Market Challenger

What Is a Market Challenger?

A market challenger is a firm that has a market share below that of the market leader, but enough of a presence that it can exert upward pressure in its effort to gain more control. Market challengers are able to jockey for industry leadership in several ways:

1. Challenging the market leader on price (direct approach).
2. Increasing product differentiation.
3. Improving customer service (indirect approach).
4. Launching an entirely new product or service in order to change the field (radical approach).

Understanding Market Challengers

Companies with low market share are generally not in a position to influence prices and are often susceptible to the actions of larger firms. Market challengers, being in a position of becoming the dominant player, may face a high degree of risk, because they must take potentially radical steps in order to draw away consumers from the market leader. Each of the three primary strategies carries with it a unique risk, with the direct approach and radical approach posing more risk, due to the high potential costs.

Several of the most high profile technology companies today started as market challengers. Microsoft, for example, came from behind to license 86-DOS and create MS-DOS and followed Lotus 1–2–3’s success. Windows also evolved alongside Mac OS. Facebook challenged both MySpace and Friendster to become the world’s largest social network. Google also vied for power and overcame both Yahoo! and Altavista.

Amazon continues to challenge market leaders in more and more industries. It emerged as an e-commerce leader and is now challenging grocers (with its Whole Foods acquisition) and even healthcare companies like Walgreens with its acquisition of online pharmacy Pillpack.

Market Leader and Market Challenger: Example

As noted above, a leader is a company with the largest market share in an industry. Market leaders can often use their dominance to affect the competitive landscape and direction the entire industry takes. Market leaders in oil and gas, for example, include well-known names like ExxonMobil, Royal Dutch Shell, Chevron, PetroChina, and Total.

Market leaders must work hard to retain existing customers and continue to grow their brand loyalty to remain on top and attract others to their products and services. Several unique risks also come with being a market leader. If a company becomes too dominant or appears to be abusing its position, it may become subject to anti-trust lawsuits. From an investor's perspective, a market leader may not necessarily be the most profitable. Expenses, including product R&D and manufacturing costs, might be too high to make the company the most profitable in its peer group. Its intangible assets, such as brand recognition and goodwill, however, can enhance its value.