Strategies to Crack Well-Guarded Markets

Key ideas from the Harvard Business Review article by David J. Bryce and Jeffrey H. Dyer

The Idea

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.

Still, you can crack these well-guarded markets, say Bryce and Dyer. The key? Attack indirectly—through combinations of three basic strategies: 1) Leverage your existing assets. For example, put a new product on shelf space you already own. 2) Reconfigure a value chain. For instance, bypass brick-and-mortar retail outlets and sell your product through a Web site. 3) Create niches. To illustrate, offer premium features at a price only certain consumers will pay.

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.

The Idea in Practice

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.

Reconfigure the Value Chain + Create a Niche

Use this most powerful combination to create low-cost business models and stay off incumbents’ radar screens.

Example: 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.

Leverage Existing Assets + Reconfigure the Value Chain

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.

Example: 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.

Leverage Existing Assets + Create a Niche

Like the other combinations, use this one simultaneously or sequentially to get your foot in the door to an attractive market.

Example: 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.