How to Contain the Costs of Aggressive Competition

Over the years, Apple and similar souped-up firms have confounded business observers with their rapid pace of competitive actions. Yesterday you unwrapped an amazing iPod; today, there’s a new and improved version hitting the market. To strategy experts, there is little unique about Apple’s business model; the firm is just an exemplar of a strategic approach known as competitive aggressiveness. This involves creating temporary competitive advantages by relentlessly rolling out new products, price cuts, marketing campaigns, or similar actions designed to keep rivals on their heels.

Competitive aggressiveness can certainly be a winning strategy for market leaders in newly developed markets or highly dynamic industries such as consumer electronics, biotechnology, and pharmaceuticals. “We’ve accumulated a lot of evidence that aggressiveness matters, that it really improves performance, especially in these highly dynamic environments,” says Goce Andrevski, associate professor and Distinguished Faculty Fellow of Strategy at Smith School of Business.

Still, for Andrevski, something doesn’t sit right with this rosy view. Most research to date has focused on the upsides of the strategy rather than the downsides. “I started thinking there are also costs associated with aggressiveness,” he says. And if costs are factored in, would an aggressive strategy still look so good?

Andrevski decided to look deeper. Teaming up with Walter Ferrier of the University of Kentucky, he launched a study in search of a more complete picture. They studied the relevant data for 141 companies in the personal computer, computer-aided software engineering, and semiconductor industries.

From this, the researchers uncovered a more nuanced story — that competitive aggressiveness works for some firms and not for others. Those that were tripped up were unable to deal with the extraordinary costs associated with rapid development. Their study also showed the conditions under which firms successfully pull off an aggressive competitive strategy. Their results were published in the Journal of Management.

“It's not whether you can just be aggressive. But to be aggressive efficiently, that's completely different”

The benefits of a competitive aggressiveness approach are significant. By constantly improving a product, a firm delivers superior value to its customers and generates new demand. “An aggressive series of actions also delays rival responses and creates temporary monopolistic positions,” says Andrevski, “allowing firms to charge premium prices and earn higher profit margins.”

Constant iteration also offers intense action-based learning that helps firms improvise and quickly adjust on the fly, improving the odds that future moves will be successful.

But, as Andrevski and Ferrier found, the costs can pile up as the pace of competition intensifies. For one thing, there are operational inefficiencies that come from mistakes, poor judgement, and lack of coordination among departments and suppliers — the inevitable byproducts of rushed planning and execution.

More significant, though, is that development costs increase exponentially when firms develop new actions within shorter periods. The researchers cite studies that estimate a 1 percent decrease in project development time increases total development costs by 1.75 percent. “Shorter project development times require the use of additional resources with diminishing returns,” says Andrevski.

Specialized Tech and Partners

How can aggressive firms earn superior profits despite escalating costs? Andrevski and Ferrier point to three factors that allow firms to reduce the costs and increase the benefits of competitive aggressiveness.

One is specialized technological resources. The researchers found that technological research depth increases both the speed and efficiency of developing and executing new competitive actions. “Aggressive firms with specialized technological resources learn intensively through improvisation and trial and error,” says Andrevski, “which enables them to develop actions faster and at lower costs than rivals and thus earn superior profits.”

A second is a dense network of trustworthy partners. These types of networks provide opportunities for efficient learning from alliance partners and access to resources. “For aggressive firms, it turns out that an alliance network can reduce coordination costs,” says Andrevski. “In a dense network, everyone communicates with everyone else, so there is efficient flow of information. . . If you’re willing to share, you keep the cost down. That's why aggressive firms can increase the frequency of new moves and still contain costs.”

A third is the inability for rivals to match the level of aggressive competition. This likely suggests that rivals simply do not have the resource base to compete on an equal footing.

An open question is whether other factors, such as human, reputational, or financial resources, can also reduce the costs of competitive aggressiveness.

The message for organizational leaders is that they must accurately determine whether they have the specialized technological resources and network of trustworthy partners to keep down the costs of aggressive competition. If they are found lacking, how long would it take to develop those resources?

It’s not simply a matter of mirroring the aggressive actions of an industry leader. Big firms can do that, but not necessarily at the same cost. “It's not whether you can just be aggressive,” says Andrevski. “But to be aggressive efficiently, that's completely different.”

— Alan Morantz