This piece first appeared as Steve Wunker's piece for Ivey Business Journal
By Steve Wunker
Business leaders are trained to focus on big, attractive markets, yet some of the most compelling sources of growth come from markets that start out as tiny footholds. Penetrating such foothold markets requires an entirely different approach than the one used for big, established markets. Readers of this article will learn which strategies and tactics work best.
At first glance, some of the biggest opportunities in business can look exceedingly small. For example, the functional non-alcoholic beverage industry – a $20+ billion behemoth in North America – got its start in 1965 with Gatorade, a product concocted for players on the University of Florida’s football team. In the 1950s, IBM considered an offer from Xerox to partner in bringing out the first photocopier, but a careful study of the market concluded that it would be too small to merit serious attention.
Business leaders are trained to focus on big, attractive markets, yet some of the most compelling sources of growth come from markets that start out as tiny footholds. As Table 1 shows, 8 of the 10 most valuable companies in the United States got their start as tiny slivers in the economy, only to go on to
grow with their industries to become titans.
Exhibit 1 – Foothold Markets for the 10 Most Valuable U.S. Companies
Winning in a vibrant, new market is a time-tested route to commercial success, but the best strategies in that setting can differ substantially from approaches used in established markets. Rather than targeting big accounts or large swathes of consumers, firms can do far better by focusing tightly on well-defined foothold markets. These markets consist of a relatively small set of customers that:
In addition to violating conventional principles of business strategy in established markets, this approach runs counter to the political processes in many corporations. To sell a new proposition to senior management, champions of an idea often want solid estimates of a market’s size. Then, they gravitate toward existing markets that have reliable data. Moreover, companies may be in a hurry to grow, and targeting a market different from the long-term battleground may seem too drawn-out. Such thinking applies the logic of established markets to new markets. It’s a big mistake.
As we will see, foothold markets are highly valuable in industries with diverse customer types, limited upfront development costs, and rapid iteration of new offerings. Most services, consumer products, IT, and many other sectors fit this description well. A handful of industries do not, such as satellites, semiconductors, and biotech drugs. Yet even in these exceptional cases, it is critical to understand and identify which companies will open the door to market penetration. Often, those customers will have the same characteristics as good foothold markets.
Why new markets call for foothold strategies
In established markets, companies know who their most important customers are, and they have a rough idea of what these customers want. They also understand the playing field, and win by beating competitors. This is the essence of marketing and strategy as taught at leading business schools – segment the market, provide customer segments with appropriately tailored offerings, and win against the competition. Firms can then make multi-year plans to execute the strategy, chasing the most attractive customer segments and leveraging the most powerful sales channels.
New markets are completely different. They can change very fast. The nature of demand and the identity of the most attractive customers may be in flux. It is hazardous to extrapolate from existing data. Companies win not through elegantly dissecting the market with robust segmentation schemes, but through adapting quickly to emerging commercial realities. Indeed, the entrepreneur’s lore is that successful new ventures change their strategy an average of five times before hitting upon the right formula.
Often, the key challenge in new markets is not to vanquish competitors – that can happen later – but rather to jumpstart demand. Success comes from removing the roadblocks to broad customer adoption of a solution, not from being too focused on staking out territory in a barely-existent segment of mainstream customers. Companies can win through focusing first on atypical foothold customers who validate new concepts and stimulate overall market growth.
New markets may also be crowded. Entrepreneurs as well as incumbent companies in adjacent industries may be jockeying for position. To create the basis for long-term success in this environment, a company can try to become the leader in some aspect of the market. It stands out from the gaggle of me-too competitors by excelling in a particular segment of the market. It will then have the clout to attract wavering customers who see it as a safer choice than many of its rivals.
Consider how Research in Motion (RIM), the company that invented the Blackberry, initially won in the smart phone industry over giant firms such Nokia and Ericsson. In the late 1990s, Nokia and Ericsson poured resources into developing their first smart phones. Their initial forays into the market, the Nokia 9000 and the Ericsson R380, were expensive, complicated machines that targeted high-end, technophile consumers. Nokia and Ericsson never expected these phones to be blockbusters, but they hoped to stake out early leadership in smart phones among the demanding consumers who would pay high prices for the latest technology. They also wanted to beat each other to become the early leader in this industry. The companies were focused on the big market that smart phones would eventually become — rather than on an early foothold market that would be satisfied with basic solutions.
RIM took an entirely different approach. It did not attempt to make the Blackberry into a complete smart phone suitable for the most discerning consumers. In fact, the first Blackberry was not a phone at all, but rather a two-way paging device that excelled at being integrated with corporate e-mail servers. RIM focused on what seemed like a small foothold market – people needing to connect with their e-mail on the go – and it served that foothold exceptionally well. The rabid fans that RIM developed through its first device helped the company gain traction for later offerings that incorporated many more features.
RIM’s strategy embraced the uniqueness of new markets by responding to the 3 imperatives of successful foothold strategies:
1. Reduce uncertainty: In the early days of smart phones, many critical facts were unknown. How much would customers be willing to pay? What features would they value? What would mobile data plans look like? Would people want a single device that did everything, or separate devices for voice and data communications? Would personal computer manufacturers enter the fray? With so many variables unknown, Nokia and Ericsson took a big risk in creating their fully ornamented devices; they were competing for a market that they theorized would develop, rather than one that clearly existed. The substantial expenses they ran on these projects locked them into using their first devices as the basis of future iterations; it would have been too costly to abandon the flagship platform and start over.
By contrast, RIM’s simple device was less costly to create, and so the company could adjust as it learned more about the market. The complexity of the Nokia and Ericsson projects also meant that the devices took a long time to develop. Eighteen-month development cycles were the norm at the outset of the smart phone industry, even though the market was changing very fast. Because RIM’s devices did less, they could be created more quickly and be more responsive to emerging realities.
2. Stimulate demand: By failing to focus on a foothold, Nokia and Ericsson struggled to stimulate demand. Customers could do many things on their first smart phones – check the weather, compose a document, send a fax – but none of these capabilities seemed compelling enough to lead a significant slice of the market to purchase the devices.
RIM nailed a single need, and in doing so it created a critical mass of adopters who evangelized about the benefits of these products and battered corporate IT staff into integrating these devices into their networks. Ultimately, general interest smart phones became a bigger market than devices focused on corporate e-mail. But because of RIM’s early efforts the e-mail market became the first viable market in the industry.
3. Enable leadership: Nokia and Ericsson had far better established brand names than RIM, yet the latter was the unquestioned leader in its chosen foothold market. In new markets, consumers wary of less-than-fully-baked solutions can gravitate to the market leader, so RIM became the choice of businesspeople and corporate IT managers. Its early success became self-perpetuating all the way through 2007, which is an eon in this industry.
Signs of a good foothold
The narrowness of foothold markets makes them powerful, but it also creates a quandary: With so many potential footholds, which one should a company choose? Fortunately, high-potential foothold markets have several distinct qualities:
Clear Target Customer
A major virtue of foothold markets is that they provide a well-defined target for a company’s development efforts, thereby enabling simple solutions that satisfy the market, which in turn enables rapid commercialization.
To realize these advantages, the foothold must be very clear. RIM was laser-focused on white-collar employees of large companies, whereas Nokia and Ericsson were backing a general push to popularize smart phones through mobile networks’ company stores. Gatorade’s initial concentration on college athletes enabled the company to bring solutions to market quickly and invest efficiently in a focused brand identity. In a different corner of the beverage industry, Red Bull launched as a mixer targeted at club-hopping youths, an approach that is completely distinct from the typical new beverage launch that is pushed through prominent displays in grocery stores.
Reference for Broader Customer Sets
Given that a foothold market is a path to accessing a broader market and sometimes not a highly attractive market in itself, the initial customers should serve as a proving ground and valid reference for large numbers of prospects. Ideally, their trial of the new solution should be able to be easily observed by others, so that the effect has instant impact. Atari was not the first home videogame system – that distinction belongs to Magnavox’s ill-fated Odyssey – but it beat out Magnavox by showcasing its Pong game in video arcades. Whereas potential customers had to witness Odyssey in a Magnavox company store or in one of the few households owning the system, pinball players could observe Pong in action and decide to bring the experience home.
A key reason to pursue a foothold market is that it is fast and inexpensive to enter, which is why companies should choose undiscerning customers who are not the objects of fierce competition. This is how Zipcar became the leading rent-by-the-hour car rental firm in North America. The company focused on urban college students as well as professionals living in densely populated areas. These groups – who are tech-savvy and open to a new, Internet-based way of reserving cars — were not being served by industry giants such as Hertz and Enterprise. College students may not be the most lucrative long-term market – they are famously cheap and perhaps not the best drivers – but they were an easy place to start. Sometimes companies pioneering a new solution want to launch with a prestigious marquee account. But in doing so, they neglect the fact that these accounts can be demanding and slow to move. Customers similar to college students may lack prestige, but they still can provide fast feedback and prove the value of a novel offering.
Being dependent on multiple decision-makers and business partners can substantially retard a category’s growth. The natural gas industry is grappling with this issue today as it advocates for the replacement of gasoline with compressed natural gas (CNG). CNG is less costly than gasoline obtained from predominantly domestic sources. Yet to achieve broad market penetration, the industry would need automakers, car buyers, and service station owners to align themselves with these new systems. However, it is impossible to coordinate all these forces. So the industry is reaching for a foothold market – long-haul trucks. There are only a handful of these big rig manufacturers, and the buyers of these fleets are relatively concentrated. More critically, these rigs travel mostly along major highways, meaning that converting only some service stations along these routes would go a long way toward making CNG viable. Groupe Robert, a large Canadian freight carrier, is going so far as to partner with a CNG distributor to build fueling stations at its terminals near Montreal and Toronto, enabling trucks to make the 700-mile run without depending on other firms.
Finding the foothold
1. A company hoping to pinpoint the right foothold should begin by thinking hard about what it wants to accomplish from its first foray in the market. Consider the 3 imperatives that a foothold strategy meets: reduces uncertainty, stimulates demand, and enables early leadership. What are the big assumptions that need testing? What are the major things that mainstream customers will want to see proven by the first users? Where will early leadership count most? These factors become criteria for assessing potential foothold markets.
2. A company should create an exhaustive list of potential footholds. These markets may be quite small, and so there can be a lot of them. Customers can be considered not only in terms of their demographics but also according to what job customers want the product to do. Red Bull’s young clubbers were trying to keep partying late into the night, which is a totally different job than when these same people were trying to stay focused during an all-night cram session. A surgeon using a new stent to alleviate pain is a very different target than a peer using the device to treat a patient with a heart attack. The job people are trying to get done relates directly to what the foothold market is supposed to prove and how it will demonstrate the value of the solution for other customers.
In some industries, such as medical devices, thinking as well about the supply side of the equation can be valuable. What simple, early offerings could be created relatively quickly and appeal to certain customers? Given that the foothold market is supposed to be fast and inexpensive to penetrate, companies should concentrate on customers who will be happy with those kinds of solutions.
Sales channels are another option to consider in listing potential footholds. Instead of pushing for a national launch via Wal-Mart, perhaps a consumer products company would do better to test its concept in a small drugstore chain that has more flexible policies and would be eager for the attention. An IT company might concentrate on foothold customers that it can sell to directly instead of educating third-party sales forces about how to tout a complex offering.
3. A company should evaluate footholds according to its objectives. If the key need is to reduce uncertainty, which foothold can help take major risks off the table? In this case, the firm might show a bias toward a foothold where it can address risks in a fast, sequential manner, enabling it to double down or cut its losses with minimal upfront investment. Conversely, if the big need is to seed demand, the company might pursue an industry’s opinion leaders with offerings highly tailored to their particular needs.
Once it has settled on a target foothold, the company must keep in mind why it is using this approach. Managers frequently try to convert a foothold into being a business in its own right, because running a business is what they do well. But a foothold is not about building a business for the ages. The whole idea is to proceed quickly and inexpensively. By pursuing a foothold, the company is buying information about the viability of a customer group and a proposition, while it is attempting to jumpstart demand and gain good references for mainstream markets. To maximize the value of footholds, it is imperative to get to them fast, avoid over-spending, and learn diligently. If a non-critical function, such as IT systems or product fulfillment, can be outsourced early on to help meet these goals, the company should do so. There will be time later to hone the proposition and make the business model as cost efficient as possible. It does little good to build a finely tuned business that makes the wrong stuff.
Humility matters. It is the key reason why footholds make sense, and it should guide the execution of foothold strategies as the teachings and benefits start to pour in.