The leader is the follower

Following up on my recent reader question about strategies for market leaders, one of the biggest things to understand is that the leader is the follower.

I'll explain.  If you're the market leader in your space, that means you're doing better than anyone else is.  You have more customers and are making more money.  Likely you're more profitable and have better economies of scale.  You have better brand awareness and probably more overall affinity and preference than your competitors do.  Word of mouth works to your advantage and you win the SEO war.  You get a guaranteed mention anytime anyone in the press or blogosphere talks about the category, and you're automatically invited to all RFPs.  It's a pretty good position to be in, and all else being equal, these advantages tend to cause leaders to continue to win.

Smart challengers are aware of these advantages and therefore try not to play against the leader at its own game.  Instead challengers typically try to differentiate themselves in some way from the leader.  They need to prove that they're better or that they better serve the specific needs of a segment, geography, or situation than the leader does.

I've mentioned in the past that leader and challenger strategies are mirrors of each other.  If the challenger's success depends on differentiation, then the leader is well advised to eliminate or minimize that differentiation.  And thus we find one of the paradoxes of market behavior, which is that innovation occurs not in the companies that are best resourced and have the most customer feedback and can bring new products and services to market most efficiently.  Innovation tends to take place on the struggling, starving fringe of the market, where companies are motivated to innovate.  Then what happens is some of these innovations take off, and when they do, smart leaders move to cover them quickly.  The power of the leader typically is what brings these innovations into the mainstream, not the original inventiveness of the challenger.

So it turns out that the effective leader strategy is to be a follower.  Challengers will come along and try to differentiate themselves.  Keep a close eye on these innovations.  Some will obviously be good ones.  Some will not be so obvious.  Cover the good innovations as quickly as you can, choking off the oxygen to these smaller, more poorly resourced usurpers.  Keep an eye on the questionable innovations to see if they gain traction.  If they do, they're good innovations and treat them appropriately.  If not, someone else burned up his money on them so you didn't have to.

A great visual metaphor for this situation occurs in Formula or NASCAR racing.  Oftentimes you'll see one car trying to pass another.  The front car will have a natural tendency to stay in front by virtue of the fact that it's blocking the other one.  So to pass, the second car must be on a different stretch of pavement than the lead car.  The second car must differentiate itself.

So what does the lead car do?  It moves to block the second car.  When the second car bobs left, the lead car bobs left.  When the second car cuts to the right, the lead car cuts to the right.  In this circumstance it's actually the trailing car that's calling the shots, the trailing car that's deciding where both cars will go.  And the leader is pursuing a smart leader strategy and covering every move before the challenger can take advantage of it.