In part one with Andrew Gross, we talked to the bedding veteran about the best business book you’ve never read. It’s called New Lanchester Strategy.
Gross introduced us to a framework for how to think about market competition. In part two, Andrew discusses how to apply the principles of warfare to gain market share.
How do you operate if you’re the dominant market player? Well, it’s different than how you approach gaining market if you’re a smaller business.
Whether you’re number three or number one, Andrew outlines strategies for taking bigger pieces of the pie. Here’s a hint for smaller players: beat up on everyone who is smaller than you.
Andrew Gross’ Notes from New Lanchester Strategy
The Greatest Business Book You Have Never Read
Purpose: Share a framework for how I’ve thought about market competition and discuss its implications for the mattress business.
Background: I’ve read many business books over the years, heard from many business thinkers, and worked for some great business leaders (including two bedding legends – Sherman and Fazio). But one book (actually three) that I found most influential when thinking about strategy is the New Lanchester Strategy series by Shinichi Yano back in the mid-90s.
The books, by the way, are written in Japanese Manga comic book style and a fun read, if a bit dated particularly in how they portray the male-driven Japanese work culture of the time.
Discussion Outline (It’s easy as 1-2-3)
- Who was Frederick W. Lanchester? Lanchester was an engineer (who had over 400 patents and was one of the pioneers of the British automobile and aviation industries) and military theorist in the early 1900s who formulated theories about war that were then adopted and refined by the Japanese after WWII to define how they thought about markets and the battle to gain market share. This thinking has also become popular in Silicon Valley.
- What are his Two Laws?
- Linear Law– Ancient hand to hand combat. Fighting power = to # of troops X how effective each soldier and/or weapons are. Examples – Battle of Thermopylae (“300”) or battles in Lord of the Rings. Basically, one solider could fight one opponent at a time.
- N Squared Law – modern warfare. Fighting power = # of troops Squared X how effective your weapons are. Think of the difference between sword play vs weapons able to fire at long distances against multiple targets. Examples – WWII vs WWI. Multiple soldiers could fight multiple soldiers at a time, from greater distances.
- Implication – Think about the analogies of these laws to all your business assets and investments, whether your locations, people, products, advertising, or media. Things like product, people, in-store marketing, and direct mail are hand-to-hand combat. Electronic media (TV/Radio) is more modern warfare because they could reach multiple people at a time. Search marketing is one-to-one combat. Social media is so powerful because it is a hybrid of one to one targeting, broach (w/influencers) with an incredible multiplier effect.
- What are some key principles when you think about the war for market share? These were developed by the Japanese who adapted Lanchester’s theories to business strategy. I’ve taken some liberties and summarized these down to 3 principles:
- Your goal is to be #1 in whatever you do (e.g. find a space you can own)
- Only the leader boasts an absolute advantage in battle
- Utilize segmentation (markets, products, consumers, channels, etc.) to create opportunities for leadership
- Segments must be well-enough defined to create a clear battleground
- Concentration of effort is key
- Focus your resources on the small number of segments where you can win
- Know the rules of battle you will be fighting under before engaging the enemy
- Linear Law (e.g. Ancient Hand-to-Hand Combat) – The Japanese calculated that you needed to be within a 3:1 market share ratio of your competitor to win because you can use some combination of segmentation/increased effectiveness to win battles.
- N-Squared Law (e.g. Modern Combat) – You need to be within a 1.7:1 market ratio to win, because of the multiplier effect of multiple competitors in a market. Basically, size (# of troops) has a bigger impact than effectiveness so you need to start closer.
- Battles are fought to be won
- Never take on the leader unless you have a significant advantage. Prioritize your attacks on the weak and on weak points
- Separate the competitive target (the leader) from the offensive target (rivals below you). This is important. Example – sports teams win the regular season (to get a great playoff position by beating up on the weak times). Or think about Bob Sherman’s strategy for building Serta – find a partner in each market who wanted to be #1 and work with the partner to mutually build the business.
- Only take on the leader when you have gained sufficient strength from defeating the rivals below you. Then focus on the leader’s weak points.
- The key points here are the Differentiation and Concentration so you can win your business battles. It’s hard for many of us do, especially when you have lot of ideas. I heard one successful entrepreneur say that the keys to new business success were Focus, Belief and Effort. Most have belief and effort, but do they have focus?
- Your goal is to be #1 in whatever you do (e.g. find a space you can own)
- Ok so what are the implications for folks in this audience? Yano details many strategies you can use depending whether you are “weak” (battling for more market share) or “strong” (the leader in a market and trying to fortify your position). I’m going to assume most of the people in this audience are battling for more share rather comfortably sitting on their position, especially given the world we live in today. So, we can start with some of the things you can do if you are looking to gain share in a market.
- Strategies of the “Weak” – Here’s some examples.
|Differentiation||Offer something meaningful the competition doesn’t have||iComfort gel memory foam Purple technology + video marketing Spink & Edgar farm to bed Special delivery, virtual consultations, loyalty programs (e.g. Colders Half Back/Double Back), financing options etc.|
|Local Battles||Fight enemy on well-defined, closed in territory to even the playing field||Casper NYC/SF Launch Strategy Geo-Fenced Adv/Promotions Segmentation – e.g. SSB new strategy Limited Distribution|
|Close Combat||Create situations where you can fight under the linear law and better match||iComfort Display at launch (3x cost) DTC at launch (only competing against the worn-out bed in your bedroom) Fairs and Events (pre-Covid) Private showings/sales SSB leaving Vegas and having own event|
|One Point Concentration||Focus your small forces on one area where you can win (sharpshooting or Luke and the Death Star)||DTC focus on the buying process iComfort/sleep hot perception No foam vs foam construction Sleep Number and airbed segment Conn’s credit program|
|Diversionary Operations||Confuse/distract the enemy (Trojan Horse)||Organics fake test market example Secret sales vs advertised event|
A key thing to remember here is those 3x/1.7x rules – you need to do things that create a decided advantage either in your effectiveness (think a big new promotion or advertising idea) or amount of effort (people/spending deployed), the latter more important when you’re fighting by modern rules.
And, over time your competition will catch up, so you always need to be improving. That’s why it’s important to win and scale quickly (e.g. part of the thinking behind Reed Hoffman’s Blitzscaling approach – find your niche, expand rapidly, and build a moat). Also discuss Powell Doctrine in US Military – overwhelming force.
- Strategies of the “strong” – There are many approaches, but I’ll focus on the first three, particularly the first one as it might go against what some people think a leader should do.
|Matching Operations||Copy any reasonably good idea from a competitor right away.||TSI’s initial reaction to iComfort (deny) and their eventual success (made cooling a strong feature of Tempur) In tech, being “featured” – your idea or app becomes just another feature of someone else. This is what has happened to sleep tracking (worth a discussion). Pre-announcements|
|Wide Area Battles||Compete in an arena without boundaries to counter the weak’s tendency to fight on a close battlefield.||TSIs broadening portfolio with Sherwood acquisition (PL & bespoke), push into retail Casper moving to “better sleep” (discuss) DTC players going to retail MFRM national expansion Becoming omni-channel|
|Stochastic Battles||Force your enemies to fight each other, thus diverting resources from fighting you.||In a way, the warranty wars were like that. Start a price war and then back away and let others fight|
|Comprehensive Battle||Attack from all points to overwhelm the concentrated strategy of the weak||Dominate all media|
|Inducement Operations||Get the enemy to show their cards and then conquer||Legal challenges Pre-announcements (Vaporware)|
- What are the big takeaways?
- Differentiate and concentrate – do it and do it again!
- Pick your battles where you can win and build on those successes. There are no noble battles in business!
- Be relentless about getting better at what you do best and do more of it. Remember those 1.7x/3x ratios – you need to keep driving effectiveness and use your people, money, and resources in the best way you can to that you have overwhelming force where you choose to win.
- It’s ok for leaders to copy. They should quickly incorporate the best ideas into their business before others exploit weaknesses. Always be open-minded and “Steal with Pride”!
About Andrew Gross: Andrew held an EVP position at SSB and was a board member and SVP of marketing for Serta. During his time at Serta, the brand moved from #3 to #1 while doubling EBITDA. He and his team introduced iComfort gel-memory foam, widely considered the most successful new product in category history and ultimately a profitable $500MM+ franchise.
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