The concept of "barriers to entry" is perhaps the most daunting proposition an innovator must 
face. Incumbent companies run by deep, experienced management teams dominate almost every 
industry. Established customer relationships, tried-and-true products, powerful brands, and 
significant scale advantages provide these companies with a thick armor that often appears 
impregnable to aspiring entrants.

Yet, time and again, upstarts find a way to prevail—and not only in technology hotbeds such as 
Silicon Valley. Nationwide, slow-growth industries with high fixed costs—including auto 
manufacturing, consumer goods, and big-box retailing—may seem unassailable. But then along come 
such giant slayers as Toyota, Nike, and Amazon.com, each of which has transformed the business 
landscape of its industry.

In truth, industry incumbents are often surprisingly vulnerable. Clayton Christensen and others 
have shown that beating an established company at its own game requires strategies that disrupt 
the status quo by focusing on customers the incumbents either ignore or aren't willing to defend.

Occasionally, companies can invent a better mousetrap and challenge an incumbent head-on for its
most profitable customers. But most succeed by first devising cheaper, more convenient ways to 
serve targeted customer niches that are below an incumbent's radar. This allows the entrant to 
mine profits in ways that are not cost-effective for incumbent companies, which have higher cost
structures and broader focus. Over time, that strategy can migrate to other segments until the 
challenger's approach becomes the new status quo.

But how do innovators create disruption? Bain's experience and analysis suggest that customer 
focus holds the key. Successful challengers target specific segments and design propositions 
that address customers' unique concerns in ways incumbents don't—and very often can't. 
Challengers deliver a powerful customer experience by coordinating efforts across business 
functions, and they punch above their weight by investing selectively in what matters most to 
their target segments. Then they succeed over the long haul by systematically renewing their 
edge with customers.

All customers are not created equal

Giant slayers begin by recognizing that customers' needs and perceptions of value vary 
significantly across segments. Incumbents tend to give their customer segments varying amounts 
of attention, frequently concentrating on those that deliver the highest margin. Successful 
challengers often begin with a single-minded focus on delivering superior propositions to over
looked segments—addressing needs or desires that established companies don't (or can't) meet.

Giant slayers begin by recognizing that customers' needs and perceptions of value vary 
significantly across segments. The European airline industry's dramatic turnabout provides a 
stark example of how powerful customer focus can be. Before 1995, high-cost "legacy" carriers—
such as British Airways, Lufthansa, and Air France—dominated. They tried to be all things to 
all travelers but, for obvious reasons, spent most of their energies catering to their most 
profitable customers: businesspeople.

This created a bloated cost structure that opened the door for Ryanair and easyJet, two start-
ups founded on the premise that many customers simply want a convenient, inexpensive way to 
travel. Both companies created a focused value proposition for cost-sensitive leisure and 
private travelers and tailored their business plans to make that model work.

The strategy began with their fleets. To gain a cost advantage, the challengers bought small, 
efficient aircraft and offered only one class of service. Unlike the incumbents, they 
standardized their fleets, reaping savings from common maintenance and training programs. And 
rather than maintain expensive, inconvenient hub networks, they chose high-volume, point-to-
point routes from less-crowded, secondary airports.

To save on distribution costs these airlines chose their sales channels carefully. They eschewed
traditional third-party travel agents and pricey booking systems and relied on direct sales 
channels: telephone call centers and the Internet. As a result, distribution makes up only 
3 percent of total costs at Ryanair, versus 10 percent for some large carriers. The smaller 
carriers pass those savings on to the customer.

Both upstarts recognized quickly that online transactions were their most profitable channel. 
So they worked hard to steer customers to their Web sites without sacrificing service quality 
or convenience. EasyJet offers a discount of £10 (approximately U.S. $18.50) per round trip if 
customers book over the Internet. Once on the easyJet site, customers find a simple-to-use 
interface that downloads quickly, even on dial-up modems. Buying a ticket requires only five 
steps, versus ten on some legacy carriers' sites. And because easyJet collects key customer data
with each booking, it is able to analyze more precisely who its customers are in order to 
continually hone its strategy.

Without large bureaucracies and unions, Ryanair and easyJet also benefit from low overhead and 
cheap labor. They have driven cost out of their supply chains and ignored the bells and whistles 
their customers don't value, such as free in-flight food and drinks.

The lack of corporate baggage is a key advantage for any upstart. 
Profits are plowed back into the business to continue to provide customers with a comfortable, 
lower-cost alternative, which in turn drives more volume. The results have been dramatic. Low-
cost carriers have already taken 10 percent of the intra-Europe market and are projected to have 
more than 25 percent by 2010. Ryanair and easyJet together added more than £4 billion (nearly 
U.S. $7.5 billion) in market value between 1995 and 2003, while many large incumbent carriers 
have lost value.

Focus the business on delivering a powerful customer experience

The lack of corporate baggage is a key advantage for any upstart. While new entrants can design 
their business plans and strategies on a clean sheet of paper, older companies are saddled with 
systems and patterns of behavior developed over many years. This hampers their ability to deliver
the sorts of end-to-end solutions challengers can devise from scratch.

A few years back, Australian telecommunications companies faced a tough growth environment after
deregulation of the market led to intensified competition and price pressure. Number two player 
Optus Administration, which had been the first to take on the incumbent Telstra, was able to fill 
a good portion of its growth gap by taking a close look at key customer segments and coming up 
with distinctive services tailored to its customers' needs. 

The flexibility to "design for purpose" led to a major promotion—called "'yes' Time"—in which 
Optus invited its customers to call each other for free between 8 p.m. and midnight. At the heart
of the initiative was an innovative pricing strategy that used an asset that was of little 
expense to Optus—in this case, spare nighttime network capacity—to provide something of real 
value to its customers.

The promotion hit a bull's-eye, helping Optus to turn existing customers into brand promoters 
who encouraged friends and associates to switch to Optus's service. "'Yes' Time" was a winner 
on another level as well. It encouraged new and existing Optus mobile customers to use Optus at 
night instead of relying on Telstra's traditional landlines for their evening calls.

Optus has counted on its entrepreneurial culture to help it grow into the multibillion-dollar 
business it is today. For instance, in the mid-1990s it implemented a computer-sharing initiative
that cut millions in IT costs and improved call-center productivity. Today the company uses 
innovative partnering programs, including one that pays commissions to businesses that help 
generate sales leads for Optus.

Viewing the marketplace through the eyes of a challenger taking on established players is "in 
the cultural DNA of the company," points out CEO Paul O'Sullivan in a recent interview with The 
Australian Financial Review. "It's not one of those top-down hierarchical corporations...This 
is a far more maverick…place. And we pride ourselves on that." 
 
Are You Ready to Take On a Giant?

Building on its customer innovations and its cultural strengths, Optus has consistently grown at 
more than twice the rate of the market since the company started operations in 1992 and has 
taken market share from Australian incumbent telco Telstra. The company's revenue has grown to 
A$5.5 billion (U.S. $4.3 billion), up from about A$2 billion (U.S. $1.5 billion) in 2000, and 
it now enjoys market leadership in such customer segments as high-speed Internet access.

Renew the customer experience again and again

The ability to move quickly based on superior knowledge of customer needs is another hallmark 
of successful challengers. They often build tight feedback loops with their markets, taking full
advantage of their flatter organizations to ensure that customer insights are identified and 
acted upon. This capability allows them to renew a valuable and satisfying customer experience 
again and again. It also gives them the ability to identify future customers and reorient their 
strategy to market changes.

Over the last decade, the home mortgage business in Australia has undergone a sea change brought
about by upstart mortgage brokers (such as Mortgage Choice, Australian Finance Group, and Aussie
Mortgage Market) and low-cost mortgage originators (such as Aussie Home Loans). As recently as 
1993, traditional banks controlled all but a sliver of the mortgage market. But by listening 
carefully to what customers wanted and providing the increased service they sought, independent 
brokers forced the banks to play by a new set of rules.

By 2003, brokers were originating 30 percent of mortgages in Australia, and their share grew to 
around 45 percent by the end of 2004. More impressive, they have captured A$350 million of the 
Australian mortgage profit pool (U.S. $270 million). Concurrently, bank margins have been 
slipping steadily.

The independent brokers have tapped into a deep wellspring of home-buyer consternation. In a 
recent survey, Australian borrowers were asked if they found the mortgage process confusing: 
75 percent of them said yes. A sizeable majority also preferred personal visits from mortgage 
brokers or even shopping for their mortgage on the Internet to visiting a bank branch for a loan.
What they wanted was unbiased advice. And the brokers were providing it.

The ability to move quickly based on superior knowledge of customer needs is another hallmark 
of successful challengers.Traditional lenders tend to push proprietary products with minimal 
focus on an individual's circumstances, but brokers can draw from an array of lenders for the 
best rates and payment terms. Moreover, brokers offer expert advice to individuals who are 
often novices at one of the most significant and complex transactions most consumers will ever 
make. Banks provide limited service and customers have to shop around on their own for the best 
terms. Brokers, on the other hand, offer one-stop shopping and often will make house calls or 
office visits to explain options. And brokers provide these extra services at no additional cost
to borrowers. They are funded by the very banks they compete with, through a schedule of 
commissions.

Why do the banks put up with it? To date, they've had no choice. Although the brokers take 
profits away from the banks, they provide such a compelling service that the banks have been 
forced to support their efforts. But the banks are fighting back. They've reduced broker 
payments for poor-quality loans and aligned commissions to reward more profitable types of loans,
such as those that have longer terms. Their interest rates and offerings have also grown more 
competitive. All of this has cut into the brokers' margins and highlighted how essential it is 
for challengers to use superior customer knowledge to stay ahead of the curve. Unfortunately, 
the brokers have missed some tricks.

Instead of relying so heavily on bank commissions, brokers could have parlayed their customer 
relationships into products beyond financial-planning advice. That's what Optus and the European
airlines have been able to do—take their original concept and migrate it into other segments. 
It isn't easy. Indeed, one of the leading Australian brokers, Wizard Home Loans, recently sold 
out to GE Money, the consumer finance arm of General Electric, in recognition that it needed 
help to compete. Wizard's experience is an object lesson: Finding ways to deliver customer 
satisfaction again and again is crucial to making giant slaying sustainable.

Learning from the giant slayers

That a David can defeat a Goliath is no myth. Even when upstart companies lack long-standing 
relationships, pervasive brands, and scale advantages, they can still win big against incumbents,
driving dramatic market-share shifts in just a few years. 

Chris Harrop is a partner with Bain & Company in Sydney, and co-leader of Bain's telecom and 
technology practice in Asia. Barney Hamilton is a Bain partner in London.

Source: http://workingknowledge.hbs.edu/item.jhtml?id=4915&t=strategy1