According to a McKinsey report, in some dynamic industries, the investment behavior of companies is not just a means to maintain a market position, but a key force in determining the evolution of the industry landscape. Often referred to as "arenas," these industries are characterized by a constant "arms race" in which companies must continue to invest and evolve quickly or be left behind.
Triple rewards from capacity improvement
As companies continue to improve the quality of their products and services, their profitability increases. This improvement is achieved in three main ways:
1. Increase the customer's willingness to pay: for example, through product optimization or brand marketing.
2. Reduce costs: For example, by improving the customer acquisition process.
3. Expand sales: Expand your user base with network effects.
What's more, as companies continue to grow their capabilities, they can also expand beyond the boundaries of geography or product to a wider range of markets. This "capacity spillover" effect means that companies can not only do better, but also do more.
S-Curve and Competitive Pattern Evolution
The development of an industry usually follows an "S-curve" of technology diffusion. At the beginning of the curve, technological breakthroughs and market potential attract an influx of new players, bringing a wave of innovation; In the mid-stage of rapid growth, companies will compete fiercely with each other in an effort to seize market share. In the later stage, the leader establishes its position through the accumulated advantages, and the industry enters a relatively stable maturity period.
Arena competition occurs in the early and middle stages of the S-curve. At this stage, companies must continue to invest in the evolution of technologies, products, and business models to maintain or even expand their market share. And once it stagnates, it is possible to quickly overtake the opponent.
Figure: How technological advancements are reshaping the industry landscape
Comparison of the three competitive models
To better understand the peculiarities of arena-style competition, it can be compared to two other common modes of competition:
1. Simple competition: the threshold is low, there are many players, and the technical threshold and differentiation are limited. For example, the community laundry or locksmith industry is small and easy to enter, and the competition mainly relies on price and convenience.
2. Mature market competition: It usually occurs in the later stage of the S-shaped curve, where a few large players hold most of the market share, and it is difficult for new players to enter. In the case of long-haul airlines, for example, high aircraft procurement costs, airport resource constraints and strict regulations make it difficult for new entrants to shake the existing pattern.
3. Arena competition: It is a never-ending investment race. Companies continue to build their capabilities by investing in R&D, marketing, and infrastructure. This competition often stems from "endogenous sunk costs" – those that build on existing capacity building on an ongoing basis, such as product iteration, branding, or production process optimization. This model allows the industry to evolve in a continuous and dynamic way, allowing leaders to further expand their strengths and even enter new market segments.
Case: The evolution of the social media industry
Taking the consumer Internet industry from 2005 to 2020 as an example, Meta (formerly Facebook) is a typical arena player. During this period, the company continued to invest in platform construction, user experience optimization, and global market expansion. While it acquired Instagram and WhatsApp and was once considered to be in a mature phase, TikTok's meteoric rise has once again ignited the spark of competition. This shows that even if the industry enters the latter part of the S-shaped curve, as long as there is a new business model or technological change, it may still inspire a new round of competition.
Arena competition is a typical feature of the era of rapid evolution of technology and business models. It is different from the stable pattern of traditional industries, but a race to continuously upgrade. In such an environment, enterprises do not advance or retreat, only continuous investment, continuous evolution, in order to truly win the market, grasp the initiative.
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