We briefly touched on using the New Lanchester Strategy for startups in an earlier post here. Today I want to expand on how the strategy applies to startups entering existing markets by referencing the works of Steven Gary Blank – noted entrepreneur and author of the classic product development book The Four Steps to the Epiphany.
Remember these simple rules that companies can use to analyze an existing market:
If a single company has 74% of the market, the market has become an effective monopoly. For a start-up, that’s an unassailable position for a head-on assault.
If the combined market share for the market leader and second-ranking company is greater than 74% and the first company is within 1.7 times the share of the second, it means the market is held by a duopoly. This is also an unassailable position for a startup to attack.
If a company has 41% market share and at least 1.7 times the market share of the next largest company, it is the market leader. For a startup, this too is a very difficult market to enter. Markets with a clear market leader are, for a startup an opportunity for re-segmentation.
If the biggest player in a market has at least a 26% market share, the market is unstable, with a strong possibility of abrupt shifts in the company rankings. Here there may be some entry opportunities for startups or new products from existing players.
If the biggest player has less than 26% market share, it has no real impact in influencing the market. Startups who want to enter an existing market find these the easiest to penetrate.
Knowing these rules, Blank goes further to state:
“Let’s say the market you are going after is a well-defined existing market. If there is a dominant player with more than 74% market share, do not under any circumstances attack that market head-on. Why? Because of the rule that says you need three times the resources of the market leader, you’ll be out of business shortly. Instead target your attack at the point where your limited resources can make a difference. You will segment the existing market to create a submarket where your product can be unique or substantially different. Or if you can create an entirely new market, you can define a space that the market leader does not address at all.”
“Your goal is to become number one in something important to your customer. It could be product attribute, territory, distribution chain/retailer, or customer base. Keep segmenting the market (by age, income, region, etc.) and focusing on the competitors’ weak points until you have a battle you can win. You know your segmentation is correct when you have created a niche where you can be number one. Remember, any company can take customers away from any other company if it can define the battle.”
“If the dominant player has between 26% and 74% market share, pick your battles carefully. Remember the cost of a head-on attack: three times the budget of a single competitor or 1.7 times the budget of a competitor in a crowded market. Most startups don’t have access to those financial resources. Therefore, re-segmenting the market or creating a new market is almost always the default when faced with a dominant incumbent. All the marketing tricks for nipping at the heals of an entrenched competitor can be used here: most of them were invented 2500 years ago by Sun Tzu’ and described in his book The Art of War. “All warfare is based on deception. If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight and if not, split and re-evaluate.””
“If there is no single company with more than 26% market share in an existing market, then the startup gods have smiled on you. The market is ripe for your head-on attack. You can still choose to re-segment the market, but the cost of entry is low and the market is ripe for innovation. It is yours to lose.”
Here’s the takeaway: For startups, attacking entrenched competitors head-on is foolish. Most would be better served by applying the rules of force concentration as outlined by the New Lanchester Strategy.
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