A new product threatens your business, but how should you respond? Should you scramble to copy the new offering or focus on your core business? It depends on the type of threat, says Alexander Kandybin, writing for Strategy+Business.
Not all threats are the same. Kandybin outlines three different types of market threat and describes the appropriate countermeasures to tackle each one.
DIFFERENT TYPES OF THREAT
Not all upstart threats come from below. New services and products – or market dislocations – can enter your market from a few other directions.
Misdiagnose new threats at your peril. An inappropriate response will only bring further harm to your firm. Step back and work out which type of threat you’re facing before determining the appropriate countermeasure.
1) Top-down threats. These entrants start by giving high-end customers luxury products and services for a premium price. Later, once the upstarts have gained in reputation, they add mid-range alternatives to compete with incumbents.
2) Sideways threats. The sharing economy is an example of this type of threat. While there is no significant price difference, the new entrants provide accessibility and features that established companies do not or cannot offer.
3) Bottom-up threats. These disruptive innovations allow upstarts to build a new market from the bottom up, at first by offering simpler, cheaper products and services. When the entrants gain market share and proficiency, they start to add features and versatility, ultimately enabling them to replace the incumbents as market leaders.
Your strategy should improve competitiveness and functionality. How you do this will depend on your capabilities and the type of threat you face.
Matching or absorbing the threat can work when threats are coming from any direction; leapfrogging works for dislocations from above and from the side, while ignoring works best with threats from the bottom up.
1) Matching the threat. This is the most obvious countermeasure and it can work with all types of threat.
With a bottom-up threat, this means cannibalising yourself by launching an inferior, lower-priced product to match the newcomer’s offering. One option is to create a service or product that’s distinct from your main line, as HP did. The company created a separate division for inkjet printers, allowing it to compete with its own laser-printer business.
When the threat starts mid-market or higher, stay competitive by changing your core product.
2) Absorbing the threat. This means bringing the entrant into your firm through mergers and acquisitions (M&A) or direct investment. This tactic works for dislocations from any direction, but only if the new business is acquired, not to kill the threat, but to take advantage of it.
Incumbent software companies have boosted their innovation by acquiring startups. Salesforce.com has invested in over 100 startups through its venture fund, often leading to integration into its cloud.
3) Leapfrogging the threat. Leapfrogging works best against threats from the side or from above. Expanding your offerings protects your core business while providing something better than the new competition. Higher quality and more desirable products or services offered at a lower cost will help you race past threatening competitors.
Airbnb’s low-overhead business model is a hard match for traditional hotels. Major hotel chains must develop models that create branded networks of private rentals. Customers still stay in private homes but with added value from branded amenities such as delivered breakfasts.
4) Ignoring the threat. Often, bottom-up disruptions capture only part of the market – leaving a large share for traditional incumbents. In such cases, decide whether to react to the upstart with the match or absorb countermeasures, or just to ignore them, maximising your market share by paying greater attention to your core customers.
When Southwest Airlines entered the market as a disrupter, some airlines tried to fight them by launching low-cost airlines as separate subsidiaries. This was unsuccessful in the majority of cases. The incumbents who focused on improving services and efficiency for their core customers emerged as stronger players.
Ignoring the threat does not mean doing nothing. Ignoring a threat is risky, as evidenced by the failure of companies like Kodak, Smith-Corona and Nokia. The secret to ignoring disruption is finding the appropriate balance between waiting and responding.
KNOW YOUR ENEMY
Knowing where potential market dislocations can come from and how they can change your market, means you can choose the appropriate countermeasure to protect your business. Knowing your enemy is half the battle.