New Lanchester Strategy: Volume 1

I originally learned of New Lanchester Strategy from Steve Blank in The Four Steps to the Epiphany.  In order to learn more, I recently read the 3 volume set from Shinichi Yano on New Lanchester Strategy (in manga form!).  The first volume is an overview, the second focuses on the "strategy for the weak", and the third focuses on the "strategy for the strong".

Here are my notes from the first volume...

New Lanchester Strategy is the application of Frederick Lanchester's Power Laws (relative strength of military forces) to sales and marketing strategy.

Lanchester's First Law - The Law of Single Combat

M_o - M = E (N_o - N) 

where 

M_o is the initial numerical strength of group M
M is the final numerical strength of group M after combat
N_o is the initial numerical strength of group N
N is the final numerical strength of group N after combat
E is exchange rate efficiency which is determined by weapon performance and individual skills

In ancient combat, large-scale warfare was essentially an aggregate of one-on-one engagements.  To win, one can either:

1. Increase numbers
2. Increase exchange rate efficiency (i.e., better weapons, tactics, training)

This concept also applies to one-on-one market competition, where numeric strength is market share.

Lanchester's Second Law - The Law of Stochastic Warfare

M_o² - M² = E (N_o² - N²) 

In modern combat, large-scale warfare is a messier affair with weapons that engage multiple people.  To win, one can either:

1. Increase numbers
2. Increase exchange rate efficiency (in proportion to the square of the strength ratio)

In other words, numeric superiority becomes more advantageous with stochastic combat.  The primary way to win with inferior numbers is to disperse the opponent's forces.

This concept also applies to many-to-many market competition.

Market share targets

• Maximum Target = 73.9%, also known as "monopoly share" of market.  At market share greater than 73.9%:
• it is difficult to stimulate additional demand;
• you get into direct competition with speciality niches;
• the correlation between market share and profitability disappears.
• Equlibrium or Stable Target = 41.7%, assuming 3 or more competitors.  The key point is that 50+% market share is not required to become the industry leader.  The gap in profitability between the leader and rivals widen when the leader as 41.7% or more market share.
• Minimum Target = 26.1%.  26.1% is the boundary for unstable and stable market leadership.  Any less than 26.1% and there is significant danger of leadership reversal.  Profitability also changes at this point.

Shooting range theory and market share
In a local battle between two companies, if one company's "war potential" (i.e., market share, effectiveness) exceeds the other by more than a factor of √8, it is undefeatable.  In a wide-ranging, comprehensive battle between many companies, this factor is reduced to √3.

This also applies to competitions over individual customers or market regions, and in competitions for market positions (e.g., 2nd vs 3rd place).

The No. 1 principle
Only the leader (aka No. 1) has absolute advantage in a battle, therefore segment the market and become No. 1 in as many ways as possible.

No. 1 strategy for the strong
#1 product -> #1 product line -> #1 in customer base (industry, channel, profession) -> #1 with client -> #1 in region

Focus on one or a few products and create #1s and then keep adding to get a #1 product line

No. 1 strategy for the weak
#1 with client -> #1 in customer base -> #1 in region or district -> #1 product

Focus on a region and create #1 with specific clients and then keep adding to get #1 in a customer base for the region and then until #1 in the region and then get more regions

Prioritise attacks on the weak and on weak points
Your competitive target is a stronger rival you are attempting to reverse.  Your offensive target is a weaker rival that you are attempting to take market share from.

Attacking weaker rivals to grow market share is known as the principle of "bullying the weak".  This is done to prepare for stronger rivals.

For stronger rivals, you should attack blind spots and weak points and avoid direct confrontation.

Combined the principle is "prioritise attacks on the weak and on weak points"

Principle of One-Point Concentration
If you have fewer resources than your rival, you cannot win unless you concentrate them.

What you concentrate on depends on whether you are strong or weak.  See No. 1 strategies for the strong and for the weak.

How much you concentrate depends on the level of investment by the rival.

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Next: New Lanchester Strategy for the Weak