Today, it is possible to interact almost exclusively with ‘challenger businesses’ in our day-to-day lives – we can fly with Jetstar (Qantas’ challenger business), connect with friends and family using Belong mobile or Belong broadband (Telstra’s challenger business), manage our finances with UBank (NAB’s challenger business), access entertainment content on Foxtel Now (Foxtel’s challenger business) and lease/buy property on domain.com.au (Fairfax’s challenger business). These are just a few Australian examples of market leaders who have launched separate businesses that operate alongside their core businesses; new faces for a new age. So what is behind this trend? The term ‘challenger’ is in vogue and has been used to describe anything from a low-cost brand alternative to a disruptive tech-enabled new entrant. We have defined ‘challenger businesses’ as offshoots launched by a market leader to operate in its core business but compete on a different basis. It’s easy to associate ‘challenger’ with ‘low cost’ – broader trends related to digital disruption have undoubtedly given rise to a new class of organisation that are leaner and more agile than we have been used to. However, the desertion of the low cost and value segments from an incumbent’s core business may also be the canary in the coalmine that suggests a more fundamental shift in the economics underlying an industry. We have looked at several examples of market leaders that have launched/purchased a ‘challenger’ business to identify a potential set of strategic rationales for the incumbent business which can be broadly flagged as ‘defensive’ or ‘offensive’ plays. The defensive challenger As discussed in the ‘Innovator’s Dilemma’, new entrants (particularly those enabled by new technologies) will start off at the low-end of the market with a product that is just good enough. A ‘defensive’ challenger strategy for the market leader seeks to limit the ability for that new entrant to move up the market and into the core customer base of the incumbent business. When Virgin Blue entered the Australian domestic airline market in the early 2000s, amidst the collapse of Ansett in 2001, Qantas was faced with a competitor that was quickly gaining market share by undercutting on price. Once Virgin listed on the ASX in 2003, Jetstar became Qantas’ response; a low-cost airline which helped drive a wedge between the low and high ends of the market and allowed Qantas to maintain its premium position. The strategy also accelerated a choice for Virgin: should it stay in the low-end and compete with Jetstar or try and leapfrog Jetstar and compete with Qantas? The latter would have significant capital investment to be much better than Jetstar but also good enough against Qantas. As such, to be successful while protecting their core, Jetstar needed to play in a separate market to Qantas, confining its routes to domestic and then Asia-Pacific, while Qantas continued to perform its full service across longer leg journeys to Europe and the US. Outside of the airline industry, we have seen the defensive challenger strategy play out in telecommunications with the launch of businesses such as Belong in Australia and Skinny Mobile in New Zealand and in financial services with digital pure-play banks such as UBank. Next in line could very well be the energy sector, with consumer demand for cheaper, cleaner resources driving market leaders to question how to better serve this need, while maintaining their traditional offering. On the front foot Not all markets can support both the incumbent and new entrants amidst disruption. While, foreseeably, there will always be budget travellers and premium travellers, the same cannot be said of streaming video services and cable television services. When a market leader faces a fundamental shift in the economics underpinning the industry, a more ‘offensive’ challenger strategy seeks to use the privileged assets of the incumbent business to take hold of the revolution and lead the cannibalisation of the core business in order to retain market leadership in the new world. As uptake of streaming video services are expected to exceed the 30 percent ceiling for cable television, Foxtel has doubled-down on its Foxtel Now challenger business with a rebrand, new pricing models and new devices. Foxtel’s initial strategy, Foxtel Play, was heavily geared to video game consoles as the access point (a customer base with low cannibalisation risk to their core business). This was partly successful, but when streaming began to take hold of the mainstream market (given a nice little shove by Netflix’s launch in Australia), Foxtel launched Presto as a joint venture with Seven. Presto fell short of rapidly rising customer expectations on content and user interface relative to Stan and Netflix, driving Foxtel to buy out Seven, shut down the service, and relaunch Foxtel Play as Foxtel Now, making it available as a streaming service on any connected device, and slightly unbundling its subscription tiers to be more price competitive. The risk of cannibalisation was higher, but the competitive threat was higher still. Foxtel Now has repositioned itself to win on the basis of exclusive, premium content – something that leverages the traditional assets of the incumbent business to carve out a defensible position in the streaming video market against agitators such as Netflix. Accordingly, Foxtel Now takes advantage of Foxtel’s exclusive licensing deal with HBO, its range of local original content and its live sports licensing deals to offer a compelling customer value proposition for a new world for on-demand content that is detached from cable television. In summary, not every decision by a market leader to launch a challenger business is the same, it is not just about creating a low-cost offshoot because the incumbent business cannot support a cost leadership position in the market. The strategic choices behind the challenger business should be informed by the answers to three key questions: What is the customer need and market this business will serve? How is it similar / different from the core business? How will it compete? By understanding the nature of the threat to competition faced by the incumbent, market leaders can determine the value of a developing a challenger strategy, and whether that strategy will be an offensive or defensive play.