What to do when you’re #3 in the market

In the 1980’s Jack Welch famously set a rule for GE’s myriad of companies that they had ‘to become #1 or 2 in their market’. The un-stated threat was that failure to achieve this goal would mean the company would be sold, or, more personally, that new executives would be found to lead the business to a stronger market position.

Yet moving out of the pack to challenge the market leaders is notoriously difficult. Market leaders have deeper pockets and a greater customer franchise. In other words they have ‘home’ advantage. If you try to play on their football pitch to their rules with their ball, it’s more than likely that you will lose.

So how do you move from #3 to a market-leader? I believe that you must create your own pitch and your own rules. There are four specific ways you can achieve this.

  1. Redefine your market. Ryanair started out life in 1985 as a smaller version of BA and Aer Lingus on routes between Ireland and London. Their model included selling business class seats and having a normal ‘at seat’ service. It was only in the early 1990’s when Michael O’Leary was brought in to make the airline profitable that it redefined its market and its strategy. Instead of serving high-ticket Irish business people O’Leary changed the company’s mission to that of becoming Europe’s #1 low fare airline. Since that decision the company has become one of the most profitable airlines in the world and has grown from carrying 86,000 passengers in 1986 to 45 million passengers today.
  2. Lead on a key dimension. If you are in the pack it is unlikely that you will be able to be all things to all people. Not only will it require investment you can’t afford, but you will simply become anonymous. You must therefore focus where you have the potential for the greatest differential and leverage in the market. For example, in the 1980’s Avis broke out of the car rental pack to become a clear #2 to Hertz through a focus on customer service. Their message, ‘We try harder’, provided a distinctive message that elevated Avis above the other market challengers.
  3. Grow through adjacent markets. In dynamic markets new opportunities will be arising continuously. Rather than diversifying completely it is possible, through a series of small steps, to build complementary businesses in adjacent markets. For example, during the 1990’s UK supermarket Asda knew that it could not fight on food against market leaders Tesco and Sainsbury. However, Asda overtook Sainsbury in large part by moving into an adjacent market where they could compete effectively. They created a credible clothing offer and built a £1 billion business. As CEO Allan Leighton told Management Today back in 1997, “The clothing market is high-street; large number of distribution points, high operating cost, high distribution costs, long-distance sourcing. My model is slightly different to that; my space costs are half, my distribution costs are half, my operating costs are half. If I am reasonably competent, it means I should be able to translate that into same-quality garments at a significantly better price.”
  4. Sit tight and wait for a big wave. Like a surfer waiting on the beach for sight of the perfect wave, some companies prefer to continue with their current strategy and simply wait until something much better comes along. This is particularly appropriate in more dynamic markets when discontinuous changes can create major new opportunities. As I have mentioned in previous editions, a McKinsey Quarterly interview with strategy professor Richard Rumelt enabled Rumelt, with more than a dash of name-dropping, to relate a conversation he had with Apple CEO Steve Jobs in 1998. Jobs had recently returned to lead Apple and faced a situation where Microsoft had effectively won the battle of the PC market. Rumelt asked him what his longer term strategy for Apple was. Jobs reply? “I am going to wait for the next big thing.” The end result was Pixar, i-tunes and the i-pod!

The bottom line

These four strategies are not mutually exclusive and you can pursue more than one at once. What you don’t need to do is simply accept your fate and continue to be a pale shadow of your market leader. If you are not #1 or 2 in your market (and even if you are) you can use these approaches to deliver higher levels of growth and profitability for your business.


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