Building a successful startup and fighting military battle have many of the same qualities. Everyday you need to get up and fight to gain marketshare, defend your ground and find new ways to innovate and suceed and prosper. Founding a start up is not for the feint of heart much like leading an army, it takes vision, determination and a confidence to continue with your instinct in the face of adversity.
It is not suprising therefore, that the two worlds are not that far apart. Today I want to introduce you to the New Lanchester Strategy. The New Lanchester Strategy is A battle tactic that has transitioned into the corporate world for companies that are looking to enter existing markets. If you are a small company looking to take on the incumbants in an existing market, or you are a new startup looking to forumulate a battle plan, you might be very interested in the theory behind the New Lanchester Strategy.
The theory behind the New Lanchester Strategy is, how much “fire power” will it take to beat an enemy and how can concentrating forces into a smaller portion of an enemy be a better strategy for victory.
Targeting a smaller a specific aspect of a battle to concentrate forces is not a new military strategy. There are many prominant cases in history where a smaller force in sheer numbers has defeated a much larger army using this battle plan. Two such examples are the Battle of Thermopylae and the Battle of Trafalgar.
In the Battle of Thermopylae was fought by The allied Greek states lead by King Leonidas of Sparta against Persian Empire of Xerxes. King Leonidas’ strategy was to defend the only passage way and therefore concentrate the battle at a single point, rather than have his inferior army flanked by the Persians.
Lord Nelson was in a similar situation when he faced the combined navel fleets of France and Spain. Nelson has only twenty-two ships, but managed to win the battle without losing a single one by concentrating his attack to the rear of the enemy fleet of ships.
The New Lanchester Strategy takes it’s name from the British engineer, Frederick W. Lanchester. Lanchester observed that the advantage of size on one side is the square of the number of units in the force. So if two opposing armies went to battle, one with a 2-to-1 advantage, the amount of firepower of the bigger army will be quadurbled and inflict four times the punishment. Lanchester, In 1916 he published his ideas on aerial warfare in a book entitled “Aircraft in Warfare: the Dawn of the Fourth Arm” and his equations for determining the outcome of a battle became known as the Lanchester’s Power Laws.
The basic foundation of the New Lanchester Strategy is you must concentrate your force to attach a single point of an enemy. Once you have won that battle, you move onto the next small chunk that your concentrated force and resources can overcome. It is really just the old battle strategy of divide and conquer.
This idea was first adopted into the corporate world by Nobuo Taoka in the Japan during the 1960s. The idea behind the transition related to market share. The theory goes, that in order to steal market share from an established leader, you must first concentrate your resources to establish a beachhead on a single aspect of the market in order to find a footing to grow and beat the market leader.
At the time, Nobuo Taoka was a business consultant that was hired by Cannon to help them establish themselves in the photocopier market in the UK. Xerox was by far the dominant industry leader and so Nobuo employed the New Lanchester Strategy to concentrate Cannons resources and to first establish a foundation for further market growth. At first Xerox was unmoved by Cannon’s early market acquisition, but the divide and conquer strategy prevailed, and soon the small territories Cannon incrementally won eventually built up into market dominance.
Steve Blank references the New Lanchester Strategy in is classic business book, The Four Steps to the Epiphany. Blank uses the strategy equations as a basis for calculating the required resources for entering a market;
- If a single company has 74% of the market, the market has become an effective monopoly. For a startup, that’s an unnassailable position for a head-on assault. (think Microsoft).
- If the combined market share for the market leader and second-ranking company is greater than 74% and the first company is within 1.7 times the share of the second, it means the market is held by a duopoly. This is also an unassailable position for a startup to attack.
- If a company has 41% market shar and at least 1.7 times the market share of the next largest company, it is the market leader. For a startup, this too is a very difficult market to enter. Markets with a clear market leader are, for a startup an opportunity for resegmentation.
- If the biggest player in a market has at least a 26% market share, the market is unstable, with a strong possibility of abrupt shifts in the company rankings. Here there may be some entry opportunities.
- If the biggest player has less than 26% market share, it has no real impact in influencing the market. Startups who want to enter an existing market find these the easiest to penetrate.
So what rules can we take from these equations? Well for one, attacking a company that holds a monopoly head-on is suicide. No startup has enough cash to out spend an industry leader in marketing resources. But, if you target a smaller aspect of that industry leader’s business and establish a foothold, you have a far greater chance of success.
For example, say your startup creates a portable music player that rivals the iPod. Trying to attack Apple head on will be impossible. Instead you must find a way of attacking a particular aspect of the business, for example, targeting an unloved demographic that is being ignored by Apple’s marketing department. Once you establish yourself as the key leader of portable music devices for the demographic, you can then use thoe evangelists to acquire more marketshare by targeting the next key demographic.
Too many companies try to beat an established leader head-on by fighting the battle on the enemy’s terms. If your startup defines the battle, a battle that you can win with concentrated resources, you are very likely to win the a small battle that could lead to eventual market dominance.