Playing To Win
Competing Against Big New Entrants
A client recently asked me how I think through a situation in which entirely new competitors enter an existing market — not tiny little upstarts but big established firms whose primary businesses are in different industries. It is a good strategy question, so I decided to write my 9th Year II Playing to Win/Practitioner Insights (PTW/PI) piece on Competing Against Big New Entrants: Beat ’em, Join ’em, or Exit Stage Left? You can find all previous PTW/PI here.
The Strategy Question
An extremely popular question, ever since the great Clay Christensen’s best-seller The Innovator’s Dilemma, is how a leading player in an industry should think about/deal with upstart entrants into their industry. I don’t want to add to the mountain of writing on that subject. Rather, I will address the less discussed question of what to do when a giant — as big as or bigger than you — migrates from its own traditional industry into yours? While it might not happen as frequently as upstart entry, it does happen and is strategically tricky for the incumbent.
Thinking it Through
The tool I use for this circumstance is the same one I use whenever I think about a competitor — the Strategy Choice Cascade pictured above. While people may think that the Cascade is a tool for your own strategy — and it is — it is also the best way to understand the strategies of your competitors. Start by reverse-engineering their Where-to-Play (WTP) and How-to-Win (HTW) choices — those are pretty obviousto a thoughtful external observer from their observable actions . Then make educated guesses as to their Winning Aspiration (WA), Must-Have Capabilities (MHC), and Enabling Management Systems (EMS).
When you understand a competitor’s WA/WTP/HTW/MHC/EMS, you can think through how your Cascade needs to be uniquely different than theirs in order to win in a distinctive fashion. As I have argued previously, there can be multiple ways for competitors to win in adjacent and/or partially overlapping spaces. But you have to understand the Choice Cascades of your competitors to pick that optimal place to play and corresponding way to continue winning.
So, when an established company shifts its strategy to overlap with yours in a way that it didn’t previously, the automatic strategy reaction should be to reverse-engineer its new strategy to gain the insights necessary to determine how to respond.
What was Google’s WA when it entered the smartphone market in 2007 against the established competitors — led at the time by Research in Motion? It was not to make a buck in smartphones. Google gave its Android operating system away for free. Instead, it wanted more customers to enter the Google online universe of Gmail, Chrome and the Google Play Store because their phone ran on Android. And it had the knock-on effect of helping Samsung, already a highly capable consumer electronics giant, gain the one thing it was missing for successful competition in smartphones, which was operating software development. So, the established competitors (including Apple who entered contemporaneously) needed to understand that Google/Android could not be repelled from the smartphone market because it wasn’t trying to make a (direct) profit, and that Samsung would be a huge force in the industry because it got for free the one missing piece in its endowment of MHC.
When MCI entered the US long distance telephony market against AT&T, its WTP was much narrower than that of AT&T, the previous monopolist. AT&T played absolutely everywhere — all customers in all geographies. MCI targeted the dense, high-volume customer and geographic segments for which the costs-to-serve were considerably lower. MCI didn’t worry about customers in rural Wyoming or businesses outside large metro areas — while AT&T served them all, with the attendant higher costs. And worse still, AT&T cross-subsidized customers, overcharging the dense routes and high-volume customers while subsidizing the sparse routes and low-volume customers. Slowly but surely, AT&T’s economics worsened as the most attractive customers defected until such time as it was acquired by SBC at a fraction of its peak worth. To survive, AT&T would have needed to respond to MCI’s narrower WTP choice.
When giant Apple entered the MP3 player market in 2001 against the incumbents including the first portable digital audio player, MPMan, it chose a broader WTP. It didn’t just sell a MP3 player, it provided users with the combination of the iPod with the music downloading service iTunes. It was a broader WTP that enabled a compelling HTW — which enabled iPod to dominate the space.
When Progressive Insurance took on the established giants (e.g., Allstate, State Farm) in non-standard auto insurance, it decided to win by making its profits on insurance, not on investment income and that enabled it to win with non-standard drivers by paying out claims quickly and without customer hassle because Progressive’s strategy didn’t call for delaying claim payments for as long as possible to keep earning investment income. The incumbents didn’t want to change their business models, which enabled Progressive to become the leader in non-standard auto insurance.
Red Hat decided that rather than attempting to make money by selling disks containing its compilation of Linux software, as did all the other Linux players in the mid-1990s, it would make money on selling services. That caused it to allow its software to be downloaded free from the Internet, which built its market share to the dominant in the industry, making it the most attractive service provider. The other incumbents didn’t have any response to this new HTW and allowed Red Hat to dominate the space and build a business that it later sold to IBM for $34 billion.
When Apple entered the smartphone business in 2007, it brought a suite of webpage rendering capabilities to the business from its long experience in PCs that made its iPhone a superior web access device versus the incumbents and the new Android-based entrants. Those capabilities, plus the experience with operating the iTunes business which gave it a leg up on developing its App Store, helped it make the iPhone the most profitable player in the rapidly growing smartphone space.
Loblaws became the dominant grocer in Canada, penetrating markets outside its home of Ontario by owning its own real estate, not leasing it, which enabled it to offer whatever selection of goods and services it wished and not be constrained as were its competitors by leases with non-compete clauses in the developments in which they operated.
Enabling Management Systems
When Amazon famously entered the book selling business against the entrenched incumbents, it had a management system that captured and used buyer data to build the capability for providing recommendations of other books that its existing buyers were likely to enjoy. In due course, the incumbents responded by building management systems and capabilities, but their efforts were far too little, far too late.
Making an Assessment
Reverse-engineering the strategy of the entrant will enable you, as the incumbent, to assess the magnitude and form of the threat. And that assessment will facilitate you making one of three fundamental strategy choices in response.
The first choice is to up your game on your current strategy. The beloved Canadian retailer, Canadian Tire, is considered one of very few competitive retailers that has fared well in the face of major entry into its market by Walmart. When Walmart entered its market based on a strategy of global purchasing scale and huge but typically distant Supercenters, Canadian Tire doubled down on its local-ness. With smaller stores, owned by local franchisees, proximate to shoppers (90% of Canadians live within 15 minutes of a Canadian Tire), Canadian tire encouraged its franchisees to get even more local in their assortment and connection to the community, and that created a productive contrast with the giant, anything-but-local entrant.
In the face of entrants, AT&T could have doubled down on its breadth and ubiquity but eliminated the cross-subsidization in pricing that handed over its most valuable customers to the entrants. The incumbents that Progressive outsmarted could have focused more on giving customers a better experience and made Progressive’s incursion much less successful.
The second choice is to join them — to adopt the key unique feature of the entrants’ strategy. This is tricky because you must ensure that your strategy remains sufficiently unique while doing so. Adobe represents a success story on this front. A traditional software company with a revenue model based on selling licenses saw the incursion of the SaaS business model and made the painful choice to shift to a SaaS model — which it very difficult due to the revenue dip that occurs when a new customer gives you one month of revenues rather than a big permanent license. It continued to differentiate with uniquely valuable software, but with a revenue model that matched its competitors.
Had competitors invested more in webpage rendering or in owning the real estate beneath their stores or aggressively pursued online sales, they could have significantly blunted the incursions of Apple iPhone, Loblaws, and Amazon, while accentuating the things that made their own strategies special. But none of them did — until it was far too late.
The third choice is to exit — to sell to an enthusiastic buyer before your value slips away. For every turkey business, there is a turkey buyer. Time Warner cleverly sold to dull witted AT&T when it saw the inevitable demise of linear programming and the ramp up of investment in content by numerous new players. Its shareholders reaped $85 billion for an asset that was demonstrably worth only $43 billion a few years later. Nokia sold its handset business to Microsoft, but not soon enough to reap the reward it could have nearer its peak value. LinkedIn probably played it perfectly — soon enough to enable the deep, deep pockets of Microsoft to invest in a prosperous future for it.
In retrospect, there was probably nothing the existing players, all of whom had to invest huge resources in building their own operating software, could have done in the face of Google giving Samsung (and anyone else who wanted it), the missing piece with its free Android software. MPMan was probably utterly doomed when Apple launched the iPod. And the fate of all the other Linux players were probably sealed the minute Red Hat launched its brilliant software giveaway. All should have exited before the world figured out that they had been inescapably trumped.
If you are an incumbent facing the entry of a big established player, don’t just watch and worry. Reverse-engineer its Strategy Choice Cascade to better understand the nature and magnitude of the threat to your position. Then decide quickly, because time is of the essence.
Is your strategy still robust in the face of this new strategy? If so, determine how to double down on the distinctive features of your existing strategy in ways that neutralize the entrant’s advantages. Be the hyper-local Canadian Tire in the face of the distant and global Walmart.
Are key features of their strategy so powerful and inevitable that you need to adopt them in order to avoid disabling the distinctive features of yours? If so, do it and incorporate those key elements into your strategy. Be like Adobe. Keep your strategy but adopt a SaaS approach to selling your product in order not to disable all of your advantages.
Are you doomed because their strategy trumps yours in such an emphatic way that you have no good options left to compete? Are you Slackware and Yggdrasil and Red Hat has just figured out how to obsolete all of you? Are you Time Warner and you can’t compete with Amazon, Netflix, Apple et al in the future of media content? Then find a turkey buyer before it figures out the same thing.
You won’t always be able to predict the future accurately. But this approach will enable you to improve your odds.