Early Warning of New Rivals

Firms have always had difficulty spotting new competitors, and business history is full of stories about incumbent market leaders being displaced by a smart new entrant. If anything, the task seems even harder today. Unrelentingly rapid changes in technology, shifts in consumer tastes, and the rise of global markets are blurring traditional industry boundaries. Many firms are now competing with companies that, five years ago, were thought to be operating in entirely different industries.

Consider, for example, retail banking. Ten years ago in the United Kingdom, this sector was dominated by four major clearing banks, which faced relatively minor competitive threats from a number of smaller, regionally based retail banks. They are now no longer the top players in the sector and do not set the lead in prices, service standards, or new products. New entrants into the sector include several former building societies, or mortgage-based financial institutions, that have converted themselves into banks, as well as several supermarkets. Retail banking now focuses on selling financial services, something that many older bank managers simply cannot understand. Retailers, such as Marks & Spencer, clearly do, offering a range of financial services to customers. Ten years ago, what banker would have worried about competing with a supermarket or a leading retailer of women’s garments?

Much the same scenario is occurring in telecommunications. New digital technologies have led to competition among several formerly distinct sectors, including telephony, computing, and entertainment. In the past, the major (usually national) telecommunications companies, or telcos, competed with each other in a heavily regulated marketplace. Now they compete with diverse firms, often through unlikely alliances. Northern Telecom, for example, is working with several electricity companies in the United Kingdom to provide broadband communications capacity over electricity lines. In the meantime, British Telecommunications (BT) has teamed up with a satellite television company, BskyB, to develop digital TV in the United Kingdom. Among other things, the alliance of BT and BskyB will compete with cable TV companies that also offer voice telephony services in the United Kingdom. The combinations and permutations in this sector seem to bring endless surprises.

These examples and stories about displaced incumbent market leaders carry two noteworthy lessons, which are simple and straightforward.

First, successful market entry occurs as a result of a basic product or process innovation coupled with sound business planning. New entrants act like other firms: they observe events in the market, develop new ideas, and decide to enter markets using rationale similar to that of incumbents. This is why companies can spot potential new competitors. They are not aliens from Mars acting in bizarre and unpredictable ways.

Second, incumbent firms are often surprised and later displaced, because they tend to become totally preoccupied with themselves and their activities. As a con-sequence, they are unable to view their market from other perspectives, making them vulnerable to new entrants.

To identify new competitors, a company must distance itself from its current activities, which is often the way to discover innovations that will preempt competitors and preserve market leadership.

How to Spot New Competitors

Markets are continually generating new business opportunities for firms. Although thousands of markets exist on the planet, only a small fraction of the events happening in these markets offer genuinely profitable opportunities for enterprising firms. Acting on these opportunities before anyone else requires not just knowledge of the opportunities but the ability to evaluate market signals and exploit them.

Evaluating whether an innovation is likely to be profitable is a complicated problem. Innovations introduce change, and sometimes their consequences are unexpectedly far-reaching. The real skill lies in analyzing how the innovation will change patterns of demand, costs, and market structures; which kinds of competitor reactions the innovation might provoke; and determining the implications for prices and profits over time. To do this well, a firm must understand both the market and the underlying basis of its innovation. Generally, knowledge about potentially profitable opportunities in particular markets is only available to firms operating in that market or in “nearby” markets. Furthermore, to evaluate the various opportunities that arise, firms need to have intuitive or tacit knowledge of how the market operates, which comes only from operating in or “near” the market for some period of time. As a consequence, the parade of entrants into new markets is often fairly well ordered and seems to follow a logic that is related to these flows of information.1

For example, the big U.S. integrated steel makers that dominated their domestic market in the 1950s and 1960s were challenged by at least five waves of entry. The first challengers were the Japanese integrated steel producers, which developed a substantial competitive advantage on the basis of process innovation (including extensive use of continuous casting). Minimills followed, concentrating on low-end steel sold to construction companies in regional markets. Then came aluminum producers and plastics firms (successively), which picked off the beer and soda can market and parts of the car assembly market that had formerly been served by big steel. Finally, second-generation minimill firms, such as Nucor, began to concentrate on thin-strip continuous casting to serve the upper end of the steel market or, as in the case of Quanex, diversified into aluminum, graphite composites, and ceramics to become “speciality materials” companies. Each wave of entry into this sector was provoked by new production or demand conditions, which created opportunities for different types of steel-making operations. Entrants focused on particular segments of the market formerly served by the big integrated steel makers that did not respond to new opportunities, and different buyers were active agents promoting these different waves of entry.2

To spot a potential entrant into a specific market, one needs to trace how knowledge about profitable opportunities in that market is likely to diffuse through the economy. Market knowledge travels along three information highways, and most — if not all — of the potential entrants into the market operate somewhere along one of these highways.

Related Product Markets

Few goods or services are purchased or consumed in isolation. Most are consumed in a package with a range of other complementary goods and services. Individual products and services are often not valued separately, but as part of a lifestyle decision or as input into a household or industrial production process. Identifying producers of these complementary goods and services — sometimes called complementors — is generally considered important because the existence of common interests opens up the possibility of acting cooperatively to increase profits.3 If their fortunes are tied to your company’s, it makes sense to try to coordinate your activities with theirs to present an attractive consumption package to consumers. Newspapers, for example, are complemen-tors for books, TV, and cinemas. Although all compete for a share of consumers’ sedentary leisure time, newspapers provide useful information about what is available in bookstores, on TV, or in cinemas. These other products provide newspaper editors with content for their pages.

Complementors are also potential entrants, however. Because they own part of the package of goods and services that your consumers purchase, they understand what your customers need and how they use your product. Furthermore, as active participants in your market, they can spot opportunities and evaluate their worth. Finally, they are established market participants in the eyes of your consumers, so they do not have to create a reputation, brand recognition, and consumer trust. They are, in short, formidable potential competitors. This is a point that the former British Satellite Broadcasting (BSB) corporation understands well. An early mover in the U.K. satellite market, it was overtaken (and then taken over) by Sky TV, an offshoot of Rupert Murdoch’s News Corporation newspaper business.4 Among other things, Sky TV received publicity that BSB did not (particularly in the Murdoch-owned newspapers), and it gained access to (arguably) a more attractive film library than BSB. Even today, the success of satellite TV (and now digital television) in the United Kingdom depends, in part, on the extent to which press coverage or comment stimulates public interest in satellite TV programs. Many people believe that gaining access to high-quality sports programming will also matter. Rupert Murdoch’s multimedia enterprise has been built on complementarities between newspapers, publishing, TV, and cinemas, and it has also recently tried to acquire a leading U.K. football team (Manchester United).

Up and Down the Value Chain

Just as the goods or services that your company produces are often part of a package purchased by consumers, so each product or service is itself a package, constructed from various inputs and distributed for sale with the help of many specialist service providers. They, too, are complementors; that is, their fortunes are tied to those of your company, and their revenues rise and fall with yours. For this reason, they are also potential market entrants. They have access to similar information, they are in a good position to evaluate that information intelligently, and they have an established name that may be familiar to your customers.

There are many examples of vertically related market entries. Microsoft, for example, has been unusually successful in using its operating systems business as a platform from which to make great inroads into a number of software application markets. Similarly, Tandy entered the personal computer industry from a retail base (it owned the Boston-based Radio Shack chain), whereas Bill Millard, whose early 8080 machine was the basis of IMSAI’s early success, ended up moving downstream into computer retailing with ComputerLand.5 Starbucks has established a prominent position in the gourmet coffee market, using its skills as a coffee buyer and coffee roaster to stock a range of coffee bars with high-quality coffee. Indeed, many of its early Seattle outlets were coffee bars that also included in-house roasting operations and a retail coffee business.6 Brothers Gourmet Coffee is another company meeting with success in this vertically integrated fashion. As a result, coffee bars, coffee wholesalers, and the traditional coffee-producing majors — Maxwell House, Folgers, and Nescafé — have all suffered.

Related Competencies

Understanding markets is not just a matter of understanding consumers’ needs and spotting the opportunities created by changing consumer tastes. Serving the consumers’ needs is imperative, and a market comes into existence partly by discovering an economic way to serve particular needs. For example, as long as telephones have been attached to telephone lines, there has been a demand to make them more portable. However, the development of a market for mobile phones and related services required technology to provide a secure and private communications medium at an economic price without congestion. Cellular technology was the answer. Any company that understood this technology automatically became a potential player in the mobile telephony market, and, in the U.S. market, Motorola was a founding entrant with ASTS. Early users of this technology came from the defense sector, such as Racal and Ericsson. Both companies used their knowledge of the basic technology to enter and challenge established telcos in national markets around the world.

The competence that most people consider essential to market entry is command over technology. Many argue that the evolution of knowledge follows particular “technological trajectories.” As scientists and engineers follow these trajectories, they uncover a range of related product or process innovations that spring from the same scientific principles.7 This means that firms operating at one point along the trajectory are likely to be able to function at some other point, making them formidable potential entrants into a whole range of markets. For example, there were at least two major waves of entry into the U.S. computer industry in the 1950s. The first included business machine firms such as IBM, Remington Rand Corporation, National Cash Register Company, and Burroughs Adding Machine Company, whose businesses were potentially threatened by computers. In the late 1950s, the second wave consisted of firms such as the Philco-Ford Corporation, General Electric, Control Data Corporation, and Digital Equipment Corporation (DEC). These second-wave entrants rode a technological trajectory into the new computing market.8 In the telco sector, technology expertise propels most new market entrants, and new waves of entry generally coincide with major technological developments.

Technology is not always the key to success, however. Firms develop a whole range of competencies that create market opportunities and allow them to compete effectively with market leaders. Managing retail outlets, providing certain kinds of customer service, developing or marketing new products — all are valuable competencies. Some firms manage supplier bases or alliances well, whereas others develop brand names or reputations that influence a range of markets. Thus, for example, Nike has branched out from its initial base as a producer of athletic shoes into sportswear, sports equipment, and even managing sports events.9 The entry of supermarkets into retail banking is not too surprising, particularly now that charge accounts or loyalty cards have come into widespread use. People visit supermarkets regularly, and they should be able to handle simple cash transactions there or buy their groceries on credit. Similarly, many airlines are natural entrants into prestige or luxury goods retailing. Why not shop during long transoceanic flights, particularly when the airline can use its network to assemble goods from around the world and deliver them to your destination?

Thus, to understand the kinds of firms that might enter your company’s market and challenge your position, you should:

• Follow the flow of valuable information outward from your market. Entrants will usually come from “nearby” markets, which means that they already know your customers, are familiar with parts of your value chain, or have the basic competencies to compete effectively in your market.
• Take note of firms with particularly relevant capabilities that could become formidable potential competitors. What matters is whether their skills can be profitably applied in your market. Firms that really understand your market will know whether such skills can be effectively deployed. Many companies that possess relevant skills may not be in a position to acquire the knowledge needed to become potential entrants.
• Keep in mind that market entry by means of a related competency is probably the most difficult of all types of entry to anticipate. Since it is hard to predict how fast knowledge about market opportunities will diffuse through the economy, it is hard to predict when it will reach firms with the relevant competencies (if it reaches them at all). Even if you know that entrants with certain skills could, in principle, fare well in your market, it may be hard to be sure about when such entry will happen.

Assessing the Threat

The first step in identifying potential competitors is to follow each source of information outward from your company’s market. Make a list of the various firms that might, in principle, become competitors. Since newly established firms may appear, your list may include “phantom firms,” that is, a description of a particular type of challenge that might be used as a vehicle for entry by some unknown firm. Following any or all three information highways may generate a long list of potential competitors. The next step is to identify which firms are likely to mount a challenge, how they will do so, and when it is likely to happen.

This seems like an awesome task, but it is easier than you might think. The best way to anticipate someone’s actions is to try to see the world as he or she sees it. In the context of market entry, this means thinking through the process of constructing a new business and creating a market for its products. The way to do this is actually simple in principle: devise a plan for entering your own market. The basic algorithm mimics the thought process of any entrepreneur:10

• Identify a consumer need that is not being met by the existing range of products and services. This will help to establish the amount of value your new activity will create for consumers.
• Work out an economic way to satisfy this need. Thinking about satisfying customer needs will help you determine what your costs will be.
• Iterate between these first two steps until a viable activity (or several of them) has been identified.
• Identify how distinctive the new activity is and determine how long it can be expected to generate decent returns. The fact that a viable market exists for some particular product is not enough. Good ideas can easily be imitated or even supplanted by better ones.

You will end up with a list of possible strategies that you can use to enter your own market and “compete against yourself.” Each strategy has a target group of consumers, a particular method of appealing to them, and a set of activities that ensure consumers can be served at a profit for at least a reasonable period of time. Firms operating in related product markets may know about target groups of customers who might be attracted by a certain product or service, or they may have a natural way to appeal to them. Firms up or down the value chain may also be familiar with these consumers, or they may possess a competency in one or more of the activities needed to serve these consumers. Of course, firms in disparate markets may have the right competencies to successfully execute one of these strategies and may, somehow, learn about the opportunities present in your market.

Putting yourself in the entrant’s shoes is difficult. Entrants have one great advantage over you in working through this entrepreneurial algorithm: they start without a history. They come to your market without your preconceptions or mental models of what consumers want or how things should be done. Not being a market leader may also mean that they are less arrogant and, therefore, less likely to overstate their abilities and understate those of their rivals. Furthermore, since they lack existing activities, they do not face choices that might cannibalize their current activities and displace the resultant profits. They may have a wider range of choices open to them for doing business in your market. They may spot more opportunities in your market than you do, and they will not be locked into particular ways of doing things (or thinking about them).

This latter point is important. Many companies get locked in by doing all the right things to meet their existing customers’ needs, and then they find that this makes it hard for them to innovate and change. IBM dominated the market for mainframe computers for many years, but missed out on minicomputers because, among other things, minicomputers did not meet their existing customers’ needs or flow naturally from the skills that IBM had built up to serve them. The minicomputers market was created by DEC, which was later joined by Data General, Hewlett-Packard, Wang Laboratories, and others. They concentrated on improving the services they supplied to business and professional users, which was in the interests of these customers but blinded these corporations to the possibilities opening up in the market for personal computers. Apple and then Commodore, Tandy, and others were the early colonizers of this market, and later IBM made its presence felt. Not surprisingly none of these firms was involved in creating the engineering workstations market pioneered by Apollo, Sun Microsystems, and Silicon Graphics. In all these cases, incumbents were well protected in their existing markets, but lost out when entrants created new markets nearby that supplanted the existing markets. Incumbents were blind to these challenges because they were too close to their existing markets and unwilling to do anything that might threaten them.11

Putting yourself in the shoes of an entrant means distancing yourself from your company’s current activities and not taking an egocentric view of the market. No one has devised a simple way to do this, but the following tricks have proved their worth time and again:12

• Use outsiders to provoke and challenge your presumptions about your company and your market. It is important to be able to see your company as others see it if you are to understand how potential entrants propose to take advantage of you. Like entrants, genuinely disinterested oursiders do not know all your company’s strengths and weaknesses, but they may view what they do see through a clearer lens than you do.
• Take advantage of differences of opinion within your organization. Not every one in your organization thinks that your current strategy is the only worthwhile option, but many people feel that to challenge it may be disloyal, dysfunctional, or career-threatening. However, these people are well inform-ed and at least some of them will leave to set up their own firms or will join rivals whose strategy they think makes more sense or may create more opportunities for them. Find a way of tapping into what they think.
• Accept that the returns from your existing activities are not going to last forever, and actively plan to close them down at some specified date in the future Sooner or later, all your existing activities are going to decline: nothing lasts forever. The key to long-run success is not to make current activities last as long as possible, but to have the next set of activities ready to take over when current ones begin to fail. A truly successful firm is enthusiastic about what is going to happen next and will be ready to abandon existing activities well before the last drops of profit have been squeezed out of them.
• Create a separate product division and stimulate internal competition. New ventures are often strangled at birth by existing activities. Managers are often more inclined to stick with what is familiar to them, particularly if it is less risky and more likely to produce high short-term returns. Furthermore, new ventures often require new ways of thinking about the business or new activities and creating an insulating well in the form of a separate product division is a good way to nurture the new culture.

Possibly most radical is the last suggestion — creating separate product divisions for new ventures and allowing them to compete freely against existing divisions. The airline business provides particularly interesting insights into the effectiveness of this suggestion. Suppose that you had built up your airline’s brand name and reputation to the point where you could command a modest price premium on many routes. Potential entrants might try to emulate you, but establishing a reputation for good customer service is a long and costly proposition. An alternative strategy that an entrant might take is to compete indirectly, providing a low-price, no-frills service. One of the appeals of this strategy is that it will be hard for you to respond if this leads to a general price war: low-cost airline operations have different cost structures, and participating in a price war could really undermine your brand. Continental Airlines discovered this when it tried to compete with Southwest Airlines using a new low-price service called Continental Lite. Continental kept its new operations integrated with its full-line service operations, with the result that Continental Lite was neither “Continental” nor “Lite.” Like Continental, British Airways (BA) has recognized this challenge to its currently profitable activities and is determined not to find itself stuck in a prestigious but declining segment of the market. It has recently adopted the same strategy as Continental, but with this one difference: its new operation, Go, will be independent and will not operate out of BA’s main hub at Heathrow airport. British Airways hopes that Go will become the main competitor of its existing operations — and that is, of course, the right way to measure its success.13

Responding Strategically

So where does all of this leave you? Once you have formed a view about which companies might enter your market and what they might do, the next task is to work out when they are likely to arrive. To do this, monitor the accumulation of competencies by potential rivals. When you are sure that an entry challenge is likely to occur, it is time to act. The two responses are (1) preempt the entrant by moving first or (2) follow the entrant as a second mover.

Monitoring Rivals’ Competencies

Thinking about where entrants will come from will produce a (possibly long) list of potential market entrants; assessing the threat of entry will produce a (probably much shorter) list of entry strategies that are likely to work in your market. For each viable strategy, there is a shopping list of inputs, assets, and competencies needed for success. Understanding what they are will provide insight about the what, who, and when of potential competition:

• Any entry attempt is going to be based on some kind of business design and will, therefore, require the entrant to possess certain skills or competencies; that is, what any particular entrant will do depends on the kinds of competencies that it has at its command.
• Understanding the competencies needed to support any particular entry strategy is the way to identify who is likely to enter your market: the firms you need to fear are those that either have the needed competencies or can rapidly acquire them.
• Entry will occur when particular entrants have matched a strategy to the set of competencies needed to implement it and have acquired those competencies.

The entry threats of relevance are those that are launched by firms possessing the competencies needed to implement the viable entry strategies that are likely to be successful in your market. Since it is rarely sensible to delay entry that takes advantage of attractive opportunities, you can assume that entry will occur whenever potential competitors have assembled the requisite set of competencies. Firms having these competencies can, in principle, enter almost immediately; firms that do not have them will have to accumulate them. To understand when entry is likely to occur, you need to monitor the accumulation of particular competencies by particular rivals. The key questions here are:

• What are the key competencies that an entrant will need in order to use this strategy effectively as a vehicle for entry?
• Who is likely to possess such competencies: complementors, firms up or down the value chain, or firms operating on related technological trajectories?
• What observable actions do they have to take to assemble the skills and assets that they will need?

Potential entrants typically need to make certain types of investments before they can move into your market. If you monitor their actions carefully, investment activity will tell you who is coming, when they will arrive, and what they are likely to do when they come.

Spotting the accumulation of competencies by a potential rival is not always easy, but it is not impossible. New entrants to some industries must pass through one or more regulatory hurdles before they can enter markets (airlines, for example, need landing slots). In other sectors, entrants require particular inputs (for example, new cable or satellite television stations need programs). Consider Birds Eye, the early leader in the U.K. quick frozen food market. For a major (i.e., national) entrant to mount an effective challenge, it must develop a nationwide distribution system to deliver the product to retailers. Hence, Birds Eye’s strategy focused on the buildup of logistics capacity and then, of course, on the acquisition of supermarket shelf space and new product advertising. Substantial entry did occur in this market, but only after the big supermarket chains built up their own distribution systems.

The signal that preceded JVC’s assault on the video-cassette recorder market was the system of alliances it constructed to manufacture and distribute the product. Since the real competition in the videocassette recorder arena was about setting a standard, the key competitive action was to get a large enough installed base of early users. To do this, participants needed to get the product out on the market quickly and, if possible, under recognized brand names.14 In all these cases, entrants had to make a number of strategic investments before entry; thus an alert incumbent that carefully monitors its rival’s accumulation of strategic assets or skills would never be surprised by entry.

Respond by Preempting the Competition

After designing a number of viable entry strategies that you believe will succeed in your company’s market, one way to respond to the threat of entry is to adopt these strategies yourself; that is, enter your own market using those strategies your company’s capable entrants are likely to adopt.15 If you take advantage of all the best opportunities available in your market, you will leave little room for entrants to prosper. As we saw earlier, some airlines (like Continental and British Airways) have chosen to meet threats from no-frills operators by entering that segment of the market themselves. Similarly, a number of pharmaceutical companies are now launching generic versions of their own off-patent drugs, trying to preempt capable generics that are certain to do just that sooner or later. (It is not yet clear how effective this strategy is going to be.)

There is a deeper truth here. The simple algorithm outlined earlier to help you identify profitable entry strategies is exactly the same algorithm you would want to follow if, like 3M and other innovative companies, you were committed to introducing as many innovations as possible into your market. It is also the algorithm that many innovative firms actually do use in practice. For an innovation to be successful, new needs must be identified or existing needs must be met in new ways that generate more value than costs. Discovering the “newness” in product or process innovation means stepping away from existing activities, exactly as an outside entrant might. Furthermore, needs must be coupled with competencies in a way that generates an excess of value over costs, and this often means developing new competencies.

First movers have another strategy open to them, and that is to block entry by making it difficult for entrants to develop the competencies and accumulate the inputs they need.16 In some situations, the supply of key inputs is limited, and a smart first mover can take advantage of this scarcity by limiting the ability of entrants to acquire the inputs. Shelf space in major supermarket chains is a key to success for many fast-moving consumer goods, particularly those whose brand recognition is weak. Proliferating products is one strategy that denies entrants access to the market; offering to supermarkets price discounts that are related to product range as well as volume is another way of squeezing entrants. For satellite or cable TV, owning the rights to attractive program series, movies, or sports events is the key to getting people to subscribe to a network. Preemptively buying up the rights to this valuable material is an obvious way for terrestrial networks to block entry. Bidders for a particular target company occasionally try to limit entry to the bidding process by putting major sources of funds, investment bankers, or lawyers under contract (a strategy that makes sense only if quality bankers and lawyers really are in short supply).17

Respond by Moving Second

The great problem with moving first is that you usually have to move before you really want to. Many firms would be more than willing to introduce new innovations that cannibalize part of their existing activities, but only when that existing product range has nearly finished its natural life. Further, first movers that overestimate the speed of entry by rivals sometimes move far too early, which carries a large opportunity cost. Second movers can bide their time, and, when it seems likely that potential entry will be long in coming, this can be a big advantage. Second movers that bide their time also give themselves plenty of opportunity to learn from the mistakes of first movers. However, this strategy carries its own costs. Second movement is usually the strategic choice of firms that, deep down, do not want to change. This means that they rarely use their time well. When entry occurs, they are forced to change and sometimes at a pace that does not suit them. In addition, if they are unlucky, first movers can totally preempt them, leaving little room in the market for them to operate. Hence, the trick to a successful second movers’ strategy is to be willing to change and to actively plan to do so — but only when the time for change comes.

In the days when it dominated the market for mainframe computers, IBM was famous for its pursuit of this strategy. Only six of the twenty-one major innovations in mainframe computing in the 1950s and 1960s could be credited to IBM, although IBM responded quickly and rapidly to almost all of them. Each of the three generations of mainframe computer was introduced by an entrant, although IBM soon reclaimed its leadership position.18 Banking and financial services is a sector in which first movers can rarely take advantage of first movement by branding or monopolizing scarce competitive assets. As a consequence, most players play imitation (or fast second) strategies, responding to changes initiated by others (usually entrants) but rarely taking the lead themselves. In the United Kingdom, many of these second movers have not moved willingly, and, as a consequence, their mastery of new services (like telephone banking) has been poor.

Moving second is often part of a broader response to entry, one that can sometimes be aggressive. Some firms choose to respond to a fast-moving entrant by launching a price war or escalating their marketing expenditures. Such strategies are effective when entrants suffer cost disadvantages, have limited financial reserves, or cannot build up sales fast enough to support a rapidly escalating fixed cost base. The problem with these strategies, however, is that while they may defeat a particular entrant, they do nothing to close the market opening that led to entry in the first place. If the entrant’s strategy was truly a good idea, then sooner or later someone else is going to try to do the same thing. Ultimately, the only way to block entrants from taking advantage of a genuine market opportunity is by moving into the market yourself.

Choosing between first and second mover strategies always causes anxiety, and, as a consequence, many executives opt for a strategy of “let’s wait and see how it develops.” This makes them second movers by default, rarely a wise choice. A smart firm is always ready to move first, but sometimes chooses not to. Moving second can be a good idea when you cannot take advantage of moving first; that is, when you cannot preempt or block your rivals. It can also be a good idea when you have more to learn from rivals than you have to fear from them. Moving second because you cannot move first, however, is not a virtue; it’s an admission of competitive weakness.

Summarizing the Process

The challenge of new entry competition is real. A great mass of potential entrants exists, particularly in industries where sweeping changes in consumer tastes or adoption of new technology are blurring boundaries in new and unfamiliar ways. Potential entry should be a cause for concern, but not necessarily a source of anxiety. To understand the challenges your company will face, you need to understand your company and, more importantly, you need to understand how entrants see you. All this adds up to a relatively simple bottom line. To maintain control of your market: (1) follow the flows of information from your market and identify who might take advantage of them; (2) put yourself in the shoes of a possible entrant to think coherently about new competition; (3) work out how best to attack your own market position and organize these thoughts into a coherent business design; (4) express this business design in terms of required competencies to help you think about the what, who, and when of entry; and (5) actively plan to introduce the new product or process innovations that you have devised to preempt entrants.