Leaders of the Pack

By Richard A. D’Aveni

March 3, 2007

It’s harder than ever for a company to dominate its market these days—or to defend a dominant position. That makes it all the more important to have a strategy to try.

A company with a so-called stronghold is so powerful in a geographic, product or customer segment that it sets the standard for all others in the market in terms of price, performance, reliability and other characteristics. A stronghold represents a company’s key source of profitability, its platform for expansion and its power base for attacking its rivals. Companies without one are often spread too thin across many markets or segments, making them vulnerable to more competitors.

For most companies, however, strongholds have become much more difficult to obtain and to hold. Among the reasons: With so much market-research data available, it’s typical for several players to converge on the same new territory at once; trends, needs and government regulations change faster than in the past, making strongholds more temporary; and some barriers that once helped defend strongholds are weakening due to converging technologies and globalization.

Yet having a stronghold has never been more important. Increased volatility in financial markets has made Wall Street a less-steady source of capital for many companies. Businesses with solid strongholds, on the other hand, generate the kind of continuous cash flow that Wall Street likes to see, and that a company needs to grow.

Knowing your way around a landscape of strongholds requires familiarity with basic stronghold strategies. Studying such strategies focuses one’s attention on competitive questions central for any company: Where will your company dominate? Where will it concede to rivals? How can you secure a stronghold once it is captured? And how does this stronghold need to change to ensure success in the future?

What follows is a look at the essentials—the Five S’s of stronghold strategies: securing a defensible stronghold; separating strongholds into nonoverlapping parts of the market; surrounding rival strongholds to contain them; storming a stronghold by direct or rapid assault; and shape-shifting strongholds by radically redefining the boundaries among strongholds in a market.

Securing a Stronghold

A company’s ability to defend a stronghold depends on the strength of its walls, and on the relative strengths and weaknesses of the defender and the attacker. In the absence of strong walls, the ability to secure a stronghold depends upon willingness to take risks inherent in giving up territory before counterattacking.

A traditional stronghold defense is to create strong walls, or barriers to entry that block competitors from a market. These can include building economies of scale and a full line of products, making heavy capital investments and limiting access to distribution channels. Walls, however, develop holes as time goes on and companies grow. Walls are vulnerable to technological change, globalization, mergers, deregulation and convergence of industries.

From the 1960s to the 1980s, International Business Machines Corp., for example, had a stronghold in mainframe computers in part by relying on entry barriers of switching costs and a full line of mainframes. Its customers faced huge costs and potential disruptions if they attempted to replace their IBM mainframes with those of a competitor. And the company’s full line of mainframes made it difficult for others to find a hole through which to enter. However, in the 1980s, competitors simply flew over IBM’s walls as companies started switching from mainframes to PC-based computer networks. IBM was forced to migrate to a new stronghold, establishing itself in information-technology services and business software.

When fixed barriers can no longer be relied on, more flexible defense strategies can be used, including proactively counterattacking outside the stronghold, in markets or segments not crucial to the control of the stronghold. These act to deter, distract or deflect potential entrants.

In 1985, Ralston Purina dominated the biggest part of the U.S. pet-food market, with a 52% share of dry cat food and 39% of dry dog food. Ralston’s stronghold dry pet food was secured mainly by two barriers: Ralston’s economies of scale in purchasing and processing grains for humans and animals, and its ability to command supermarket shelf space as a major food producer.

Threats to Ralston’s stronghold could be contained as long as the rest of the market remained divided like it was—with Quaker Oats Co. and Gaines Foods Inc. occupying the small and declining soft-dry and moist dog food segments, respectively, and Carnation Co., H.J. Heinz Co. and Alpo—a division of Grand Metropolitan PLC at that time—battling over canned dog and cat food. With the market divided in this way, no rival was strong enough to launch and finance attacks into Ralston’s stronghold.

To break out of this situation, Heinz and Carnation tried to build full-line cat brands that cut across dry, canned, moist and soft-dry foods. Similarly, Quaker acquired Gaines to create a stronghold in soft-dry and moist dog food, and to build a full line of dog foods. These rivals were attempting to resegment the market into a dog stronghold and a cat stronghold, and to switch the basis of competition from economies of scale in production, which favored Ralston, to economies of scale in advertising and branding, which favored the rivals.

Ralston successfully defended its stronghold by regularly using product launches in the canned, soft-dry and moist segments to keep its rivals off guard, signaling that it could undermine their profitability if it wished, and to stir up price competition among rivals. Ralston thus used mobile and pre-emptive maneuvering outside its stronghold, in its border territories.

SEPARATING

A second strategy is to make tacit alliances with competitors that allow a peaceful coexistence of nonoverlapping strongholds in the same market.

Home Depot Inc. and Lowe’s Cos. initially coexisted by tacitly dividing the home-improvement market along lines based on store format and customer types. Home Depot went for a warehouse format and focused on do-it-yourselfers and professionals—the part of the market traditionally served by lumberyards and construction-supply businesses. Lowe’s used a hybrid between retail and warehouse formats and focused on women. Geography, too, played a role, with Lowe’s focusing on secondary cities and the Southeastern U.S. Both companies also offered different product mixes and brands, with each pushing for exclusive distribution deals.

Separation can widen over time, but mostly it doesn’t last without using the securing strategies discussed above. Indeed, the uneasy truce between Lowe’s and Home Depot has been eroding, as Lowe’s attempts to serve more contractors and Home Depot adds more services and fashion items to appeal to women. Lowe’s began copying Home Depot’s large-warehouse model and moving into high-traffic suburban and urban areas.

Other times, rivals in the same competitive space maneuver to get out of each other’s way. For example, France’s Bic Group and Gillette, now a subsidiary of Procter & Gamble Co., formerly competed in two key areas: disposable lighters and razors. When Bic introduced a disposable razor in the mid 1970s, Gillette had no choice but to introduce its own disposables. But these products cannibalized Gillette’s higher-margin cartridge razor business. After a decade of brutal price wars, Gillette moved to make a separation. It pulled out of the cigarette-lighter business, leaving it to Bic. Gillette then poured its resources and attention into the successful introduction of its Sensor cartridge razor in 1990. By the end of that year, Gillette had two-thirds of all razor users. The remaining third of the market went to Bic and other competitors. Gradually, Gillette has been pulling back on its disposable razors as well, further separating its stronghold in cartridge razors from Bic’s in disposable plastic products.

SURROUNDING

Some companies surround a rival’s stronghold by riding the fastest growth segments outside the stronghold. This strategy positions the company to contain or constrict the rival’s stronghold gradually. It is often used to box the rival into a less-attractive part of the competitive space.

In the late 1980s, Wendy’s International Inc. launched an initiative that had the effect of pinning down McDonald’s Corp. and Burger King Holdings Inc. in their core stronghold, fast-food burgers, while Wendy’s surrounded them with a shift to nonbeef menu items like salads. Wendy’s began by introducing its 99-cent Super Value Menu in 1989. McDonald’s and Burger King later adopted their own 99-cent Big Macs and Whoppers, which led to intense price cutting between the two, and culminated in McDonald’s much criticized and draining 55-cent Big Mac promotion over two months in 1997.

Wendy’s, meanwhile, maintained its original 99-cent menu but didn’t discount its premium beef sandwiches. Moreover, while McDonald’s and Burger King remained pinned down in price wars for control of the less-profitable burger market, Wendy’s carried on with a menu that included higher-quality items, such as signature sandwiches and Garden Sensation salads, and higher prices. In 2001, Wendy’s market share in the fast-food-burger segment grew 1.6 percentage points from a year earlier, while McDonald’s and Burger King lost share. Wendy’s also maintained a higher average customer check than McDonald’s ($4.75 versus $4.42 in 2002).

Adrienne Hayes, Burger King vice president, public relations and marketing communication, says Burger King’s decision to discount Whoppers in the mid-1990s was not in response to Wendy’s introduction of the 99-cent menu. A spokeswoman for McDonald’s, Lisa Howard, says, “We continue to be absolutely focused on our customers and on our brand.”

A variation of the surround strategy uses a rival stronghold’s inflexibility and entry barriers against the rival itself, in effect trapping the rival behind its own walls, like a city under siege.

Take a look at fast food again. As the battle among the Big Three raged, so-called fast-casual restaurants burst upon the scene, such as Panera Bread Co. These restaurants have margins more than double those of quick-serve restaurants because they cater to customers who are less price-sensitive. The Big Three, meanwhile, have been unable to attract these kinds of clients in large numbers because of the very things that defended their strongholds to begin with: ubiquitous franchising systems and powerful brand images that stand on low prices and a core customer of children and families.

STORMING

Sometimes companies storm a rival’s stronghold by breaking through, going around or neutralizing its entry barriers.

When the U.S. auto makers built massive service networks that would take years to replicate, they thought they had an invincible barrier to entry. But the Japanese simply made cars that needed less service.

In shock treatment, the attacking company uses overwhelming force to push a rival out of a stronghold it has targeted. Circuit City Stores Inc. appeared to use this strategy in local geographic markets against Sears, Roebuck & Co., which held the leading national share in retailing of small and large home appliances and consumer electronics. Circuit City became the largest retailer of consumer electronics and small home appliances in the U.S.—for a while—by going into local or regional markets like gangbusters. The goal, according to its annual report, was to quickly “gain a dominant position in any market we enter.” By 1991, Circuit City had 156 free-standing stores and had achieved 23% market share for retail consumer electronics in its markets. Circuit City has since been overtaken by Best Buy Co.

There are risks to using shock. Rivals may counterattack. If the attacking company uses overwhelming force, it must be sure the defender is left with too little strength to strike back. The defender also may concede its stronghold only in order to regroup and move aggressively into other markets.

Because of the risk of retaliation, many companies prefer attack strategies with more finesse. In a stripping strategy, rivals slowly pick away at a stronghold piece by piece—often so gradually that the competitor doesn’t respond and suffers death by a thousand cuts. Sears, for example, once defined its stronghold as being the general store for the middle class. But bit by bit, the old department-store and catalog company was stripped of its business: Chains like Kmart and Wal-Mart arrived, offering more discounts on many goods; other department stores consolidated, giving them more purchasing power to lower prices for higher-end goods; big-box stores specializing in electronics, home appliances and hardware carved new territories out of what were once steadfast Sears departments. Even the Sears catalog came under attack as specialty books began to multiply.

In a domino, or steppingstone, strategy, a single company moves toward the stronghold of a rival in a series of steps, each of which adds capabilities, resources and momentum for the next move. Toyota Motor Corp. started with a stronghold in small cars, a peripheral zone for General Motors Corp. and Ford Motor Co. It then moved into luxury cars with Lexus, and is now moving into the core profit zones of the U.S. manufacturers—SUVs and trucks.

Finally, guerrilla attacks can be staged on different strongholds or on different parts of a single stronghold. Small skirmishes keep the rivals guessing where the next attack will come from. PepsiCo Inc. did this in 1976 with the Pepsi Challenge, a blind taste test in which participants indicated they preferred Pepsi to Coke. The tests, launched in Dallas, proved so successful that PepsiCo eventually staged challenges in 100 cities and towns nationwide in random patterns a few cities at a time. The ability to move quickly and strike without warning—a key feature of guerrilla attacks—left Coca-Cola Co. vulnerable to these attacks.

Coke’s resulting loss in market share gave Pepsi a temporary but significant victory in the cola wars. A few years later, Coca-Cola changed Coke’s formula to New Coke to make it sweeter, as Pepsi continued to make inroads in the cola market.

Scott Williamson, a spokesman for Coca-Cola, responds that while it might be an interesting exercise “to look back decades,” Coke is still the No. 1 soft drink in America and “the world’s most valuable brand.”

SHAPE–SHIFTING

Shape-shifting strategies change the borders—and size—of strongholds by changing the competitive landscape. There are three basic methods: convergence, or redrawing the boundaries of once-separate markets into a new, larger playing field; reinventing strongholds by creating new customer and product segments; and recombining existing segments.

Convergence, which redraws boundaries between industries, is seen often these days. Apple Inc., by introducing the iPhone, which combines the iPod music player with a cellphone and Internet-browser features, is attempting to carve out a new stronghold in the mobile-device market. Banking companies that add stock-brokerage services and insurance, and health-maintenance organizations that sell both insurance and the delivery of health care, are using convergence strategies, too.

Reinventing strongholds, by contrast, involves identifying new types of customers and products within existing industry definitions. In the 1950s, for example, motorcycles were largely judged by their engine power and unique style. Motorcycle segments were largely divided based on lightweight and heavyweight. Even though it offered lightweight machines, Harley-Davidson Inc.’s stronghold was in heavier bikes, making it king of the road. In the 1950s and ’60s, British rivals made performance more important. Using superior technology, the British started producing lighter motorcycles with better fuel efficiency, less noise and vibration, and better handling. This redefined the competitive landscape into two new segments: high and low tech, with the British establishing a stronghold in the high-tech segment.

Then, in the mid- to late 1960s, Japanese competitors created a new customer segment—and a new stronghold—based on inexpensive, high-quality and small-displacement motorcycles, and marketing campaigns that targeted respectable people. Over time the Japanese marketed larger motorbikes to responsible but adventurous riders, commuters looking for reliable transportation and thrill-seeking sports bikers. So by the 1980s, strongholds were based on the type of user, with Harley strong among the rebels—and weekend rebels—and the Japanese among the other types of riders.

With each redefinition of motorcycle strongholds over the past 50 years, the successful initiator gained ground. While Harley was initially weakened when the emphasis shifted to technology, reliability and lower prices, it later helped shift the division of the market again to branding and lifestyle, which gave it a new clear stronghold from which to base its future growth moves.

In the third method of shape–shifting, companies try to increase market share by recombining existing product or customer segments. Microsoft’s stronghold in desktop operating systems, for instance, expanded by incorporating adjacent segments into its suite of software. Windows rapidly added spreadsheet, presentation and word-processing programs, an encyclopedia and an Internet browser. Microsoft thus widened the boundaries of its operating-system stronghold, giving itself a strong base from which to stage attacks into the strongholds of others—including network and server software, Internet portals and user-interfaces for mobile devices.

While the Five S’s are presented as separate strategies, they are often used in combination or in sequence, and the lines between them are not always distinct. They form a spectrum of options. Companies might use a defensive strategy on one front, for example, while using storming strategies on another.

Companies need to think through the impact of moves and countermoves that can lead to chain reactions and ripple effects. As companies move out of the way of each other, voluntarily or not, and as strongholds shift in shape, very different market landscapes emerge.

In the end, to protect and leverage the power of strongholds, the use of the Five S’s must be governed by four principles:

For companies seeking market power, the object is ultimately to extend the power of the sphere. This strategy can involve more than just the core product segments of the stronghold. Any part of a company’s portfolio is important if it serves to preserve and protect value in the stronghold.

Don’t think only about whether a product segment contributes directly to the bottom line. Consider how noncore products and segments may prevent the erosion of the core by blocking steppingstone strategies of rivals or constraining the aggressive instincts of a rival, or whether they can be used to force or lure rivals into less-favorable product segments.

This is something often overlooked by securities analysts who believe in “pure-play” portfolios, and by those who believe a portfolio must be built by leveraging a core competency without regard to protecting a core stronghold.

The best strongholds can be more than a mere safe haven. They create power. And the purpose of stronghold strategy is to keep the balance of power in your favor.

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