• Abstract
• Schumpeter’s Creative Destruction
• D’Aveni Hypercompetition
• Discussion And Implications
• Root Causes Of Hypercompetition Discussed
• Key Further Reading

Abstract

At the center of Schumpeter’s theory of competitive behavior is the assertion that competitive advantage will become increasingly more difficult to sustain in a wide range of industries. More recently, this assertion has resurfaced in the notion of hypercompetition. This research examines two large longitudinal samples of firms to discover which industries, if any, exhibit performance that is consonant with Schumpeterian theory and the assertions of hypercompetition. We find support for the argument that:

1. Over time competitive advantage has become significantly harder to sustain
2. The phenomenon is limited neither to high-technology industries nor to manufacturing industries but is seen across a broad range of industries.
3. We also find evidence that sustained competitive advantage is increasingly a matter not of a single advantage maintained over time but more a matter of concatenating over time a sequence of advantages.

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destruction is defined as the “incessant product and process innovation mechanism by which new production units replace outdated ones.” —Antoine Buteau

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.” —Antoine Buteau

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. —Antoine Buteau

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.” —Antoine Buteau

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

Discussion And Implications

The results presented above provide evidence that periods of sustained competitive advantage, as evidenced by its consequence, superior economic performance, have been growing shorter over time. To answer the question in the title, this is evidence that Schumpeter’s ghost has indeed appeared in the form of hypercompetition. These results hold across a wide range of sectors of the economy. These results provide direct support for Schumpeter’s theory and for the occurrence of hypercompetition. Coupled with the findings of Thomas (1996) of a hypercompetitive shift in the behavior of the manufacturing sector, results here provide additional support for the contention that a substantial portion of the US economy is characterized increasingly by hypercompetitive behavior. Further, there is evidence to support the notion that managers have responded to this hypercompetitive environment by seeking in relatively more situations, not a single sustained competitive advantage, but rather a series of short advantages that can be concatenated into competitive advantage over time. In the absence of the innovative dynamic change that characterizes hypercompetition, one possible alternative explanation for the results here might be deregulation. The most formerly regulated subsample, Transportation and Utilities, shows evidence of this in terms of Tobin’s q (but not in terms of ROA); however, the rest of the sample included many non-regulated industries—and these show strongly diminishing duration of superior economic performance in terms of ROA. Another alternative explanation for the results reported above might be largely due to increased levels of static competition. But, as in Thomas’ (1996) study of manufacturing, there is no clear mechanism for such an increase in static competition alone—especially across such a wide range of industries. Yet another alternative explanation for the decrease in duration of competitive advantage might be turbulence in the macro-environment. Such turbulence would, however, not be likely to have a more significant effect on only those firms with a sustained competitive advantage—at least not in the absence of substantial dynamic competitive effects. Further, McNamara et al. (2003: 272) found no evidence of fundamental changes in industry stability, dynamism, or munificence. Thus the logical explanation for the reduced duration of sustained competitive advantage across a variety of different industries appears to be attributable to a shift to hypercompetition. The independent empirical evidence presented by Thomas (1996) and the anecdotal evidence in D’Aveni (1994) reinforce this conclusion. The finding that hypercompetition characterizes a wider number of firms than just a limited number in high-technology industries (Porter, 1996), and industries even beyond those manufacturing industries studied by Thomas (1996), is important. The mechanisms for the spread of hypercompetition beyond those industries with a rapidly changing technology base cannot be determined by this research. We can, however, speculate that those industries with stable traditional technology bases are increasingly subject to the effects of changes in information technology which are being ubiquitously deployed across all industries. Better sources of competitive information, business intelligence and higher levels of internal flexibility can shorten competitive response time. Further, even in these stable industries, managers who observed the successful employment of hypercompetitive strategies in more dynamic industries may import such strategies into their industries and innovatively destabilize them. The wide appearance of hypercompetitive effects has significant implications for both practice and research. Finally, an obvious question that these findings inspire concerns why our results differ from those of the most comparable study: McNamara et al. (2003). First, as previously noted, there is the difference in methods: their study utilized the same (albeit a more sophisticated version) autoregressive techniques used by most of the studies outlined in Table 1. Second, their study examined the decay of persistence for all business units (including average as well as poorly performing business units). In their own words, ‘with this model, we can assess the degree to which abnormally higher or lower business returns decay over time to the mean’ (McNamara et al., 2003 (emphasis added)). Our primary method only examined persistently superior performing business units and firms, which is a more direct link to the Schumpeterian theoretical question regarding the effect of creative destruction on the sustainability of competitive advantage. Third, while both studies used multiple samples and multiple methods, their study included many other variables (dynamism, mortality, stability) that no proponent of the hypercompetitive approach has directly discussed, making most of their tests indirect tests, while our primary methods all focused solely on direct tests of Schumpeterian theory regarding persistent superior performance. Further, our secondary analysis at the business unit level, using the same dataset as McNamara et al. (2003), shown graphically in Figure 1 and using simple linear regression reported in Table 8, found a clear and significant decline in business unit performance over time at all levels of performance (with over 87% of the variance in ROA explained by time alone, indicating a very strong trend in the performance data over time, similar to the downward trend in the corporate level data reported by Barber and Lyon, 1996). Note that McNamara et al. (2003) focused their analysis on the variance of returns, which they found not to change significantly over time, whereas we focused on the mean returns, which do change significantly over time. Again, neither Schumpeter (1939) nor D’Aveni (1994) theorize about variance of returns.

Root Causes Of Hypercompetition Discussed

1. Changing technology
2. "Better sources of competitive information, business intelligence and higher levels of internal flexibility can shorten competitive response time."
3. "Managers who observed the successful employment of hypercompetitive strategies in more dynamic industries may import such strategies into their industries and innovatively destabilize them."

Key Further Reading

• Same as it ever was: the search for evidence of increasing competition by McNamara G, Vaaler PM, Devers C. in 2003.