Competitive Strategies for Challenger Firms

What is a competitive strategy?

A competitive strategy is the approach that a company takes to distinguish itself from various
competitors, and go about the task of obtaining customers. The idea is to increase the demand
for the goods and services offered by the company, either by capturing a larger share of the
current consumer base, or by going after niche markets that competing companies have yet to
recognize and attempt to enter. In many situations, the configuration of the competitive
strategy will contain elements that are both defensive as well as proactive.

With a defensive competitive strategy, the idea is often to respond to claims of competitors or
even perceptions by consumers that the goods and services offered by the company are
somehow inferior to those offered by others. Part of the marketing and public relations efforts
will be tailored to refuting the claims as false, and providing information that implies that the
goods and services offered are actually of superior quality. For example, if the canned soups
made by one company are identified as using inferior ingredients, the business may counter
the claim by creating television commercials and print ad campaigns that point to the
freshness of their ingredients, and thus the superiority of their product.

A competitive strategy that is proactive or offensive is usually aimed at cultivating new

markets or developing new products that attract additional consumers, before competitors
have the chance to do likewise. With this approach, the idea is to establish the business as the
standard or benchmark that all competitors must match or exceed, a task that is sometimes
hard to manage once customer loyalty is firmly entrenched and the brand name is well known.
In like manner, a business that is forward-thinking and develops products that meet emerging
consumer needs before anyone else will quickly build a reputation of being the only source
for that product. If the strategy is particularly effective, the business is likely to maintain that
status even when the competition releases similar product lines.

• What does Market Challenger mean?

A firm that has a market share below that of the market leader, but enough of a market
presence that it can exert upward pressure in its effort to gain more control. Companies with
low market share are generally not in a position to influence prices, and are often susceptible
to the actions of larger firms. Market challengers, being in a position of becoming the
dominant player, may face a high degree of risk because they must take potentially radical
steps in order to draw away consumers from the market leader. A market challenger is a firm
in a strong, but not dominant position that is following an aggressive strategy of trying to gain
market share. It typically targets the industry leader (for example, Pepsi targets Coke), but it
could also target smaller, more vulnerable competitors. Why join the navy if you can be a
pirate? So said Steve Jobs, the Apple founder. The challenger seems to be the most exciting
of market positions because you are more motivated to win. Who wants to run a forgotten
second when you can have a serious crack at first place?

What are the advantages of challenger brands?

The challenger has many advantages on its side. An advantage is a weapon that can be
deployed for use against the enemy, in this case, the market leader. Amongst the challenger’s
advantages are:

It’s easier to attack than defend (even if most attacks fail).

The market leader has much territory to defend and, for most of them, covering it all is almost
impossible. The leader is vulnerable to attacks, the challenger can attack on a small front to
make good inroads. If the market leader tends to wait-and-see, it may have time on its side.

Psychological advantages. Less to lose, much to gain.

Challengers have attack attitudes that drive them to win. And every portion of market share
taken from the leader is a victory worth celebrating. Market leaders don’t have the same sense
of winning, but experience a heightened sense of loss. The challenger grows confidence, the
leader becomes weakened. This may motivate the market leader to make a strategic mistakes
that benefit the challenger.

The most famous example of this strategy occurred when Pepsi, already gaining market share
through running its “younger generation” theme, ran taste-tests that showed consumers
preferred the taste of Pepsi over its rival, Coca Cola. Amazingly enough, Coca-Cola was
intimidated enough to change its product in response. It validated the Pepsi campaign and
confused Coca Cola loyalists.

Challenger Brands are not alone.

There is one leader and many competitors hungry to take market share. Think “my enemy’s
enemy is my friend”. Challengers can strengthen their position by entering into strategic
alliances and cooperative relationships with other competitors and form a united front.
Smaller competitors can pool resources, present united fronts to regulators, form buying
groups to secure cost advantages and more.

The Sympathy Vote.

There are always consumers that will buy from non-market leaders as a form of protest or
pro-competition position. They like to support the underdog, partly out of a sense of justice,
and partly because support for the underdog means that competition remains in the market.
With competition in the market, it is assumed that prices will be kept at an acceptable level.

Of course, no brand is able to appeal to everyone. The market leader wants to appeal to the
biggest or most important part of the market but, in doing so, is unlikely to appeal to smaller
niche or specialized markets which may provide extremely profitable share for the non-
leading brands.
Challenger Brand Believability.

Depending on the challenger’s brand position, it is easy to make the consumer believe that the
challenger is the “good guy” at the expense of how the consumer perceives the market leader.
This is clearly the Virgin story, but is a common story with many challenger brands that enter
the market at lower price levels, forcing the leader to reduce prices to defend its market share.

A challenger can turn tables because it is in opposition so it should tell the opposite story. The
most prominent example of this was the battle fought long ago between rental car companies,
Hertz and Avis, which led to an Avis advertising campaign acknowledging its second place
status and encouraging consumers to support it because “it tried harder”. It’s “queues were
shorter” than the leader, Hertz.

The Regulator Supports the Challenger Brand.

In most developed countries, challengers are protected and the behaviour of market leaders is
carefully scrutinized. This is because many Governments seek to promote competition and
fair trade in the market place to benefit consumers, business and the community.

In Australia, for example, the regulator regulates certain network industries including
telecommunications, energy, water, post and transport. Their role includes the promotion of
access to monopoly infrastructure assets. Specifically, the regulator provides pricing oversight
and forces third-party access to ‘essential’ services that it deems necessary to curb the market
power of monopoly infrastructure.

Securing a regulator or company watchdog on the side of the challenger can be extremely
advantageous. While the challenger brand can focus on the competitive battle for market
share, the leader can be distracted through managing regulatory intervention. By using this
strategy, the challenger seeks to (a) distract the staff and tie up the resources of the market
leader n managing the regulatory requirements and (b) secure a legally-sanctioned
advantageous competitive arena for itself.

To maximize the use of this advantage, challengers need to implement a lobby plan, and
engage an experienced lobbyist whose role is to promote and protect the interests of the
challenger with key regulators and corporate watchdogs. Presenting a united front with other
competitors has the advantage of greater pressure being able to be applied and shared cost
between multiple parties.

Market Leader Complacency.

The biggest threat facing market leaders is when they start to believe that they are as good as
their market share reports, and they become complacent about their leadership. Complacency
leads to an assumption that leadership cannot be lost – but a quick comparison of Fortune 500
Lists over the years shows history proves over and over that this is not the case. Complacent
leaders ignore shifts in what consumers want or perceive, usually to their own demise.

A complacent leader does not respond immediately to competitive threats, in fact, it may not
respond at all until it is forced, but timing is critical in marketing. If the market leader waits
too long, it gives the challenger enough time to grow strong and, once this occurs, the leader
is less able to effectively respond to the competitive threat.
 • What is the strategic objective?

A market challenger must first define its strategic objective. Most aim to increase market
share. The challenger must decide whom to attack. If the attacking company goes after the
market leader, its objective might be to gain a certain share. However, if the attacking
company goes after a small local company, its objective might be to drive that company out of
existence

• What is/are the opponent(s)?

It can attack the market leader: This is a high-risk but potentially high-payoff strategy and
makes good sense if the leader is not serving the market well. The alternative strategy is to
out-innovate the leader across the whole segment. Xerox wrested the copy market from 3M
by developing a better copying process. Later, Canon grabbed a large chunk of Xerox’s
market by introducing desk copiers.

It can attack firms of its own size that are not doing the job and are underfinanced: These
firms have aging products, are charging excessive prices, or are not satisfying customers in
other ways.

It can attack small local and regional firms: Several major banks grew to their present size by
gobbling up smaller regional banks.

When is the best time for a challenger brand to strike?

Odds need to favour the challenger winning market share and thereby weakening, even subtly,
the market leader. Market leaders can be attacked at any time, but they are best attacked
when they pose the least resistance to the challenger. This can be achieved by:

Attacking the leader when it is distracted.

Distractions occur during changes in senior management, times of downsizing, times of

ownership changes, negative media coverage, regulatory intervention or other major incidents
that occupy the leader’s attention.

Attacking the leader where it is least likely to respond.

The market leader may not retaliate if it does not value the territory that you are attacking or it
deems it to be unimportant. This might be because the target market is too small to warrant a
market leader pursuing it. A challenger may win profitable market share by collecting
multiple uncontested segments in its armory.

Attacking the leader when it is least likely to respond.

Some challengers, and most guerillas, operate in stealth. If the leader doesn’t see your
competitive activity, the leader is not positioned well to respond to it. Stealth has the added
advantage of enabling the challenger to quietly build its strength – in other words, to “fly
under the radar” of the market leader. Once the market leader realizes that the challenger is
strong, it is too late. The challenger has grown into a force to be reckoned with.
Attacking the leader when market chaos is occurring.
In much the same way that leaders get distracted by internal matters, leaders can also be
forced into scattering resources if too many attacks take place simultaneously. Challengers
can muster support from allies to create chaos – and this enables territory to be taken from the
leader.

What strategies are used?

Using military analogies, a challenger can choose from the following offensive maneuvers:

• The head to head full frontal attack

• The Pincer Movement, encirclement of market leader
• Assaulting the sides – the flanking attack
• Guerilla warfare
• Changing the rules of the game

How strategies are used?

1. The Head-To-Head Full Frontal Attack

To undertake a full frontal, head to head assault on a market leader, a challenger needs to be
extremely well resourced and have the element of surprise on its side. A full frontal assault of
this nature is generally rare in marketing since it may be extremely expensive to undertake
and usually fails. The market leader redeploys its resources in preparation of the assault and
the challenger finds itself attacking strength not weakness.

This strategy may be considered if:

• Brand equity and customer loyalty is low.

• The market leader has few or limited resources.
• The challenger has strong resources.
• Products have little or no difference.

A more common execution of a full frontal attack is a softer version of it, driven by a price
push from a challenger to force the market leader to reduce its prices. (A high price is not
always a sign of a market leader vulnerability since a market leader may easily be able to drop
prices and still return a healthy margin.)

 Exemple: Japanese and Korean firms launched frontal attacks in various ASPAC
countries through quality, price and low cost

2. The Pincer Movement, Encircling the Leader

This strategy involves encircling the market leader through the introduction of products that
are similar to the market leaders. Segments are targeted, products are taken to them, and
market share gradually acquired from the market leader. This strategy is best executed in
stealth so as to avoid a head-to-head full frontal confrontation.

 Exemple: Seiko attacked on fashion, features, user preferences and anything that
might interest the consumer
3. Assaulting the Sides – The Flanking Attack

This strategy, also a niche market strategy, involves competing for a market segment or
geographic region that the market leader does not consider to be important. Because it is not
critical, the market leader will be unconcerned so is less likely to respond to competitive
activity.

Most flanking attacks include the following elements:

Advertising and promotional campaigns to specific segments or territories.
Product customisation to suit specific needs.

The flanking strategy, in some form or another, is one of the most popular of challenger
strategies. Since many markets are well-segmented, and market leaders may be large so less
able to serve niche markets, it offers opportunity for smaller competitors to secure market
share, some of it very profitable. To be able to undertake this strategy, the challenger needs to
have sufficient resources to defend its niches from smaller competitors that want to acquire its
market share.

 Exemple: In the 1990s, Yaohan attacked Mitsukoshi and Seibu’s flanks by opening
numerous stores in overseas markets

4. Guerilla Warfare.

Guerilla warfare is best described as the tactics employed by smaller forces against larger,
better resourced forces. As in the military, in a business context, guerilla warfare often relies
on isolating smaller units of the larger force so as to attack larger force by ambush. The
attacks are designed to tire the market leader, exhausting them to the point that they move to
other markets.

Guerillas avoid mass confrontation, operating instead in small pockets that are hidden from
immediate view, perhaps moving around frequently to avoid detection. A typical guerilla
assault includes some level of propaganda to win over the public. In a high level strategic
context it may have one of two objectives:

• Inflict damage on the market leader, then leave before the leader can retaliate or
• Guerillas may enter a market to take advantage of abnormal profits and then leave as
quickly as they entered.

The principles of Guerilla Warfare are:

• Never engage the enemy in a battle you cannot win. Look for areas that are not well
defended and don’t step outside the territory you know.
• Always strike fast and use every weapon at your disposal. You should aim to inflict
the greatest amount of damage possible before exiting quickly.
• Always plan your escape before you enter an assault.

Make every attack count towards your objective. A Guerilla’s advantage comes from being
the opposite to its larger opponent. While large opponents:

• Require many supplies, small guerillas don’t.

 • Seek to dominate the people, small guerillas seek to win over the support of the
people.
• Move slowly, smaller guerillas are extremely flexible and agile.
• Tend to be sloppy due to mass, smaller guerillas have tighter operatives.
• Leave big footprints in the market, it may be hard to see where a small guerilla is
active.
• Struggle to communicate, small guerillas don’t. Their left hand knows what the right
hand is doing.

 Example: Airlines use short promotions to attack the national carriers especially when
passenger loads in certain routes are low

5. Changing the Name of the Game (Bypass attack)

The truly exciting, but high risk strategy is one that changes the way the game is played. The
outcome of this is usually a product, service or way of doing something that is disruptive to an
industry. This is by deploying a disruptive technology.

In an overcrowded market with too many me-too products all claiming the same thing, the
surest way to get your brand noticed is to change the name of the game through the
deployment of a disruptive technology.

 Examples: Skype did it to the large telecommunications giants. Google did it to

Yahoo! (and to the publishers of paper-based directories such as Yellow Pages). The
Microwave did it to conventional ovens. Digital cameras did it to Kodak. These are
products launched that fundamentally changed the way people did things. In the
process, they disrupted entire traditional industries.

• The challenger is successful if:

• Is able to sustain attacks over time.

• Attacks in a way that is damaging to the market leader.
• Is perceived to be different to the market leader.
• Is able to provide comparable product thereby offering a genuine alternative.

• Examples of successful challengers

Many market challengers have gained ground or even overtaken the leader. Toyota today
produces more cars than General Motors and British Airways flies more international
passengers than the former leader, Pan Am, did in its heyday. Airbus delivers more aircraft
than Boeing.

Boeing and Airbus

When it closed the books on December 31, 2003, Airbus, the company that began in 1970 as
an unwieldy confederation of European aerospace firms, had replaced 89-year-old Boeing as
the world’s largest manufacturer of commercial aircraft. Airbus was on course to deliver 300
new airplanes in 2003 versus 280 from Boeing —just five years earlier in 1998 Boeing
delivered twice as many as Airbus. What happened? Challenger Airbus began with a clean
slate. It created an innovative new product line equipped with modern features— the massive
A380 designed to carry 555 passengers at only 2.5 cents per seat mile. In contrast, Boeing had
an arcane production system developed in World War II, and it couldn’t match Airbus’s
advance without redesigning aircraft at prohibitive costs. Once considered as the
manufacturing marvel of the world Boeing fell behind in both technology and manufacturing
efficiency during the 1990s. A new player that’s aggressive and focused will almost always
gain ground on an established player. In the aircraft business, when it can take nearly a decade
to go from design to launch, lost ground can be incredibly difficult to regain.

Challengers like Airbus set high aspirations, leveraging their resources while the market
leader often runs the business as usual. That’s why the CEO of Airbus, Noel Foregard, vows
to keep what he calls the „mentality of a challenger”.

References:

http://fionamackenzie.com.au/tag/challenger-brands
http://www.citeman.com/1059-market-challenger-strategies/
http://www.nowsell.com/marketing-guide/market-dominance-strategies.html
http://www.wisegeek.com/what-is-a-competitive-strategy.htm
http://www.investopedia.com/terms/m/market-challenger.asp