According to the McKinsey report, there are usually two ways to enter a large or fast-growing reachable market: one is to participate in industries where demand continues to grow and there is already a sizable scale; The second is to seize market share from the existing large market by providing better products or services. The first group of companies leverages technological breakthroughs and business model innovations to accelerate value creation in fast-growing, mature industries. The revenue share of these industries typically exceeded $100 billion in 2005 and attracted significant investment due to efficiency gains or capacity expansion. Typical areas include biopharmaceuticals, industrial electronics, information-driven business services, mobile and consumer electronics, payments, semiconductors, software, and audio-visual entertainment. From 2005 to 2020, these industries grew at a compound annual growth rate (CAGR) of 5% to 13%, while the global economy grew at an average rate of only about 3% over the same period. For these industries, the main driver of market growth is usually the expansion of demand brought about by digitalization and its associated globalization trends. By 2020, 60% of revenue in these industries will come from markets outside the company's home country.
The second group of companies achieves rapid growth by launching new product or service categories to capture market share from existing markets. The first group of companies mainly accelerates growth in existing industries, while the second group of companies creates entirely new industries that grow by cannibalizing traditional market demand. For example, in areas such as cloud computing, consumer internet, e-commerce, and electric vehicles (EVs), revenue soared at a compound annual growth rate of 13% to 33% between 2005 and 2020. In these areas, digitalization often presents a more attractive value proposition. The proliferation of the global internet has enabled e-commerce platforms to seamlessly connect buyers and sellers across the globe, allowing consumers to purchase goods from their electronic devices anytime, anywhere, instead of relying on traditional brick-and-mortar retail channels. Digitalization has also revolutionized the video and audio entertainment industry, especially streaming services, shifting media consumption from movie theaters and physical CDs to homes and mobile devices. This gives consumers more content options and flexible schedules.
In the previous article, we outlined the three key elements that form the "arena": a major breakthrough in technology or business model, incremental investment, and a large or fast-growing reachable market. Over time, these three elements worked together to create a new playing field – the "arena". Next, we will further explore how the combination of these three elements can lead to a unique competitive model, known as "escalatory mode of competition".
Figure: Cloud service system capital expenditures continue to increase
"Escalating competition" is a highly dynamic and fast-growing form of competition, which is the result of the combined action of these three elements. It manifests itself in the fact that companies in the industry face escalating investment incentives, similar to an arms race. In this competition, companies continue to invest resources in products, advertising, and operations, as breakthroughs in technology or business models have upended the industry landscape and unlocked latent demand. This form of competition not only promotes the rapid development of the industry, but also makes it dynamic and uncertain.
As Arena companies continue to invest in capabilities and product quality, their profits will eventually rise. This profit growth is usually achieved in the following three ways: one is to increase the customer's willingness to pay by improving the attractiveness of the product or increasing advertising investment; the second is to improve efficiency by reducing costs (e.g., significantly reducing customer acquisition costs); The third is to increase revenue by scaling up sales (e.g., using network effects). In addition, increased capabilities often enable companies to expand their economic reach beyond traditional geographic or category boundaries.
As the industry climbs along the S-curve of technology capability and adoption, the competitive landscape changes. In the early stages of the S-curve, innovation translates into greater capabilities and rapid market share growth, which tends to attract new entrants to the market. In the ensuing phase of rapid growth, "escalatory competition" began to emerge. This phase is characterized by high growth, dynamic competition, and a significant shift in market share, which is also typical of the "arena". However, when the industry enters the plateau period of the S-curve, leading companies may gradually distance themselves from new entrants due to their long-term accumulated capability advantages. At this time, it is becoming increasingly difficult for new players to compete with these established players, resulting in a decrease in the number of market players, although there may still be fierce competition among existing players.
In addition to "escalating competition", there are two common modes of competition. One is "simple competition", which is characterized by low barriers to entry and weak competitive advantages; The other is "mature market competition", which occurs when a small number of large companies occupy the majority of the market share. What makes "escalated competition" different is that it requires participants to continuously improve product quality. The application of new technologies and the existence of large-scale accessible markets have enabled companies to increase their investment and capacity building in the battle for market share. In order to compete for or maintain market share, companies must maintain a high-intensity investment rhythm; Those players who can't keep up with the pace of investment will eventually lose their competitiveness. In other modes of competition, the dynamics of this "escalating competition" are not obvious.
Related:
18 Potential Arenas of the Future That Could Reshape the Global Economy (1)
18 Potential Arenas of the Future That Could Reshape the Global Economy (2)
18 Potential Arenas of the Future That Could Reshape the Global Economy (3)
18 Potential Arenas of the Future That Could Reshape the Global Economy (4)
18 Potential Arenas of the Future That Could Reshape the Global Economy (5)
18 Potential Arenas of the Future That Could Reshape the Global Economy (6)
18 Potential Arenas of the Future That Could Reshape the Global Economy (7)
18 Potential Arenas of the Future That Could Reshape the Global Economy (8)
18 Potential Arenas of the Future That Could Reshape the Global Economy (9)
18 Potential Arenas of the Future That Could Reshape the Global Economy (10)
