Leaders of the Pack

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.