What’s it: A market challenger is a firm striving to increase its market share and replace the market leader. Usually, they are the second-largest dominant company in the market. They have sufficient resources and capabilities to aggressively challenge market leaders and undermine their dominance.
Pepsi is an example of a market challenger trying to steal Coca-Cola’s market share in the soft drink business. And, in general, you can find examples of market challengers at the second-largest companies in the industry. They may also be a third or fourth company, if the difference in dominance (market share) is small relative to the market leader.
The difference between market leaders, market challengers, and market followers
Market leaders are companies with the largest market share in the industry. They seek to maintain and strengthen their dominance in several ways, including attracting new customers, diverting customers from competitors, or increasing its product’s usability.
If possible, they seek to remove competitors from the market through.
Having many competitors makes the market leader have to share market profits with others. To reduce competition and increase profits, they may adopt aggressive strategies, such as a predatory pricing strategy. They sacrifice their short-term goals by setting prices too low (and operating at a loss) to gain long-term gains.
Market challengers are usually the second largest players in the market. However, they may also include the third or fourth-largest players if the difference between their market share and the market leader is relatively small, indicating they have the capacity to challenge the market.
Market follower refers to a company that prefers an accommodative strategy over an offensive strategy. They seek to effectively imitate market leaders while finding profitable opportunities. They usually have a relatively low market share than market leaders, indicating they have a more limited capacity to fight back.
Market followers may differentiate the product a little. Or, they offer a product that is similar to a market leader but sells it to a different market.
How market challengers attack market leaders
The challenger has a number of different alternative strategies to adopt. They may launch direct attacks on the market leader. Or, they take over other players with smaller market share, build market share, and then attack the market leader.
To be successful, the challenger must have a sustainable advantage. This can be done through a low-cost structure or product differentiation.
At the same time, the challenger must be at least as good as the market leader. In other words, they have sufficient capacity to attack, both in terms of capability and resources. And, if they do better, there is a chance they can replace the market leader position.
Market challenger strategy
Market challengers can adopt several offensive techniques to seize market domination. Five of these challenging market strategies are:
- Frontal attack
- Flank attack
- Encirclement attack
- By-pass attack
- Guerrilla attack
In a frontal attack, market challengers seek to attack the main force of the leader. For example, companies do this by offering lower prices, higher quality products, aggressive advertising, or better quality service to customers.
By doing so head-on, the market challenger has a great chance of winning or runs a high risk of losing. If the challenger loses, then sales, customers, and company image will be wasted. Conversely, if they win, the company dominates the market and makes the market leader the loser.
A flank attack involves attacking the weak points of the market leader. This attack is a reasonable alternative if the market leader has several target market segments.
In this case, the market challenger identifies specific segments in which the market leader does not dominate. The company may choose one or two segments and then develop a product to satisfy customers and dominate in that segment.
Encirclement attacks are more long-term oriented. Under this approach, market challengers combine frontal attacks with flank attacks.
Initially, challengers establish dominance in market segments where market leaders are weak. After being successful and dominating the segment, the company targets other segments and tries to dominate them. If successful, the challenger begins to spread attacks directly across the market.
The by-pass attack is a type of indirect attack. In this case, market challengers seek to build resources and capacity first. Once strong, companies can use them to attack market leaders head-on.
Thus, at the start of implementing the by-pass attack, market challengers avoid direct competition with market leaders. They do this by:
- Develop new products that are unrelated to a market leader’s product, but are still selling them in the existing market
- Target new markets for existing products
- Develop new products for new markets
As the name suggests, a guerilla attack involves small attacks. Its goal is to destabilize and demoralize the market leader. Challengers are deploying discounted prices, and intensive short-term advertising, and will seek to use public relations to undermine market leaders. This attack may seem simple, but cumulatively, it is effective to take the leader’s market share.
Guerrilla attacks are different from flank attacks or encirclement attacks because market challengers do not aim to dominate a particular market segment. Market challengers take several small, random attacks to confuse the market leader’s focus. When a market leader is off guard, the firm can strike head-on (if it has the capacity to do so).
The good and bad of market challenger strategy
Market challengers will always try to take advantage of the leaders’ mistakes and take over their positions. Being a challenger has some advantages and disadvantages. If successful, they can replace the position of the market leader. However, if they fail, they must be willing market followers to take their positions.
The good of market challenger strategy
Market challengers usually have the capacity to attack and a relatively strong position in the market. For example, they have sufficient capacity for research and development of new products. They don’t need to do research and development from scratch. They simply enhance what their market leader has to offer.
Furthermore, the challenger can allocate more effort to product marketing. They have more time to devise strategies to get the product released to the market more quickly.
It is easier for challengers to win business because they have a relatively similar cost structure to market leaders.
The bad of market challenger strategy
Some of the biggest problems with being challengers are that they are perceived as being below the market leader. Customers may be reluctant to switch to their products. Customers perceive their product quality as inferior to market leaders (when, in fact, they are not).
Furthermore, customers may want completely new products rather than simply improving what is already there. So, improving the market leader’s product shortcomings doesn’t appeal to them.
By carrying out the attack, the potential challenger is very likely to counterattack. This can hurt more because the leader has better resources to attack. A counterattack could bring the challenger down. And finally, market challengers must be willing to be replaced by market followers.