to fund or improve its competence. Technological discontinuities, shifts in customer demographics, deregulation and globalization, or a new aggressive competitor resulting from a merger or alliance create opportunities for destroying the competence of the industry leader.

Disrupters can destroy the competencies of an industry leader by changing the industry’s critical success factors to make the leader’s competencies obsolete by using new technology and other know-how to establish a superior value-creation process. They can alter the definition of value and quality, creating a vastly superior value proposition that the leader does not and cannot deliver. They can change industry boundaries by driving past entry barriers and forcing market convergence, reshaping the market’s size so that the leader is no longer leading the new industry. In addition, disrupters can escalate the intensity significantly with more resources and alliances.

Competence-enhancing shifts, on the other hand, make the incumbent leader’s competencies and resources more valuable. For example, the shift from one Intel chip to the next generation is a competence-enhancing shift as Intel continues to develop ever-sharper CISC-based capabilities in chip design and to improve yields in chip manufacturing. In contrast, a shift from CISC to RISC chips or moves to neural network chips could be a competence-destroying change because of the possibility of technological substitution.

Competence-enhancing or -destroying disruptions can occur occasionally or constantly, resulting in very different patterns of turbulence within an industry. Some firms may find themselves in periods of stability punctuated by infrequent violent disruptions, while others may experience periods of constant competence-destroying disruption. Still others will find almost no disruption, while others may experience frequent disruptions that are not very threatening to the firm’s competencies (see Figure 1).

The four different competitive environments — equilibrium, fluctuating equilibrium, punctuated equilibrium, and disequilibrium — require different strategies for success. Each requires that the incumbent leader and the challenger or disrupter formulate a different strategy to maintain or shift the current playing field. I now examine the rules of competition in each environment and strategies to maintain or disrupt them.

Equilibrium

The equilibrium environment is characterized by long periods of little or no competence-destroying turbulence. The relatively stable environments of the banking, airline, utilities, and telecommunications industries (before deregulation) supported and strengthened the walled empires of Citibank, Eastern Airlines, and AT&T. Other factors contributed to stability, for example, the barriers to entry created by patents and proprietary technologies in the pharmaceutical industry in the 1980s.

Incumbent leaders control an equilibrium environment by creating barriers to entry for potential competitors and restraining rivalry within the industry. A powerful company extracts monopoly profits from captive customers without fear of attracting invaders seeking to capture its abnormally high profits. It creates profits by exercising monopoly power over buyers and monopsony power over suppliers only when barriers are high and rivals agree to mute their competitive activities. A company using these norms of behavior forms an industry structure that offers it a protected competitive space.

For example, DeBeers reportedly controls three-quarters of the world’s uncut diamond supply through a combination of control over the producers and a very effective marketing campaign (“a diamond is forever”) to build customer demand and keep prices high while restricting supply. DeBeers used this strategy to push into a new market, Japan, where the percentage of Japanese brides receiving diamond engagement rings increased from 5 percent to 70 percent between 1960 and 1997.7

A challenger to DeBeers might focus on disruptions that would tear down or leap over the existing barriers of the incumbent leader. For example, if Russian diamond mines created a successful independent marketing operation — perhaps using the Internet —they could break DeBeers’ industry control and turn its fixed strengths in inventories, channels, and marketing into liabilities. In fact, DeBeers has faced some recent disruption that threatens its equilibrium, with defections by producers such as Australia’s largest mine and the more independent Russian mines.8 However, DeBeers has successfully dampened these disruptive entrants by blocking or capturing alternative distribution channels and forcing these potential entrants to join the worldwide oligopoly.

Fluctuating Equilibrium

The fluctuating equilibrium environment is characterized by rapid turbulence based on frequent competence-enhancing disruptions. This environment allows industry leaders with core competencies to sustain their leadership by layering new competencies on top of old ones. This, in turn, forces everyone else to catch up and allows the leader to leverage its core competencies into new product markets while others are still catching up.

For example, the consumer wireless telephone industry in the 1980s experienced a period of fluctuating equilibrium, with constant improvement and changes in phones and cellular phone systems based on analog technology. These fluctuations allowed companies like Motorola to leverage their analog-based competencies into diverse product markets, such as pagers, two-way radios, and cellular phones and infrastructure. (Motorola later stumbled when it faced the competence-destroying change of digital technology.)

The frequent turbulence of this environment makes the industry leader’s competencies more valuable. The leader creates wealth by leveraging the unique resources or capabilities it uses in the core product market into new markets.9 Instead of erecting a wall, incumbents make money by having a valuable resource that many customers want to use, without regard to whether they are inside or outside the walls of a narrowly defined industry. The company, in essence, “rents” the assets to customers by selling a superior product or service based on its core competence.

For example, Sony uses its competencies in electronic miniaturization and brand name in several markets, including televisions, VCRs, LCDs, some computer chips, and peripheral devices such as CD-ROM drives and monitors. It used its branding to move into new digital electronic markets, including personal computers, video games, and more powerful digital consumer electronics, movie making, and even cinemas. It is experimenting with hundreds of new gadgets, hoping for a few more megahits, such as PlayStation and digital video disks (DVD). The underlying basis of its strength — a brand name that means quality and innovation, excellent marketing, and wide distribution —provides continuity as it moves into new areas.10

Challengers in this fluctuating environment try to destroy the underlying core competencies of the leader and shift the environment to punctuated equilibrium or disequilibrium. Ideally, the disruption would turn the incumbent’s strengths into weaknesses by making its competencies obsolete or a burden, as in the case of Bic and Gillette. Nokia and Ericsson did the same to Motorola in the 1990s, when they introduced digital wireless technology and a new European standard for cellular transmission that is becoming popular outside Europe. As their digital technology and stylish designs spread to the U.S. market, Motorola found its core competence being undermined and its leadership threatened.

Punctuated Equilibrium

A punctuated equilibrium environment is characterized by brief dynamic periods based on discontinuous change or competence-destroying revolutions. These dynamic periods are followed by longer periods of convergence (where the market organizes around the new common standard established by the revolution) and greater stability.11 Punctuated equilibrium environments are prevalent in industries where radical technological changes are followed by an emerging dominant design. This dominant design or standard creates a period of stability until the next technological revolution, and the cycle repeats itself. These patterns have been identified in the cement, glass, and minicomputer industries.12 In the flat glass industry, for example, the invention of the Lubbers machine in 1903 replaced hand artisans and radically improved glass production. In 1917, the Colburn continuous-ribbon process again transformed the industry. Finally, Pilkington introduced a float-glass process for flat glass production in 1963, creating another major shift in productivity and transforming the basis of competition.13

Industry leaders in this environment form fairly stable structures during the periods of convergence but then shift those structures rapidly during the periods of reorientation. Therefore, they cannot organize or strategize during a convergent period as if they were in a stable environment. Tushman and Romanelli observed organizations capable of periodic revolutions followed by a convergence focused on stability and better execution of the new approach.14 Companies sometimes balance between flexibility and stability by using alliances to enhance flexibility and less formal mechanisms such as product standards to create stability. These alliances and standards, however, can be shifted rapidly when a new opportunity or need for disruption arises.

In this environment, the challenger defines the playing field with a contrarian strategy. When the incumbent seeks to create stability, the challenger is disruptive. When the incumbent seeks to lead the next revolution, the challenger launches a counterrevolution by sustaining and improving the old environment. In this way, the incumbent faces increased costs and friction for its strategies, and the challenger has an opportunity to seize the initiative.

The leader faces the challenge of knowing when and how to respond to the next revolution. It has the option of preempting the revolution by waiting until discontinuity occurs and guiding or even absorbing it by acquisition of its leading proponent. Or, if it has vast resources, it can dampen the disruption. If the leader has more limited resources, it will try a less expensive approach to make the revolution irrelevant. For example, it may hedge its bets by using joint ventures that give it the option to emulate the new business model or gain access to revolutionary technologies after its success is proven. In general, incumbent leaders prefer to dampen potential revolutions or hedge their bets so they can sustain their position as long as possible before incurring the risk and expense of adopting every potential revolution. Only a few, like Gillette in 1998, have the wisdom to intervene and revolutionize the market before a competitor does.

Disequilibrium

Disequilibrium, perhaps the most challenging and hypercompetitive environment, is characterized by frequent, discontinuous disruptions. Many high-tech industries, newly deregulated markets, and unlikely low-tech industries such as pet foods and auto retailing face frequent, competence-destroying changes. Successful incumbents in this environment constantly create new competencies to replace obsolete ones, continually leaving and disrupting themselves before their rivals do.15 Leaders gain advantage because their slower moving opponents spend even more energy catching up and reacting.

For example, Charles Schwab had a series of tactics to continually disrupt the world of traditional stock brokers. It offered discounts, electronic distribution, and twenty-four-hour helplines and created its Advisor Network and OneSource to give customers access to new products, research, and financial planning services at no cost. Each initiative attacked the competencies of the traditional brokers by providing a low-cost or more convenient alternative to using the brokers’ research and advisory services. Amazon.com disrupted the book industry by building its on-line business and is now trying to shake up other businesses, including the sale of music compact disks and other audiovisual products. This strategy continues to keep rivals off balance.16

Challengers have to disrupt this environment frequently, efficiently, and in matchless ways or shift the environment to be less disruptive. For example, Schwab rivals such as E*Trade use the Internet to drive down costs and establish their positions. Brown and Eisenhardt identified several factors critical to success in disequilibrium environments, such as structural flexibility, creativity, speed, and aggressiveness.17

The Quest for Strategic Supremacy

How do firms achieve and maintain their strategic supremacy? How do upstarts attack the supremacy of incumbent leaders? Challengers fight to change to an environment in which their current strengths are more valuable. Others attempt to dampen the disruption. In other words, firms can either fight the alligators or drain the swamp.

Netscape founder Marc Andreessen once said, “In a fight between a bear and an alligator, what determines the winner is the terrain.”18 Andreessen learned the bitter truth of this lesson when rival Microsoft, instead of fighting this upstart alligator, drained the swamp of the Internet by incorporating it into the more solid and familiar ground of the Windows operating system. In the process, Microsoft’s strategy was to move browser competition from a disequilibrium environment to the more stable punctuated equilibrium environment in which Microsoft clearly excelled.

Is it hard to change the competitive environment? Many environments are disrupted by exogenous factors beyond the control of the firms in the industry. But sometimes, creative firms can develop strategies of disruption, particularly where they can harness the power of changing technologies and markets.

For example, Kirin dominated the stable Japanese beer industry for more than three decades until the mid-1980s, with a seemingly unassailable market share. Then, rival Asahi introduced a dry beer in 1987 that was so successful it set off a competition in new product introduction. New beer introductions went from fewer than one per year between 1964 and 1984 to a flood of eight per year from 1985 to 1993.19 Kirin’s market share continued to erode as Asahi’s rose rapidly; Asahi was far better at playing in the new environment it had created. Asahi had changed an equilibrium environment to a hypercompetitive, disequilibrium market.

In other examples, the hypercompetitive disequilibrium that characterized computing software was slowed to punctuated equilibrium by the Windows-Intel standard. U.S. automakers, intent on relatively oligopolistic competition among the Big Three, were shaken by the arrival of Japanese competitors that didn’t play by their rules. Major booksellers such as Barnes & Noble and Borders were rudely awakened by tiny upstart Amazon.com, which threatened to turn their strength in real estate and geographic presence into a liability. If the challenger is good at disruption, it can transform a more stable environment into increasing disequilibrium. In contrast, only one shrewd empire builder is needed to stabilize the chaos.

There are no clear lines of demarcation between the four environments. An environment of punctuated equilibrium in which the disruptions become increasingly more frequent becomes a disequilibrium environment. Classifying the exact line between environments is less important than understanding the different dynamics and successful strategies for achieving strategic supremacy in each. The firm’s perspective determines the environment it is currently in. One firm in an industry might see competence-destroying turbulence, while another may experience competence enhancement in which its core competence is still valuable.

The goal of incumbent leaders and challengers in each environment is to achieve strategic supremacy by controlling the degree and pattern of turbulence (see Table 1). Strategic supremacy means not only control over the environment, but also the paradigm used for the creation of wealth. Different rules or norms of competition create profits differently in each environment. In an equilibrium environment, dominant firms can profit by shutting out rivals and using power over buyers and suppliers to extract monopoly profits. In environments of fluctuating equilibrium, dominant firms use core competencies to profit from customers seeking to use these unique competencies. In punctuated equilibrium, dominant firms make profits from the first-mover advantage of a revolution that sets a new industry standard and then positioning themselves to react to the next revolution. The dominant firm in disequilibrium profits by constantly improving and creating value through innovation.

Conclusion

The evolution of business strategy has sometimes been a search for a general theory that explains success and failure. In practice, many managers try to adopt one viewpoint to guide their strategic thinking —whether it is Porter’s five-forces model, Prahalad and Hamel’s focus on leveraging and layering core competencies, the use of D’Aveni’s hypercompetitive strategies, Hamel’s strategy as periodic revolution, Slywotsky’s strategy as revolutionary new business models, or the strategy du jour served up by a constant stream of new and insightful theories.20 Others have tried to use them all simultaneously. Some have become disillusioned with their chosen paradigm(s) because it doesn’t seem to work. Others have argued that strategy is based only on creating stable industry structures, but discovered that stability (while desirable) is impossible when exogenous disruptions due to increasing globalization or knowledge intensity are uncontrollable.

Each of the major, popular strategic paradigms is really a different way to create wealth and strategic supremacy. The disillusionment has occurred because practitioners and theorists have not recognized these differences and have not understood when it is appropriate to use each model. Moreover, because rivals and customers won’t be content to maintain the current environment, the battle for strategic supremacy is continuous. By understanding the pattern of turbulence in the current competitive environment, managers can develop better strategies that lead to and maintain strategic supremacy.