In 1908, Ford launched the highly affordable Model T and dominated the automotive industry for the next decade, increasing market shares from 9% in 1908 to 61% in 1921. It was banking on the economies of scale business model, using the assembly line specialization that enabled fast production using only one color (black dried quickly as compared to other colors). In 1924, challenger General Motors decided to offer what Ford refused to give to consumers – more colors, and three years after, GM’s friendly style took over market leadership over Ford’s efficiency. The strong-willed challenger overtook an overconfident leader by looking into changing customer demands that have begun to include design, power and status.
Blockbuster was the dominant market leader in the home movie and game rental service industry. It was so confident of its market position with some 9,000 stores nationwide that they ignored the cry of its customers about unreasonable late fees. In 1998, upstart Netflix launched an online subscription type of video rental membership that has no late fees, championing the cause of the consumers.
It asked customers to simply choose from 1, 2 or 3 DVDs rental packages without any due date since the next DVD titles can only be mailed soonest the older ones have been returned. Ignoring Netflix as a threat, Blockbuster reintroduced late fees in 2010 after removing it in 2005. By September 2010, Blockbuster filed for bankruptcy and the value of the company dropped to less than 1% vs. the value bought by Viacom. The same year, Netflix founder Reed Hastings was named Business Person of the Year by Fortune magazine.
Fortune and market position can change quickly. Market leaders once admired become academic case studies of how blind spots can reverse fortunes subsequently. Denial, arrogance and pride are some factors that prevent leaders to respond to challengers they used to ignore, laugh at or criticize. The newness often doesn’t fit the paradigm of the leader whose industry logic is based on their previous success without realizing that future success may have different key success factors. By the time they respond, it is often too late as consumers know that the move was not because they wanted to satisfy customers’ needs but because they had to protect a support base that has been bleeding. Ford eventually launched a stylish model; Model A in 1927 while Blockbuster also went into online DVD rental in 2004. Both were several years too late to respond.
It’s the classic story of the rabbit and turtle retold in different industries. When a small but strong-willed, calculating challenger competes with a surprise offense and offers something never done by the leader, many leaders would tend to ignore the preliminary efforts and would brag about their experience and track record. Some would even predict the ultimate down fall of the newbies or simply ignore them, as they feel invincible, thinking they are too high up or have strong loyalty for the challenger to even matter. Eventually, the challenger gains some market shares for its unique offer, shows some initial “winnability” to attract more supporters, creates alliances to increase volume and accelerate its momentum, thus becoming a credible challenger, then converting as a strong challenger, then a marginal leader, until ultimately becoming the new dominant leader with a big lead. It’s simply a natural phenomenon for a challenger brand that gains some market share to want more, so leaders should defend promptly, be very decisive early and not allow the challenger the chance to gain a foothold in the marketplace.
One of the hardest things for a market leader to deal with is being confronted with the comeback of a challenger, who recovers from some initial market weakness then gains greater support. The leader who used to simply laugh, snipe, or bully (by calling the challenger a nobody) will lose to the challenger in their own game — in this case, prestige and influence will diminish as doubt begins to cloud over the ability of the old leader to sustain its position, and as market shifts support in favor of the underdog challenger turned champion.
Do a consistent competitive assessment of your industry. Watch out for complacency and overconfidence, understanding that a leader’s greatest strength can become its greatest weakness, while the challenger’s weakness can be converted into strength.
(Thank you to BusinessWorld for featuring this article in their paper).