The New Lanchester Strategy revisited

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Can a military strategy that traces it roots to the mathematical analysis of early air battles in World War I be applied to today’s fast and furious start-up world? The answer is “yes”. Even more surprising is that many of today’s top entrepreneurs actively embrace this strategy—the New Lanchester Strategy—in their battles to gain market share against some of the industry’s leading giants.

The New Lanchester Strategy was developed by English-born Frederick W. Lanchester, an entrepreneur credited with building England’s first gasoline-powered automobile. His consulting firm, the Lanchester Car Company, was later responsible for many of the significant inventions in the automobile industry, including disc brakes, power steering, four-wheel drive, and fuel injection.

His engineering talents soon found their way into aviation, with the publication of two notable papers in 1907: The Theory of Rotation and Lift and a two-volume treatise on aerodynamics, Aerial Flight. The ideas proposed in these papers—known as the Lanchester-Prandtl three-dimensional airfoil theorywere later incorporated into airfoil theory by the German physicist Ludwig Prandtl and are still used today.

During World War I, Lanchester took an interest in the air war that raged over Europe. His curiosity about the results of the air battles convinced him of the need for mathematical analysis of the relative strengths of opposing battlefield forces to assess the effectiveness of aircraft. After performing vast quantitative studies of the number of casualties on both sides in land, sea, and air battles, Lanchester laid out his “laws” in the classic 1916 publication Aircraft in Warfare: the Dawn of the Fourth Arm.

The laws were studied extensively by the Royal Air Force and, more significantly, they were used as part of the military strategy of the United States with overwhelming success during the later stages of World War II in the Central Pacific theater.

After World War II, quality expert W. Edward Deming had the foresight to apply the laws to operations research theory, to be used in business situations. The strategy was introduced into Japan in the 1950s; was further popularized in the 1960s by business consultant Nobuo Taoka, and was used to formulate marketing plans with strategies to attack market share. Canon was one of the first companies to utilize the strategy on a global basis in their battles with Xerox in the 1970s and 1980s.

Today, the strategy (termed the “New Lanchester Strategy”) is considered one of the best tools available for determining market type choices for both start-ups and existing businesses. According to entrepreneur Steven Gary Blank, author of the classic book on start-ups The Four Steps to the Epiphany, the New Lanchester Strategy suggests a few rules companies can use to analyze an existing market: 1

  • 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 start-up to attack.
  • If a company has a 41% market share and at least 1.7 times the market share of the next largest company, it is considered the market leader. For a start-up, this too is a very difficult market to enter. Markets with a clear market leader are, for a start-up, 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 company rankings. Here there may be some entry opportunities for start-ups or for new products from existing players.
  • If the biggest player has less than a 26% market share, it has no real impact on influencing the market. Start-ups who want to enter an existing market find these the easiest to penetrate.

So what does this really mean?

Let’s say you are going after is a well-defined existing market. If there is a dominant player with more than a 74% market share, don’t attack the market head-on. Why? Because to break through, you’ll need three times the resources of the market leader. If you do battle with anything less, odds are that you’ll be out of business shortly. Instead, target your attack at the point where your limited resources can make a difference. Look beyond the market itself; look instead for segments within the market so as to create submarkets where your product can be unique or substantially different. Or, you can create entirely new markets — spaces that have not been addressed by the market leader.

According to Steven Gary Blank, your goal should to become number one in something important to your customer.2

It could be product attribute, territory, distribution chain/retailer, or customer base. Keep segmenting the market (by age, income, region, etc.) and focusing on 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.

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.

Like the Japanese in their battles to gain a foothold in American markets fifty years ago, today’s entrepreneurs are embracing the New Lanchester Strategy in their effort to gain market share in the myriad industries being transformed by innovation today. Frederick Lanchester’s rules for military engagement and force concentration continue to stand the test of time, as the analogy of war still applies to entering new markets.

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1 Steven G. Blank, The Four Steps to the Epiphany, (Cafepress.com, 2006) P. 126.

2 Blank, The Four Steps to the Epiphany, P. 127.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.

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