Counter-positioning from 7 Powers explained: barriers, benefits, examples

To understand the power and effectiveness of counter positioning, let’s start by breaking down the three criteria that define it. 

1. Incumbents remain passive: After careful analysis, incumbents decide the cost of switching is too high relative to the potential benefits. The perceived disruption to their current business outweighs the advantages.
2. A new business model emerges: A new entrant disrupts the status quo by introducing a fundamentally different business model. This model reshapes the value proposition as well as the cost and revenue structure, in ways that traditional incumbents are unprepared for.‍
3. It is financially superior: This new model either reduces costs (be it fixed, marginal, or operational) or generates higher revenue. The financial edge is clear and tangible.

Additionally, as noted by Luke Thomas in his article on the topic, the new model should align more closely with customer needs.

A prime example of this power is Michelin, the French tire manufacturer. In the early 2000s, the company launched “Michelin Fleet Solutions”, changing the pricing model. Instead of charging truck fleets for the number of tires purchased, they priced based on mileage driven per month. 

This business model was superior in two ways. It eliminated upfront costs for clients. It also better matched operational dynamics – more mileage meant more revenue for fleets, allowing them to spend more on tires. As a result, Michelin's financial performance improved faster than its competitors. From 2000 to 2011, Michelin’s EBITDA grew by €1.1 billion, while Goodyear’s grew by $0.69 billion. Michelin’s EBITDA increased 59% faster.

Hamilton Helmer describes each power in terms of benefits and barriers. Counter positioning’s benefits are primarily through two mechanisms: reducing costs and increasing revenue. Let’s explore the mechanisms with real company examples.

1. Lower costs: Ryanair

A prime example of dramatically cutting operational costs is Ryanair. Unlike traditional airlines, Ryanair uses secondary airports, which have lower landing fees. This reduced fixed costs. Additionally, the airline operates a single aircraft type (or at least used to at the start). This streamlined maintenance, training, and operational costs. Ryanair further lowers its costs by unbundling services like food, assigned seating, and in-flight entertainment. This minimizes marginal costs. Finally, they use a point-to-point travel model instead of a hub-and-spoke model. This reduces operational complexity and costs of managing connections (handling baggage, rebooking missed connections, and maintaining hub facilities and staff).

2. Higher revenue: Bloom

Bloom Institute of Technology, a coding bootcamp is a strong example of counter positioning with higher revenue. They introduced an Income Share Agreement model, where students pay a portion of their monthly income after securing a job with a salary of at least $50,000. By deferring payments until students have greater purchasing power, Bloom can charge more. In addition, they hide a significant portion of their revenue behind the interest rate. After repayment of the $19,000 principal with interest, Bloom earns about $24,000, that’s 60% more revenue per student than traditional bootcamps, which charge between $10,000 and $15,000.

While counter positioning offers strong benefits, the power truly lies in the barrier. The barrier can be difficult to grasp. It isn’t the incompetence or lack of vision of the leadership team. Rather, the barrier emerges after careful, calculated decisions made by the incumbent itself. After analyzing the potential benefits and costs of aligning with the new business model, the incumbent chooses not to adopt, not to engage. This is because the expected damage from switching to the new model is too high.

In simple terms, the barrier is the expected damage or as Helmer puts it, collateral damage and its magnitude.

Understanding the core reasons behind the inaction is crucial. It helps validate whether a challenger truly has counter positioning power. According to Helmer, a perceived large expected damage can come from valid or invalid business rationals.

Valid reasons increasing expected damage: Fidelity

The first valid consideration for incumbents is business impact. They must evaluate a new model’s effect on their cost structure. For example, when digital photography emerged, Kodak, a company deeply rooted in film, would have had to invest heavily in mastering digital image storage, a technology it had no experience with. Operational changes also need to be taken into account. For instance, a traditional investment firm emulating Vanguard’s low-cost indexing model would need to reduce reliance on fund managers, fundamentally altering its operations. Another factor is cannibalization risk. Introducing the new model alongside the old may lead to current customers switching. In Helmer’s words, the two models will have a "high degree of substitutability."

The second valid reason is brand impact. Will adopting the new model conflict with the established brand message? For example, when Vanguard introduced passive index funds, Fidelity, the incumbent had a well established value proposition highlighting stock-picking prowess and active management. This made it difficult for Fidelity to consider selling a financial product that merely tracked the market.

Both impacts inform the incumbent’s computation of the expected damage, and helps answer the question: does the benefit outweigh the downside? In many cases, incumbents end up with No. This decision, what Helmer refers to as “Milking the original business,” is the first manifestation of counter positioning.

Invalid reasons increasing expected damage

Even if the incumbent decides not to milk their existing business, there may still be other reasons that increase the expected damage they perceive. These reasons are not rational but still real and powerful.

Long-standing market leaders can easily fall victim to cognitive biases. They view the market through a particular lens and often overestimate the risks associated with adopting new models. They have countless stories of new models that came and went. Additionally, as Helmer points out, leadership can also suffer from a low signal-to-noise ratio, where the genuine threat posed by the challenger is drowned out by other industry distractions.

Side note. A challenger can influence incumbents’ cognitive biases. How? By maintaining silence. By not over-communicating the advantages of their new model, the challenger can avoid alerting incumbents’ current beliefs. As Lydia, a French neobank now market leader puts it best: "Work hard in silence."

Another invalid reason incumbents fail to adopt a new business model is internal goal misalignment. Addressing threats from new competitors involves difficult decisions which lead to internal friction, increased costs, or short-term revenue losses. CEOs may shy away from such challenges to protect their own position or to focus on short-term profitability as opposed to long-term company success.

Cognitive biases and internal goal misalignment are the second and third manifestations of counter positioning.

The dynamic nature of counter positioning

Counter positioning evolves over time because the strengths of the challenger and the incumbent evolve. The new business model starts gaining traction with new customers joining daily. The incumbent’s customer base shrinks progressively. At the same time, the new business model starts looking less and less risky.

As a result, two things happen. The benefit of "milking" the original business declines. The risk associated with switching diminishes. In Helmer’s terms: the risk-adjusted size of the damage decreases over time. Therefore, it gets progressively harder for the incumbent to justify staying put. As a precaution, challengers should keep in mind that they will change their mind and join in on the fun at some point.

The non-exclusive nature of counter positioning

Counter positioning is non-exclusive. Even if your new business model gives you an edge over market leaders, it doesn’t mean other challengers armed with a similar strategy can’t appear. For example, In-N-Out Burger had a counter positioning power over McDonald’s, but it didn’t hold the same power over Five Guys.

In short, the counter positioning power can be disrupted by time and competition, so constant vigilance is necessary to maintain an edge. Challengers, keep an eye out.