When a new player enters the game, the market leader has a choice of moves: ignore it, buy it, or strangle it in its infancy.
At first, British Airways treated Richard Branson and his fledgling Virgin Atlantic airline as a bit of a joke. Branson, surmised BA snootily, was a record retailer who knew nothing about airlines; he was all showbiz and no substance. Soon, that mood changed. People liked travelling Virgin. Worse, reports filtered back to BA that business executives, the creme de la creme of airline passengers, were opting for Branson's service.
Even so, Virgin was making little impact on BA's revenues. There was easily room across the Atlantic, the busiest route in the world, for both carriers. But then, unintentionally, Branson began to hit BA where it hurt. A marketing genius, he began to grab the sort of publicity that those at the top of BA thought was theirs by right. He launched mercy flights, he flew hostages home, his planes were made available for anyone who could guarantee air time (or so it appeared), and he started to win industry awards.
The response of Lord King, then BA's curmudgeonly chairman, to another Branson media appearance, was to fly into a towering rage. The reaction of its then chief executive, Sir Colin Marshall, was more measured but, according to those at the top of the company at the time, he too was fuming.
Perhaps interpreting King's fury too literally, senior BA employees decided to rid the chairman of the turbulent Branson. They adopted two strategies: one was to target his customers and persuade them to fly BA; the other was to ensure that he attracted some negative publicity, an objective achieved through a discreet whispering campaign intended to encourage journalists to ask questions about his viability.
Not for the first time, Goliath drastically underestimated David. News of attempts to poach Virgin's passengers leaked out and journalists briefed by BA exposed the airline for trying to rubbish Virgin. Instead of dismissing these incidents, Branson launched a massive counter-offensive. Showing a terrier-like ability to worry away at his opponent, he went on a media blitz, denouncing BA and issuing legal proceedings.
The effect on BA was traumatic. The new kid on the block, who posed no serious challenge to BA, had demolished its carefully-nurtured claims to be the 'world's favourite airline'. Overnight, BA's smiling, comfy image had been shattered. As an example of how to respond to a new player in the market, BA's approach, 'dirty tricks' and all, was a disaster.
Of course, new, unpredictable entrants into the market are a recurring nightmare for any corporate manager. Often the established player can rely on its history and might to safeguard its position, but sometimes the interloper romps in, its bright, new offering making an established company's product look tired and outdated, and quickly starts to erode sales.
In such circumstances, knowing when to act and when not to is critical and depends on the size and seriousness of the threat. For even if an established market leader decides to do nothing, such inactivity must be a positive step, not just the default option. It pays to check out the new rival by conducting a thorough analysis of its strengths and weaknesses. Armed with these facts, an experienced player stands a better chance of seeing off the upstart by whatever means it chooses - whether that is pointed retaliation or just standing firm. There are salutary lessons to be learned.
Not conducting a proper analysis, but simply rushing in too quickly proved to be the wrong response for McDonald's. In the early 1980s, it became convinced it was under threat from new products in fast food: pizzas, tacos and fajitas. It reacted by putting them on its own menus, with the result that McDonald's customers no longer knew what it stood for. In the nick of time, McDonald's realised that it had overreacted: it scrapped the new lines and focused again on its core Big Mac.
While McDonald's was in no real danger from the new fast-food products, if the threat is genuine, a quick response is of the essence. US credit card companies should have known better than to underestimate a sensible player like the giant telecommunications group AT&T, for example. In 1990, AT&T Universal Card Services revolutionised the market with a no-fee, no-gimmick, low-interest card. To make doubly sure of success, the firm offered a quicker decision time than anyone else. In advance of the launch, Universal Card had screened most of the US population for their credit-worthiness, using AT&T's computers. A card could be in the post within 24 hours, compared with a month or longer for its competitors' cards.
This formula was a winner from the start, according to Michael Treacy and Fred Wiersema, management consultants at CSC Index and authors of The Discipline of Market Leaders: 'Customers were the first to realise it; the competition took longer. What they couldn't seem to hear was the sound of Universal Card busily sawing the legs off the structure that supported their obsolete business practices.'
What finally got the attention of the established card operators was 'the sucking sound of market share rushing south to Universal Card's Jacksonville, Florida headquarters'. By then, of course, it was too late. Paul Kahn, the first president of Universal Card, says, 'Our competitors waited two years to react. So for two years, we took market share. Our competitors never got it back.' Worse still, adds Kahn, 'We were not just taking share, we were taking their best customers ... They kept getting higher-risk customers, and we kept taking the lower-risk customers. They didn't understand that we had done a paradigm shift.' Today, AT&T's credit card is the second biggest in the US.
While speed of response is one element in any campaign, choosing the right line of attack is just as important. There are three possibilities: ignoring the new rival; buying it out; or strangling it in its infancy.
Ignoring the new rival relies on the entrant failing, usually because its product is not up to much or because it hits a financial wall and is unable to develop the product further. The danger is obvious: the rival may not fail.
But the strategy can work. In stark contrast to the paranoia that swept BA when Virgin launched its Atlantic service, Coca-Cola treated Branson with lofty disdain when he started selling Virgin Cola. Branson's arrival coincided with the decision by Pepsi, Coca-Cola's main rival and second to it in market share, to turn its cans blue and embark on a $500 million marketing campaign. Most of Pepsi's firepower, though not directed against Branson, had the desired effect of keeping his market share to a minuscule level in Britain. Coca-Cola, on the other hand, did virtually nothing. It did not need to: it is after all just about the world's number one brand.
Where Coca-Cola saw off the competition with minimal effort and outlay, National Car Parks (NCP), headed by Sir Donald Gosling and Ronald Hobson, opted to buy out its younger competitor. For years, NCP had enjoyed an unrivalled position, owning the major car park sites in Britain's cities.
Then, in the late 1980s, Euro Parks started to make some headway, buying up plots as they became available. After some internal wrangling about how best to attack the challenger, Gosling and Hobson simply bought it out. Today, NCP is still the number one car park operator: keeping its stranglehold was a costly exercise but the firm will be better prepared for the next round of boarders.
Buying up a new rival is an extreme reaction. Most companies prefer to use their superior muscle to try and kill the competition before it has properly got going. The battle can turn quite nasty. Back in 1987, Robert Maxwell pitted his ill-fated London Daily News (LDN) against Associated Newspapers' London Evening Standard, then the world's number two selling evening paper. He was confronted with the spoiling tactic of the relaunch of Associated's London Evening News, whose similar name apparently confused consumers. A bitter price war ensued. Then there were allegations of pressure on news vendors not to sell the LDN. The paper eventually closed after five months, having had little effect on the Standard's sales.
Mounting an effective defence involves planning and speed, as Hoover discovered to its cost. In 1993, James Dyson launched his new dual cyclone, non-airbag upright cleaner in Britain. Hoover, the established market-leader, hit back with its free air travel offer. This was its attempt to blow Dyson out of the water. As a means of raising Hoover's profile it was brilliant. Any publicity Dyson was expecting for his innovative product was lost amid a blaze of coverage for the free flights offer.
Unfortunately for Hoover, the offer grabbed too much publicity. The available flights were soon taken up, leaving Hoover with one of the biggest public relations fiascos of recent times. It has never recovered. Within two years, Dyson's cleaner was selling more than Hoover's most popular model.
Dyson now sells around 30,000 cleaners a month and with the addition of his new compact model, his products bring in more than Hoover and Electrolux, the other major player in the market, combined.
While the lesson of the Hoover disaster is, if you are going to fight, plan, plan and plan again, that is not the whole message. Dyson would very probably have succeeded even without the bungle. He was shrewd. He made sure his cleaners came with a guaranteed after-sales service - not from an agent, but direct from the factory. If a problem occurs, either a new cleaner is dispatched straightaway or the machine is stripped, repaired and valeted within 24 hours. Dyson made his cleaners look different and advertised heavily, even though he could not afford it at first, with a simple, direct message: say goodbye to the bag.
If Hoover wanted to stifle Dyson, it should have moved more quickly, bringing its much greater weight to bear by cranking up its own after-sales service, revamping its product lines and heavy advertising. In the event, its reaction was too slow and the disaster of the flights promotion, instead of killing off Dyson, gave him the push he needed.
Large companies in other sectors have been more successful at putting down the upstarts. In a very strong retail market, for example, the big UK supermarket chains have used a battery of weapons, including budget-price economy lines, quality own-label ranges and loyalty cards, to repel the foreign supermarket outfits: while some, like Aldi, are putting up a fight, the German Rewe has withdrawn and French Carrefour has sold out.
British Telecom (BT) used its superior strength to react effectively when under threat. When Mercury blazed a trail across Britain with its bright, silver, space-age phone booths, BT's looked lame and lacklustre.
All the cards appeared to be in Mercury's favour. It could choose the sites for the new boxes, picking mainline stations and places where people gathered, while BT's boxes were spread indiscriminately, from the Highlands of Scotland to Dartmoor.
Had BT done nothing, Mercury would have been free to corner the growing phone card market. Every Mercury booth that worked to every one of BT's that did not was a marketing opportunity for Mercury. To its credit, however, BT acted, improving beyond measure the reliability of its pay phones by guaranteeing their repair within hours. They were redesigned and in some areas new ones were installed. In the face of this blitz, Mercury, still wilting from the huge set-up costs, found it could not make its pay phones pay.
The upstart threw in the towel and scrapped them.
Earlier this year, Eagle Star decided to go head to head with a newcomer to the financial services market, Virgin Direct. Once again, Branson was behind the incursion, offering pensions by phone, a service previously almost unavailable. Eagle Star followed. Suddenly, a new market has been created.
In Virgin's other theatre of action, BA has woken up too late. Recently, the airline has embarked on a series of joint ventures and tie-ups. Virgin is not big enough to be considered an equal by the likes of American Airlines, but BA is. A partnership between giants such as these poses enormous problems for smaller carriers, Branson among them. Unfortunately for BA, however, Branson's earlier victory means he has the bit firmly between his teeth.
Every time the airline suggests any new link-up, he screams anti-competitive.
If only BA had responded in this way in the first place.
Spreading rumours and trying to undermine its business is one way of killing a new entrant early on but, as BA discovered to its cost, it can backfire. The penalty for getting caught can be threefold: possible embarrassing breaches of the law or industry regulations; loss of reputation; and being seen to be taking the new competitor desperately seriously, suggesting it must be doing something right to merit such attention. The lesson of BA-Virgin is: whatever you do, keep it clean.
Chris Blackhurst is assistant editor of the Independent on Sunday.