Signs of Hyper-competition in the Generative AI Industry

On Monday, January 27, 2025, Nvidia- an artificial intelligence (AI) chip manufacturer’s stock plummeted 16%, removing around $600 billion from the company’s valuation, which is the largest market-cap decline recorded in Nasdaq history for a single company. This stock market news sent shock waves in the AI’s global and US industries. The cause of this sharp one-day decline was attributed to a signal of a super hyper-competitive move coming from a new start-up in the AI industry in China. A very low-cost and highly differentiated open-source AI application provider, Deep Seek from China, entered the AI industry with a claim that its app development cost was negligible compared to the AI industry’s leading AI models. The little-known company from China also claimed that its open-source model outperforms Open AI’s ChatGPT in different tests.

Today’s rapidly changing business environment is influenced by political, economic, and technological forces and many other external interventions. These environmental forces, particularly the impact of disruptive digital technologies and international competition, have slowly or abruptly destabilized the industry structures of many industries. According to Rich D’Aveni, the general feature of industries today is hyper-competition: “intense and rapid competitive moves, in which competitors must move quickly to build (new) advantages and erode the advantages of their rivals.” If industries are hyper-competitive, their structures are unstable, and competitive advantage is temporary. However, research shows that disruptions with rapid structural changes are not limited to the high-technology sector—the oil and gas, financial, and taxi services have also experienced the same disruptions in the recent past.

Because of the advances in computer sciences, the time-to-market (between idea generation and launch) for a new product is getting shorter and shorter every year in the software development industry. In the same way, rivals can quickly imitate the strengths of AI software development companies. Moreover, because software development skills are less tacit and tend to become more explicit, they can be duplicated quickly. In contrast, to develop and manufacture AI hardware (chips, computer systems, etc.), more time and tacit knowledge is required, and therefore, these hardware skills are difficult for competitors to imitate. Additionally, the higher investment needs for AI hardware, such as semiconductor manufacturing, will provide strong barriers to new entrants.

The news coming out from Deep Seek indicates that the stability of the US Generative AI (GenAI) industry structure might get eroded rapidly by the disruptive impact of Deep Seek. The hypercompetitive move from Deep Seek, which rapidly built a strong competitive advantage using graphics processing unit (GPU) chips from Nvidia, might erode the competitive advantage of rival firm Open AI’s Chat GPT in the long run. Open AI and other similar companies in the US will still face international competition even if Deep Seek is banned in the US.

Currently, the US is the rational leader in AI innovation and the various groups within the AI industry are in between the introductory and growth stages of the AI industry evolution. Since the relationship between R&D and innovation output is very weak, no one can predict the amount of value the US AI industry will create in the long run and who will capture the maximum value from AI innovation output, the innovators or the consumers. Currently, there are an enormous number of new entrants into AI innovation, including some backed by heavy investments, which will cause intense rivalry and high exit barriers, respectively. Intense price competition will bring down the AI product prices, which will result in lower profitability, and therefore some companies will find difficulties in recouping their investments, however, customers will capture the maximum value, particularly in the Generative AI industry.

Innovation generates a temporary competitive advantage that offers an opportunity in terms of time for the innovative company that can be used to build capabilities quickly and defend its market position to remain successful. For example, Intel and Nvidia successfully used lead times to generate advantages in manufacturing, quality, and market position. In contrast, the electric vehicle (EV) manufacturers in the US failed to develop a cost leadership market position in their available lead times to compete successfully in the US auto market with Chinese EV manufacturers. Therefore, to stay ahead of the competition in the AI industry, a firm must continuously innovate with a robust innovation strategy, upgrade its resources and capabilities, gain and sustain its market position, and make imitation harder for competitors by developing slow-cycle resources (patents, brand name, etc.).

Strategic management is the backbone of innovation. Without it, start-ups and established innovative companies can have difficulty in generating and sustaining their competitive advantage. Because of the high attractiveness of the AI industry, an exceptionally large number of innovative firms globally have been entering the global market to capture market share and therefore are facing hyper-competition. Most startups possess only a single strength in innovation, which is not enough to sustain a competitive advantage in today’s dynamic business environment. Successful first movers should build complex competitive advantages in their initially available lead times to sustain their competitive advantages in the marketplace. This requires building strengths in multiple areas, including strategic management, to compete effectively and create customer value for their products.

References and Further Readings

1. Ashok N., The Effect of Changing External Environment on Industry Structure, Competition, and Profitability, A& N Strategy Consulting (December 23, 2022).
2. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 4, 9, and 15.
3. A. D’Aveni, Hyper-competition: Managing the Dynamics of Strategic Maneuvering (New York: Free Press, 1994): 217-218.
4. A. D’Aveni, G.B. Dagnino, and K.G. Smith, “The Age of Temporary Advantage,” Strategic management Journal 31 (2010): 1371-1385.
5. Ashok N., Creating and Delivering High-Performance Innovation, A& N Strategy Consulting (December 9, 2024).
6. Ashok N., Successful Innovative Companies Exploit Complex Sources of Competitive Advantages, A&N Strategy Consulting (April 21, 2020).