Defending against entrants as the established incumbent

I've noticed that most material discussing an incumbent versus a plucky startup tends to take the perspective of the plucky startup.

So what if we took the side of the incumbent?

Let's imagine that we are the established market leader and we find ourselves under siege by a number of annoying little start-ups.  How do we respond?

New Lanchester Strategy suggests that we need to pay attention to market share as there will be tipping points that cause noticeable changes in profitability.  If we are the dominant market leader, we expect clever start-ups not to compete head-on but rather to attempt to re-segment the market, either using a niche that we aren't focusing on, or as a low-cost alternative.

The most dangerous approach for us is when they go low-cost because this is usually an indication of a disruptive innovation attempt.  It's likely that we may initially see their product as under performing ("It doesn't even have Feature X") but they are probably targeting a less profitable segment that we are therefore more likely to retreat from and thus begin our market share slide.

To address this, we may consider setting up a separate unit that creates a low-cost variant of our product that might even cannibalise sales of our existing product.  That's still better than ceding market share to someone else.  The reason for separating the unit is that our current policies and incentives are based on different assumptions that will otherwise undermine the efforts.

Note that we should only bother doing this if we being thinking about retreating because "those customers aren't profitable anyway".  That thinking would be a strong sign that we are being disrupted.  If the startup is foolish enough to go after our profitable customers, then we can rely on our normal structures and systems to respond correctly.

The startups must focus on differentiating.  We should focus on neutralisation, that is, just being good enough that any difference in performance is not worth our customers switching to them.  We should also improve productivity to allow us to neutralise faster.  This makes things fairly uncomfortable for a cash-strapped startup.

Neutralisation is about just enough and no more, as we want to preserve resources for our own differentiation innovation.