• Strategy
  • McKinsey & Co.

Extreme Competition

The forces of globalization, technology, and economic liberalization are combining to make life harder than ever for established companies.

Three Industry Effects. Plentiful, cheap, and global labor, capital, capacity, infrastructure, and information have affected industries profoundly. In microeconomic terms, this growth in supply has had three broad consequences: the aggregation of formerly distinct markets, enhanced market clearing and efficiency, and greater specialization, particularly in supply chains.

Aggregation takes place when competitors in one geography can compete in another because of falling shipping costs, lower search costs for consumers (as a result of the ability to find sellers on the Internet, for example), or both. Technology or deregulation can also bring about convergence, a different kind of aggregation: like the geographic variety, it can quickly create substitutes and new competitors. Technology-driven convergence is common in consumer electronics — cell phones, for instance, are now cameras and Web browsers too — and will become even more so as communications, computing, and storage technologies continue their forward march. Deregulation, as well, drives convergence: with the stroke of a pen, and some subsequent litigation on both sides, U.S. long-distance and local telecom providers could invade each other’s markets.

Enhanced market clearing means that buyers can make more efficient purchasing decisions. While sophisticated purchasing practices and the scale of the buyers have long driven corporate purchasing power, widespread information and the presence of new supply alternatives with radically different economics now take the traditional “supplier squeeze” to a new level. These forces promise to reshape the economics of many industries as the products and services of competitors with dramatically different cost structures become acceptable substitutes for dominant offerings.

The combination of aggregating markets and enhanced market clearing creates the third effect: increased specialization in the supply chain. As transportation, communication, and coordination costs fall, suppliers can more easily spread production across facilities and geographies, and companies learn to optimize production by taking greater advantage of scale, proximity to end consumers, and differing costs of labor, capital, and raw materials.

Perhaps the clearest glimpse into the way these forces shape industries and the companies that compete in them comes from the personal-computer industry. In the early 1990s, it had three leaders — IBM, Compaq, and Apple Computer — and dozens of other assemblers. During the past ten years, the market aggregated dramatically. Geographically, demand for PCs became global; functionally, major players clearly came to recognize the trend toward digital convergence across PDAs, music players, and other devices and the threats and opportunities it will pose. The increasing sophistication of the buyers, low-cost sources of supply, and the widespread information access facilitated by the relatively transparent component architecture of the product itself have made PC manufacturing one of the world’s most competitive businesses. Finally, open standards for the PC platform, coupled with rapid innovation and short product life cycles, have fueled the expansion of geographically distributed, highly specialized supply chains.

This transition to extreme competition was hard for many companies — just look at Apple’s near-death experiences as personal computing coalesced around the Windows-Intel platform, Compaq’s acquisition by Hewlett-Packard, and IBM’s pending exit from the business. Yet the industry’s dynamism masked some of the harshness of the shift. For more mature industries with legacy production capabilities and investments, a sudden supply-led transition can be brutal. Consider the case of a U.S.-based white-goods manufacturer whose story will resonate with many midsize manufacturers. In the late 1990s, the company, building on momentum established through improved operational effectiveness, was posting record results. By 2001, however, its principal customers were demanding major price concessions in view of credible Chinese alternatives. In that year, the company’s margins fell by 40 percent because of pricing concessions and cost-to-serve increases.

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