Two Brigham Young University business professors explored how companies can effectively enter attractive markets dominated by entrenched rivals in a recent issue of the Harvard Business Review.
For example, how could Red Bull, the soft drink that arrived in the United States in the late 1990s, capture market share that belonged to industry giants Coca-Cola and Pepsi? Although most similar market-grabbing attempts fail, David J. Bryce and Jeffrey H. Dyer identified the three strategies most commonly used by those tiny Davids who methodically slay - or at least wound - seemingly insurmountable Goliaths.
Although savvy managers already understand the importance of not attacking competition head on, the researchers more formally "provide a framework for companies to conceptualize how to design a successful indirect attack," says Bryce, an assistant professor of organizational leadership and strategy. The recommended approaches are: (1) taking advantage of excess capacity in existing assets or resources, possibly those of partners, (2) reconfiguring the value chain, and (3) creating products that initially appeal to niche customers but not mainstream customers.
"We don't tell [executives] exactly what to do," Bryce continues. "But when companies are contemplating an expansion move, they can get everybody in a room and say, ‘Ok, folks, we've got to brainstorm around these three components and come up with an approach to this market that relies on these kinds of ideas.'"
To uncover the strategies, Bryce and Dyer examined companies that successfully entered the most profitable markets in the United States between 1990 and 2000. They found:
- Newcomers don't seem to be deterred by incumbents' strangleholds. There were almost five times as many entrants to the top 10 most profitable markets as there were to average industries.
- New entrants in attractive markets had a particularly tough go of it, typically earning returns 30 percent lower than counterparts in all other less attractive industries.
- But when new entrants to attractive markets turned profits, they hit it big. Their returns on assets were nearly seven times those of all entrants to the top markets and almost four times the returns of the profitable entrants to less attractive markets.
One theme stood out: entrants never attacked incumbents directly, instead relying on methods of indirect assault. For example, Red Bull was initially marketed to young adults based on its "energy enhancing" properties. Once it captured a foothold, its appeal widened until it had created an entire new product category - energy drinks. Contrast this success with the flop that was billionaire Richard Branson's attempt to attack Coke and Pepsi head-on with the very similar Virgin Cola.
"When companies go after customers that incumbents are ignoring, and if they use a very different business model so that the incumbent doesn't see it as direct competition, the new entrants have time to amass the resources to eventually withstand a retaliation from the big players," Dyer says.
A company that successfully executed the strategy No. 1 - taking advantage of excess assets, possibly those of partners - was Jakks Pacific, a California-based toy and action figure manufacturer. The firm has successfully intruded on the video game market with handheld game controllers, complete with internal games, that plug directly into televisions. The company's games feature characters from its partners' popular movies, television shows and comic books.
Another success story identified by Bryce and Dyer is Skype, which customers use to make inexpensive phone calls via the Internet.
Getting into the telecom services industry is cost prohibitive because of the vast amounts of capital required to build the infrastructure for a nationwide network. To successfully compete Skype "reconfigured the value chain" (strategy No. 2) by answering the somewhat subversive question, "How can we use the very network created by our competition to compete against them?"
At the same time, Skype successfully targeted a niche market of people (strategy No. 3) intrigued by the idea of saving money by circumventing the established system. Initially, the telecom giants didn't pay much attention to the company. But the appeal of inexpensive phone calls quickly attracted a critical mass of customers and that attracted the attention of eBay, which acquired the company two years after its launch for $2.6 billion.
It's not just the companies that benefit from the BYU duo's recommendations.
"This framework has the potential of enhancing the overall standard of living because companies are able to create products and services in niche areas at lower cost," Bryce said. "That ultimately serves the consumer."
Writer: Grant Madsen
