Images of Lanchester Strategy part I, presented at the Fairbanks Alaska QFD conference

Introduction

The Lanchester Strategy of sales and marketing based on F. W. Lanchester’s equations of combat [1] has been extensively developed in Japan since the early ’60s [2]. The strategy is based on a rigorous mathematical analysis of military and marketing warfare that uses elements of game theory, probability, ecology and calculus to show that the Lanchester laws are verified in theory and practice [3]. As this knowledge filters out into the business world [4], [5], the interest is in real life case studies that illustrate the application and practice of the Lanchester Strategy. However, companies are reluctant, if not paranoid about releasing information on strategic planning, market share and business strategies to potential competitors, as any case study of more than superficial interest will cover these areas in detail. An approach to gaining real world case studies is to view recent articles in the business journal through the lens of Lanchester Strategy. Using data taken from recent Wall Street Journal articles, we will provide sufficient market share and background information to generate a number of case studies that illustrate the Lanchester strategy, but first we will provide some background on F. W. Lanchester, the strategy and its significance.

The Lanchester strategy for sales and marketing is a broad strategy that includes a set of tactics for new product introduction and attack on existing companies and an equivalent set of tactics for the market leader for defense of a market share. Lanchester’s principle of concentration shows the importance of focusing on a narrow segment of the market (or customer group, geographic area, etc.) in the drive for dominance.

Developing a company is rather like flying an airplane. The company needs a certain amount of speed and lift to take off, but not too fast as it will stall and crash. Once airborne, the pilot has to fly to the destination, adjusting for short-term air turbulence and long-term drift, making course and speed corrections and allowing for changes in the center of gravity as fuel is consumed. Of course, it’s possible (but foolhardy) to attempt this without a fundamental knowledge of aerodynamics and the theory of flight. Observing models and birds in flight will give at best a crude understanding of aerodynamics, and, similarly observing companies in action can only give a crude knowledge of the dynamics of company growth.

Why the Sun-Tzu/Samurai Warrior model of marketing doesn’t work

There are many popular books available to the business community that purport to show how a strategy based on a mixture of Sun-Tzu, Mishima, Attila the Hun, seasoned with a dash of Von Clausewitz can be used as the basis for marketing strategy. However, the source materials were written long before mechanized warfare was developed and consequently deal only with the one-on-one combat that takes place under Lanchester’s linear law. Today, sales and marketing takes place under conditions described in Lanchester’s N-Squared law, since there are always multiple participants in any given market sector. The tragedy is that Western marketers are going into battle with, at best, only half a theory (and the wrong half at that!) and ignorant of the power of Lanchester’s Principle of Concentration and the N-Squared law.

So what do the top marketing gurus have to say on the subject?

In the classic marketing text Marketing Management [8], author Dr. Phillip Kotler states that “American firms are outperformed by the Japanese who target market share and not the latest quarter figures.” He goes on to say “there is an urgent need for new and improved theory of market share.” In Volume 1 of his massive three-volume treatise on Competitive Strategy [9], Dr. Michael Porter states that “there is no single relationship between profitability and market share.” Of course, there is no single (or simple) relationship as the Lanchester equations derived from differential equations are essentially non-linear.

Consultant Geoffrey More [10], after studying the behavior and performance of hundreds of companies has developed the closest approximation to the Lanchester strategy. However, even More admits that certain areas are not well-defined by his observations such as:
” I have no documented sources of evidence anywhere in this book… there is no hope of a definitive answer.”

” Our current model of the hi-tech markets is not quite right; it drifts off course in puzzling ways.”
In some areas, More and his co-authors come close to the market share numbers that are derived from the Lanchester strategy model. For example:

1. To be a market leader you typically need 50% [Lanchester strategy gives 41.7%].
2. If the market share falls below a critical mass, say 35 to 40%, the market becomes unstable [Lanchester strategy gives the critical minimum percentage as 26.1%].
3. The King or market leader has a x2 advantage [Lanchester strategy gives 1.7].
4. Pick on someone your own size [Lanchester strategy says attack a lessor company].

In the application of Lanchester’s principle of concentration to marketing, More and his co-authors finally get it right as seen in the following key statements from his book:

1. Attack the competition ruthlessly and expand distribution channels as fast as possible.

2. Target the point of attack.

3. Marketplace power is a function of market share.

4. Any force can defeat any other force – if it can define the battle.

5. Be first, because there is no second prize.

Let’s change pace now, and pick up on previously published case studies on Lanchester Strategy from Japan and relate that to some more recent data on the same market sector from The Wall Street Journal and other sources. As mentioned in the introduction, exact data from companies is somewhat difficult to obtain, but by using Lanchester Strategy as the model, we can relate information in the public domain to “reverse engineer” the market strategy.

The Beer Market

In Lanchester Strategy Volume 1 [2], Taoka discusses the conditions for maintaining a stable market share as follows (page 52): “The reason that the tradition-rich Asahi beer lost market share is because it does not have a top ranking region. Similarly, the main reason that Kirin beer is the top ranking company is that it owns the majority of No. 1 position in various geographic regions. In addition, Kirin did not enter into the Hokkaido region where Sapporo is the market leader with a 47% share. The fact that Kirin beer did not build any plants in Hokkaido contributed to its strategic strength. Other companies have built distribution plants in various locations and have become overextended, and suffered from a loss of focus and dispersion of effort.

Anheuser-Busch Beer Company as reported in The Wall Street Journal October 22, 1998.

Anheuser-Busch has a commanding 46% of the beer market share in the U.S., but only a miniscule 1% market share of the $30 billion Japanese beer market. The fastest growing beer market segment in Japan is for low malt, high alcohol beers. As Japan’s recession drags on, beer marketers are flooding store shelves with cheap low-malt brews, and cash-pinched drinkers are chugging them down. This beer sector is expected to grow to almost 15% of the market compared to 6% last year. To tap into this market, Anheuser-Busch formed a joint venture with Kirin Brewery Co., Japan’s No. 1 brewer, and created a beer called Buddy, with 20% more alcohol than a can of Budweiser and sells for two-thirds the cost.

Buddy’s target audience in Japan is the “heavy users,” mostly men in their 30s and 40s. These consumers “commute” in packed trains every day. They’re concerned about the recession, and they’re worn out from work. So what does 6% alcohol provide? Ultimate relaxation. With an aggressive advertising campaign, Buddy’s sales have so far exceeded Anheuser’s modest initial expectations of 500,000 cases this year, and are expected to boost Anheuser’s share to 1.2% this year and 4% by year 2002.

Anheuser-Busch case summary: Lanchester Strategy tells us that for a new product introduction from a position of relative weakness the optimum strategy is as follows: The market segment must be tightly focused (businessmen ages 30 to 40), make a strategic partnership with a major distributor (Kirin Brewery), extensive advertising, and product differentiation (more alcohol at lower cost).

Copier Market, The Wall Street Journal, September 29, 1997 and March 29, 1999

In the Financial Times of 1986, Dr. N. Campbell [see Campell’s paper – Ed] describes Canon’s strategy against Rank Xerox in the U.K. copier market in the late 1970s and early 1980s. First, its resources were concentrated on Scotland. Having captured about 40 percent of the market, Canon began to attack selected and tightly defined regions in England, before making a determined push on London and the southwest region of England with a numerically larger sales force.

Fast forward to 1998, where Hewlett-Packard “king of copiers” had total revenues of $43 billion against Xerox at $18 billion. So Xerox is invading HP’s most profitable business (replacement cartridges) and office copiers. Xerox introduced a slew of new printers that beat HP on price/performance and a low-cost cartridge for home office printers. At the high end, Xerox purchased Xeikon, a small Belgian manufacturer of high-speed color printers and SET Electronique with printers to 1,000 pages per minute.

“We have to compete ferociously,” said Mr. Thomson, president of Xerox. “You don’t win in the marketplace easily against HP.” Xerox, which traditionally sold its printers through specialized dealers and a direct sales force, will sell the new printers through retailers, as part of an ambitious plan to boost revenue from such indirect channels to $4 billion in year 2000. Mr. Thomson said Xerox is on track to double the number of stores that sell its products to 3,000 within the next 15 months.

Comparison shopping for printers

  • Vendor Model Speed Price
  • HP 5000 D640 40 $12,500
  • Xerox DocuCenter 20 30 $9,500
  • HP LaserJet 5SiMX 24 $2,878
  • Xerox DocuPrint N32 32 $2,929
  • HP LaserJet 5 12 $976
  • Xerox DocuPrint 4512 12 $958
  • HP Replacement Cartridge $73
  • Xerox Replacement Cartridge $56

Copier Market Canon case summary: Lanchester Strategy tells us that new product introduction against a market leader should be conducted from a remote location [North England], building up manufacturing technology, sales force experience, and building up over 41% [market domination] before challenging the leader.

Copier Market Xerox case summary: Lanchester Strategy tells us that competing with a broad-based market leader requires a wide mix of product at appropriate price/performance benefits. Develop new products for low end and with acquisitions, gain products at the high end. Expand distribution channels.

Sales Force Strategy and Motivation

In chapter five of New Lanchester Strategy, Volume 1 [5], Yano considers the application of Lanchester’s combat efficiency (E) in the case of the individual salesperson. His conclusion is that the “quality” of a salesperson depends on specialized knowledge, charisma and personality, and sales techniques or communication skills. In order to increase quality, more efficient use of time is required, hence the use of various time management skills. However, if training or selection can increase the combat efficiency, improved sales will result.

Trilogy Software training program, The Wall Street Journal, September 21, 1998

Mr. Liemandt is Trilogy’s chairman and CEO, an energetic 30-year-old who dropped out of Stanford University in 1990 to start a software company. In building Trilogy to more than $100 million in revenue, he learned the hard way that taking risks and suffering the consequences are a crucial part of business. And he wants new hires to understand the experience firsthand. In an unusual indoctrination, he puts the company’s college recruits through a kind of corporate boot camp, complete with long workouts and little time at home. His goal: to develop creative people who work well in teams, adapt to swift changes in customer demands, and take chances.

In the first week, classes begin at 8:00 am and often extend to midnight, everyone learns about programming languages, product plans and marketing. In the second phase, the trainees are divided into 80 teams and given three weeks to complete projects ranging from making an existing Trilogy product run faster to creating new products from scratch. In addition to affecting where each person will end up, teams that do well win an all expenses paid trip to Las Vegas.

Mr. Liemandt tells the group, “no reward for trying.” He also warns, “if you set a hard goal and don’t make it, you don’t win points.”

Mr. Park’s Shoe Salesmen, The Wall Street Journal, and February 19, 1999

Four years ago, Mr. Park, then 23 and one of the youngest franchise owners in the international Athlete’s Foot chain, was making a name for himself. The second-generation Korean-American was selling shoes briskly from his small shop at the corner of 63rd and Halsted – just the kind of violent neighborhood where Athlete’s Foot executives had long been scared to open stores. Mr. Park now owns nine stores in some of Chicago’s roughest neighborhoods and has become the hottest Athlete’s Foot franchise in the country: first in store growth, second in sales (1998 revenue, $7.9 million). He has done so by relying on a brazen insight about where some valuable talent hides in the inner city. Mr. Park estimates that 90% of his sales staff have criminal records. But, as he will tell anyone who inquires, this group sure can sell shoes.

Back in 1992 when he opened his first store, Mr. Park hired more “professional” employees, as he calls the kids who avoided the temptations of the streets. They weren’t aggressive enough, he says, looking back: “They were shy and they were nerds,” and “they were not making money for me.”

Meanwhile, Athlete’s Foot, which until several years ago shunned the urban market in favor of suburban malls, is seeing a future in it. Mr. Park “helped write the book on how to do it,” says Executive Vice President Roger Kehm. We look at him as a poster boy and say, “Look what you can do there.”

Trilogy Software training program case summary: Lanchester Strategy tells us that to improve performance the “E” value must be increased. Intensive competitive group training programs at Trilogy solidify group interaction, quick thinking and sense of camaraderie within the company.

Mr. Park’s Shoe Salesmen case summary: Lanchester Strategy tells us that peak performance occurs when the employee competitive efficiency “E” is enhanced. Rather than training (Trilogy), Park makes selection of highly motivated individuals.

The Daimler Chrysler merger

The Wall Street Journal reporting (April 22 1999) the finances of the new DaimlerChrysler AG company shows that net income jumped 23% in the first quarter to $1.71 billion. First quarter operating earnings by segment are as follows:

  • Segment Q1 1998 Q1 1999 % change
  • Chrysler, Plymouth, Jeep, Dodge $1.44 B $1.56 B + 8 %
  • Mercedes-Benz, Smart cars $547.1 M $566.3 M + 4 %
  • Financial services $235.7 M $466.1 M + 98 %
  • Commercial vehicles $174.9 M $195.2 M + 12 %
  • Aerospace $45.9 M $99.2 M + 116%

The biggest boost to the company’s bottom line comes from the booming U.S. market, where Chrysler brands are gaining market share. Most profitable vehicles include the Jeep Grand Cherokee, Dodge Durango sport utility trucks and the Mercedes S-class luxury sedan. The basic problem however for the global automobile industry is that the industry has the capacity of building 18 million more cars than the marketplace can absorb. In this fiercely competitive situation, DaimlerChrysler is offering cash incentives to gain further market share gains. The incentives include a new $1000 cash-back on the 1999 Dodge Intrepid mid size sedan, the re-designed Neon and increased discounts on the Plymouth Breeze, Chrysler Cirrus and Dodge Stratus.

DaimlerChrysler is also staking out two new market segments for future development. The Smart, a two-seat city car that went on sale in Europe late last year, the new A-Class city car with four seats that is expected to rack up 200,000 unit sales this year. The new PT Cruiser (Wall Street Journal May 3, 1999) is set to hit the markets in early 2000. Touted as a sure-fire “segment-buster,” the PT Cruiser combines the room of a minivan with the flair of a sport-utility vehicle and the practicality of a small car. A combination of retro and futuristic design elements, ensured that the new vehicle scored rave reviews of 41% of the consumers among focus group participants. Expect also further developments in hybrid cars, with petrol-electric, fuel cell and hydrogen technology.

In the non-automotive area, J.D. Power and Associates rank the $23 billion DaimlerCrysler financial credit services company first in the industry for customer satisfaction [11]. With the acquisition of truck manufacturer Freightliner of Portland OR, this group is also poised for growth. The profitable Dasa aerospace division owns a 31 percent stake in the Eurofighter project and 37.9 percent of Airbus.

DaimlerChrysler case summary: Using the Lanchester strategy of mimicking the competition with equal or greater cash discounts ensures that market share will not be taken away by competing companies. The second strategy of defining new market segments is a pre-emptive move against the competition. In particular, the new PT Cruiser with an acceptance rating of 41% has defined a new segment of the “Personal Transport.” The fact that 26% of the focus group participants did not like the PT Cruiser implies that it will be very difficult for any competing company to introduce a competing model.

OPEC and oil prices

OPEC’s market share of global crude oil production has rebounded since the 1986 price collapse and now stands at about 43 percent of world oil production (U.S. Department of Energy Information and Wall Street Journal May 10, 11, 1999). Crude-oil prices have steadily risen from a low of around $12.50 in January this year to just under $20.00, recent prices are slightly lower at $15.00 a barrel. Historically the 11 OPEC members have always formed an uneasy consortium, as member’s struggle for revenues by exceeding their oil production quotas.

The recent rapprochement between the two major OPEC members, Iran and Saudi Arabia who jointly control 42.5 percent of OPEC production, and as third ranking Venezuela produces only about 10 percent of OPEC total, this alignment has serious political, military, and economic ramifications [12]. As Saudi Defense Minister Prince Sultan bin Abd al Aziz al Saudi stated at his press conference with Iranian President Mohammad Khatami, “the recent contacts between the two sides have resolved all problems and there is currently no hurdle for the two states to expanding their ties in all fields.”

OPEC case summary: Close co-operation between Saudi Arabia and Iran gives them joint control of OPEC oil with over 41.7 percent of production and OPEC reinforces its control on global crude oil production. Look for lower levels of production and higher prices in the future.

Summary

Based on Lanchester’s equations of combat, developed in Japan, the Lanchester Strategy of sales and marketing will give you greater insight into the dynamics of the marketplace. The tools and techniques of Lanchester Strategy show how to penetrate a new market, and how to defend an existing market position. Companies are reluctant, if not paranoid about releasing information on strategic planning, market share and business strategies to potential competitors, as any case study of more than superficial interest will cover these areas in detail. An approach to gaining real world case studies is to view recent articles in the business journal through the lens of Lanchester Strategy. Using data taken from recent Wall Street Journal articles, we re-examine the published data to understand company planning and strategy within the context of Lanchester Strategy.

Bibliography

[1] F. W. Lanchester, Aircraft in Warfare, the Dawn of the Fourth Arm, (new edition of Lanchester’s 1916 work) 1995, Lanchester Press, ISBN 1-57321-17-X.

[2] Dr. N. Taoka, Lanchester Strategy: an introduction, Volume 1, 1997 Lanchester Press, ISBN 1-57321-009-9.

[3] Dr. T. Onoda, Lanchester Theory: Science to Win the Competition, 1999, Lanchester Press, ISBN 1-57321-015-3.

[4] Dr. Ted Lewis, Friction Free Economy, 1997, Harper Collins Books, ISBN 0-88730-009-0.

[5] Shinichi Yano, New Lanchester Strategy an Introduction, 1996, Lanchester Press, ISBN 1-57321-000-5.

[6] Shinichi Yano, New Lanchester Strategy: Sales and Marketing for the Strong, 1997, Lanchester Press, ISBN 1-57321-005-6.

[7] Shinichi Yano, New Lanchester Strategy: Sales and Marketing for the Weak, 1998, Lanchester Press, ISBN 1-57321-004-8.

[8] Dr. P. Kotler, Marketing Management, Prentice Hall, ISBN 0-13-557927-9.

[9] Dr. Michael Porter, Competitive Strategy, The Free Press, ISBN 0-02-925360-8.

[10] Geoffrey More, Crossing the Chasm, Harper Business, ISBN 0-88730-717-5.

[11] Thomas Petzinger, Jr. The New Pioneers, 1999, Simon and Schuster, ISBN 0-648- 84636-5

[12] STRATFOR, Global Intelligence Update: Iranian-Saudi Consensus Holds Seeds of a Major Regional Realignment. May 4, 1999. http://www.stratfor.com