Arvind Singhal: Onset of hypercompetition?

MARKETMIND

Hypercompetition is amongst the various new terms added to the business lexicon in the last decade or so.

There is no precise definition of this phenomenon, but generally it is used in the context of heightened competitive activity in any particular sector, leading to a loss of pricing power for all the players, including the market leaders, and to a steady erosion of margin and profitability.

Indeed, it is already a key feature of the so-called new economy in more mature markets such as the US and the EU, wherein competition has reached such heights that even the market leaders find it difficult to differentiate themselves from their competitors and hence the competitive battle has become even fiercer, leading to an unprecedented mayhem of businesses.

In these mature markets, some of the sectors where hypercompetition seems to be more visible include civil aviation, telecommunications, consumer electronics, processed food and personal care products, consumer banking /credit cards, and automobiles.

The victims include some of the most venerable names in business. Some of the major US-based airlines such as Delta teeter on the verge of bankruptcy with many other already operating under the protection of Chapter 11.

The telecommunication sector, globally, is seeing continued mergers and consolidation with major US-, EU- and Japan-based operators struggling to generate any kind of decent profitability.

Sony is now amongst the latest in the list of troubled icons with a new CEO (who, for the first time, is a non-Japanese). Unilever, P&G, and Nestle have been facing exceptional pressure on the power of their brands for years now.

Credit card issuers in the West now have to contend with wafer-thin operating margins. In the automobile sector, as per the latest issue of Fortune International, General Motors' stock now trades lower than it did 40 years ago!

In India, I believe some of the sectors that are beginning to show some signs of emergence of hyper-competitive activity include consumer durables, telecom, the consumer credit card industry, and the media.

Within 12"�18 months, some more sectors that may include civil aviation, automobile, and residential/commercial real estate could join in.

While the consumers may welcome this phenomenon, it could have a debilitating impact on some of the current market leaders in each of these sectors, leading to a forced slowdown of growth on account of reduced/negative profitability.

Some of the early warning signs are already visible in the context of the inability of almost all the players in these sectors even to maintain prices (much less, increase prices) despite persistent escalation in raw material and other operating costs.

Many have announced price increases after March 31 this year but it is yet to be seen if these price increases can actually be enforced or maintained over time.

There are many factors that are leading to hypercompetitive activity. Some of the more universally acknowledged ones include (a) rapidly shrinking product lifecycles, which in turn are on account of a more rapid globalisation/internationalisation of technology, (b) pronounced demographic and lifestyle changes in consumer segments, leading to the destruction of the so-called mass market and, in place of that, the emergence of myriad micro consumer segments, (c) ever-increasing consumer expectations for quality, performance, and service, and (d) fundamental changes in business organisation, putting pressure on the traditional "vertical" ones when faced with more nimble "virtually vertical" and "quick responsive" ones.

In the Indian context, each of these factors is coming into play. However, some more that are typical to India include the increasing impact of cross-category "desire" pulls on the consumer.

As per the latest KSA Consumer Outlook study, due to be released later in April, there are as many as 19 categories of goods and services that now account of 80 per cent of consumer spending, up from just 7 about 12 years ago.

The income levels have obviously not gone up at the same pace as the consumers' desires and wants, and hence even though consumers aspire for very specific brands, their purchase behaviour reflects the pressures they have on their actual ability to spend.

Further, over the last 5-7 years, Indian consumers have now come to expect steady price reductions in almost every category of goods and services, having seen this happen in many sectors such as consumer durables, air travel, fast food, consumer credit cost, and telecommunications.

In such an environment, even survival requires extraordinary efforts from the players competing for getting/retaining their market shares while maintaining profitability at a healthy level.

What learning can Indian companies draw from other hypercompetitive markets, and what can they do that could be more relevant for the Indian environment? Relentless focus on creating differentiation is probably the most effective strategy, although very difficult to manage.

In the Indian context, the challenge of differentiation is perhaps easy to handle for the time being since it can be achieved across many dimensions such as products, packaging, service, retail ambience (for packaged goods), assortment/selection, and customer relationship management.

Jet Airways, so far, has succeeded in remaining the domestic airline for many, despite their visibly more premium pricing. LG has managed to charge premium on most of their products on account of superior penetration, wider assortment, and better customer relationship management despite their products not necessarily being cutting-edge in terms of technology.

Offering more (perceived) value through bundling other goods or services is another feasible strategy in the Indian context.

Again, until last year, both Jet and Indian Airlines were able to offer travel plus hotel packages at major business cities, allowing the airlines and hotels to fill more seats and rooms, while the consumers benefited from higher value through this package.

Quicker response to meeting the ever-changing consumer needs and desires, more proactive and more participative collaboration across the entire value chain, acquiring a global mindset in terms of sourcing, and networking/participating in select industry forums for sharing knowledge would also help many Indian companies to compete better and manage their profitability goals more successfully.

Hopefully, most of the current leaders in various business sectors (especially consumer products) will be able to rise to these challenges and continue to compete successfully.

arvind@ksa-technopak.com