David J. Bryce

Jeff Dyer

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <p>Tempted to jump into a market where incumbents are scoring handsome profits? Beware: newcomers to the most attractive markets earn returns 30% below those of entrants to other markets.</p>
  <p>Still, you <em>can</em> crack these well-guarded markets, say Bryce and Dyer. The key? Attack indirectly—through combinations of three basic strategies: 1) <em>Leverage your existing assets.</em> For example, put a new product on shelf space you already own. 2) <em>Reconfigure a value chain.</em> For instance, bypass brick-and-mortar retail outlets and sell your product through a Web site. 3) <em>Create niches.</em> To illustrate, offer premium features at a price only certain consumers will pay.</p>
  <p>Mix and match these strategies, and you carve out a toehold. From there, you can consolidate your competitive advantage—and attack incumbents’ strongholds. Red Bull discovered this firsthand: It broke into the energy-drink market by initially selling its product only in bars. After gaining a loyal following, it ultimately captured 65% of the $650 million energy-drink market in 2005.</p>
  <p>The Idea in Practice</p>
  <p>The three strategies—leveraging your assets, reconfiguring your value chain, and establishing niches—seem simple. But the magic lies in their combination. Deploy at least two of them simultaneously or sequentially.</p>
  <h2>Reconfigure the Value Chain + Create a Niche</h2>
  <p>Use this most powerful combination to create low-cost business models <em>and</em> stay off incumbents’ radar screens. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Skype has reconfigured the telecom services value chain by letting people make inexpensive telephone calls over the Internet. It targets the niche market of cost-sensitive buyers who care little about the inconvenience or poor quality associated with using computers as telephones. Incumbents dismissed Skype as just another dot-com hopeful—giving it time to build scale and credibility. In 2005, Skype scored revenues of $25 million and boasted 100 million customers. </p>
  <h2>Leverage Existing Assets + Reconfigure the Value Chain</h2>
  <p>Your assets include plants, equipment, and real estate—as well as brands and know-how in design, manufacturing, or distribution. Combine asset leveraging with value-chain reconfiguration to make moves incumbents can’t copy. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Warehouse club Costco entered the home furnishings market by leveraging its brand, no-frills/premium-products retail concept, and customers. It located Costco Home stores near its warehouse stores and let its 20 million-plus members join its home-store business. Its value chain slashes costs by avoiding the extravagant showrooms, plentiful inventory, lavish advertising, and huge sales commissions established furniture retailers use. Revenues from its first two furniture stores stood at $108 million in 2006. Incumbents haven’t copied Costco Home’s moves because they aren’t familiar with the process of creating membership-only warehouses that offer premium products at a discount. </p>
  <h2>Leverage Existing Assets + Create a Niche</h2>
  <p>Like the other combinations, use this one simultaneously or sequentially to get your foot in the door to an attractive market. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Toys “R” Us simultaneously leveraged its assets and created a niche when it entered the apparel industry by opening its Babies “R” Us stores. It drew on its name recognition and store locations (most Babies “R” Us stores are situated next to Toys “R” Us stores). It also leveraged its relationships with real estate developers and its inventory management and distribution capabilities to go after the children’s product niche in the apparel industry. It overcame opposition from well-entrenched rivals to become the largest baby products retailer in the world by 2006.</p>
 </div>
</article-ideainbrief><p>What’s the smarter strategy: To break into an industry where, judging by the incumbents’ performance, you can make only average profits but are likely to do so? Or to jump into a market where you might make above-average profits but are unlikely to do so? The right choice isn’t obvious, but most companies prefer to enter industries where the existing players’ profits are consistently higher than those of enterprises in other industries. Entrants know they’ll have to take on powerful incumbents, but because of the large profit margins, they’re drawn to those markets like bees to a honey pot.</p>

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<p><span class="reprint">Reprint: R0705E</span></p>
<p>How can companies break into attractive markets, where incumbents erect many barriers to entry? To answer this question, the authors studied organizations that successfully entered the most profitable industries in the United States between 1990 and 2000. When they dissected the strategies that worked best, one common theme stood out: indirect assault. Smart newcomers don&#8217;t duplicate existing business models, compete for crowded distribution channels, or go after mainstream customers right away. Instead, they attack the enemy at its weakest points; then gain competitive advantage; and later, if doing so meets their objectives, go after its strongholds.</p>
<p>Recent battles in the soft drink industry&#8212;where brands, bottling and distribution capabilities, and shelf space are incumbents&#8217; main advantages&#8212;are a case in point. When Virgin Drinks entered the U.S. cola market in 1998, it advertised heavily and immediately tried to get into the retail outlets that stock the leading brands. Virgin has never garnered more than a 1% share of the market. Red Bull, by contrast, came on the scene in 1997 with a niche product: a carbonated energy drink. The company started by selling the drink at bars and nightclubs. After gaining a loyal following through these outlets, Red Bull elbowed its way into the corner store. In 2005 it enjoyed a 65% share of the $650 million energy drink market.</p>
<p>Successful entrants use three basic approaches in their indirect attacks. They leverage their existing assets and resources, reconfigure their value chains, and create niches. These approaches may appear to be simple, but their magic lies in their combination. By mixing and matching them, Bryce and Dyer say, enterprises can defy half a century of economic logic and make money entering highly profitable industries. The authors use Skype, Costco, Skechers, and many other companies to illustrate their argument.</p>

Strategies to Crack Well-Guarded Markets

Reprint: R0705E How can companies break into attractive markets, where incumbents erect many barriers to entry? To answer this question, the authors studied organizations that successfully entered the most profitable industries in the United States between 1990 and 2000. When they dissected the strategies that worked best, one common theme stood out: indirect assault. Smart newcomers don’t duplicate existing business models, compete for crowded distribution channels, or go after mainstream customers right away. Instead, they attack the enemy at its weakest points; then gain competitive advantage; and later, if doing so meets their objectives, go after its strongholds. Recent battles in the soft drink industry—where brands, bottling and distribution capabilities, and shelf space are incumbents’ main advantages—are a case in point. When Virgin Drinks entered the U.S. cola market in 1998, it advertised heavily and immediately tried to get into the retail outlets that stock the leading brands. Virgin has never garnered more than a 1% share of the market. Red Bull, by contrast, came on the scene in 1997 with a niche product: a carbonated energy drink. The company started by selling the drink at bars and nightclubs. After gaining a loyal following through these outlets, Red Bull elbowed its way into the corner store. In 2005 it enjoyed a 65% share of the $650 million energy drink market. Successful entrants use three basic approaches in their indirect attacks. They leverage their existing assets and resources, reconfigure their value chains, and create niches. These approaches may appear to be simple, but their magic lies in their combination. By mixing and matching them, Bryce and Dyer say, enterprises can defy half a century of economic logic and make money entering highly profitable industries. The authors use Skype, Costco, Skechers, and many other companies to illustrate their argument.

Strategies to Crack Well-Guarded Markets

Summary.

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