• Strategy
  • McKinsey & Co.

Extreme Competition

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

Seek Out New Demand and New Growth. One upside to the new environment of extreme competition will be new sources of demand creating many opportunities for flexible and alert companies. Think of the one billion fledgling consumers in China alone and the scale of the opportunity as demand becomes universal. Executives must identify novel customer segments and geographies, help form their consumer trends, and spot emerging competitors (and partners) early. Although the economics of this new demand may well be unusual, lower prices and potentially lower margins shouldn’t be an automatic excuse to stay out. For leaders of business units, the challenge will be to create new, less expensive business models and to make new trade-offs between capital and labor.

Extreme competition isn’t a signal to bury the old tool kit. Tried and trusted techniques for moving quickly into position — acquisitions, alliances, and licensing, for example — are more important than ever, since in many industries purely organic business building will be a day late and a dollar short.

Expanding the scope of a business through diversification is another way to tap new demand and an important strategic consideration as product life cycles become ever more compressed. Research suggests that moderately diversified companies not only outperform more diversified ones but also perform at least as well as — if not better than — more focused companies. (Neil W. C. Harper and S. Patrick Viguerie, “Are You Too Focused?” The McKinsey Quarterly, 2002 special edition: Risk and Resilience, pp. 28–37.)

Use the Portfolio of Initiatives to Increase Speed and Flexibility. At least implicitly, every corporation owns a portfolio comprising initiatives to launch new products, enter new segments, or reduce the cost of supply chain processes as well as corporate-wide efforts to improve pricing, bolster account management, or build a presence in emerging geographies. Collectively, these initiatives represent where, how, and when the corporation will create value.

A realigned and actively managed portfolio of initiatives is central to a corporation’s response to extreme competition. By “realigned,” we mean the decisive responses already discussed, together with a rich set of initiatives to hedge major uncertainties; “actively managed” means more frequent senior-executive reviews of the portfolio and its initiatives. Both the speed and the depth of the challenge to established ideas and assumptions must increase: this is no annual planning process but rather a dynamic approach that challenges leaders to reallocate scarce talent and money across business units and puts the spotlight on innovation and developing the next business model, not just on new products, processes, and services within the company’s existing approach. These wider reviews should include as broad a range of leadership experience as possible: increasingly, familiarity with specific businesses is less important than the ability to develop more and creative responses.

By helping the leadership team cut through layers of management, bypass formal reviews, and force a wider and more urgent discussion of uncertainty and the available options, the portfolio-of-initiatives approach can speed up and increase the flexibility of a company’s response to the pressures of extreme competition.

Count on Strategic Risk. Extreme competition means more volatile earnings — something that worries equity markets obsessed by predictable earnings per share. Most businesses monitor and control operational risks but pay too little attention to the more complex range of strategic ones. Four in particular merit attention: the value proposition risk (will a cheaper product knock the company out of the water?), the cost curve risk (will a low-cost competitor steal the company’s market share?), the bad-conduct risk (will a price war destroy the company’s profitability?), and the bad-bet risk (will the company’s assumptions prove too optimistic?). Companies should assess the source, extent, and timing of all these risks, communicate them appropriately to investors, and define the activities that will help mitigate them. Two things are fundamental to making such an assessment: a dispassionate view of businesses whose trajectory indicates that they will never generate satisfactory returns and a willingness to close or divest them.

Powerful supply-side forces — globalization, technology, and liberalization — are increasing the pace and altering the shape of competition across the world. Traditional players will be toppled if they don’t respond by embracing the spirit of youth, by adopting a forward-looking perspective, and by implementing radical solutions rapidly. Those that make the transition will find a world of bright new opportunities.

About the Authors

Bill Huyett is a director in McKinsey’s Boston office, and Patrick Viguerie is a director in the Atlanta office.

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