Market Challenger Strategies

Firms that are second, third, or lower in an industry are sometimes quite large, such as Colgate, Ford, Lowe's, Avis, and Verizon. These runner-up firms can adopt one of two competitive strategies: They can challenge the leader and other competitors in an aggressive bid for more market share (market challengers). Or they can play along with competitors and not try to outdo them (market followers).

A market challenger must first define which competitors to challenge and its strategic objective. The challenger can attack the market leader, a high-risk but potentially high-gain strategy. Its goal might be to take over market leadership. Or the challenger's objective may simply be to wrest more market share.

Although it might seem that the market leader has the most going for it, challengers often have what some strategists call a "second-mover advantage." The challenger observes what has made the leader successful and improves upon it. For example, Home Depot invented the home-improvement superstore. However, after observing Home Depot's success, number two Lowe's, with its brighter stores, wider aisles, and arguably more helpful salespeople, has positioned itself as the friendly alternative to Big Bad Orange. For Lowe's, the advantage has been profitable. Although it still captures only 58 percent of Home Depot's revenues, over the past 10 years Lowe's has earned average annual returns of 14.7 compared with Home Depot's 4.1 percent.16

Alternatively, the challenger can avoid the leader and instead challenge firms its own size, or smaller local and regional firms. These smaller firms may be underfinanced and not serving their customers well. Several of the major beer companies grew to their present size not by challenging large competitors, but by gobbling up small local or regional competitors. If the company goes after a small local company, its objective may be to put that company out of business. The important point remains: The challenger must choose its opponents carefully and have a clearly defined and attainable objective.

How can the market challenger best attack the chosen competitor and achieve its strategic objectives? It may launch a full frontal attack, matching the competitor's product, advertising, price, and distribution efforts. It attacks the competitor's strengths rather than its weaknesses. The outcome depends on who has the greater strength and endurance.

If the market challenger has fewer resources than the competitor, however, a frontal attack makes little sense. Thus, many new market entrants avoid frontal attacks, knowing that the market leaders can head them off with ad blitzes, price wars, and other retaliations. Rather than challenging head-on, the challenger can make an indirect attack on the competitor's weaknesses or on gaps in the competitor's market coverage. It can carve out toeholds using tactics that the established leaders have trouble responding to or choose to ignore. A For example, compare the vastly different strategies of two different European challengers— Virgin Drinks and Red Bull—when they entered the U.S. soft drink market in the late 1990s against market leaders Coca-Cola and PepsiCo.17

Virgin Drinks took on the leaders head-on, launching its own cola, advertising heavily, and trying to get into all the same retail outlets that stocked the leading brands. At Virgin Cola's launch, Virgin CEO Richard Branson even drove a tank through a wall of rivals' cans in New York's Times Square to symbolize the war he wished to wage on the big, established rivals. However, Coke's and Pepsi's viselike grip on U.S. shelf space proved impossible for Virgin Drinks to break. Although Virgin Drinks is still around, it has never gained more than a 1 percent share of the U.S. cola market.

Red Bull, by contrast, tackled the leaders indirectly. It entered the U.S. soft drink market with a niche product: a carbonated energy drink retailing at about twice what you would pay for a Coke or Pepsi. It started by selling Red Bull through unconventional outlets not dominated by the market leaders, such as bars and nightclubs, where twenty-somethings gulped down the caffeine-rich drink so they could dance all night. After gaining a loyal following, Red Bull used the pull of high margins to elbow its way into the corner store, where it now sits in refrigerated bins within arm's length of Coke and Pepsi. In the United States, where Red Bull enjoys a 65 percent share of the energy drink market, its sales are growing at about 35 percent a year.

Continue reading here: Market Nicher Strategies

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