The market has fallen two weeks in a row and the analysts are already running around like Chicken Little. While it is so tempting to get caught up in these daily dramas, it is also short-sighted.

Consider, for example, the case of Rosetta Stone (RST). This innovative language software company issued one of the hottest IPOs of 2009. It was the darling of Wall Street. It was going to revolutionize language learning and was even credited with helping to reverse the downward momentum of equities in this “great recession” year.

And then Rosetta Stone reported a second quarter loss of $7.3 million, or 42 cents per share, compared with a profit of $3.4 million, or 20 cents per share, for the same quarter the year before. Suddenly, many stock watchers are ringing bells. “Rosetta Stone is under pressure,” they say.

But I had a chance to conduct an extensive interview with the company’s CEO, Tom Adams, and then I dug a bit deeper. What I found was the fingerprint of a thriving company, one that is making strategic choices others ignore. If you step above the quarterly noise and instead analyze the company’s long-term strategic fundamentals, you will see several strategic patterns underpinning the company’s story.

Over the next week or so I will share these patterns and unique choices which have led to success before and may prove potent yet again.

Pattern #22: Move Early to the Next Battleground 

As I’ve mentioned here before, highly competitive companies seem to consistently orient themselves to the next battleground, while their peers remain entranced with the immediate turf war. RST’s core strategy begins with such a commitment.

When Tom took the company’s helm in 2003, the firm was selling language software in a crowded field of other similarly priced books, tapes, and CDs. The team’s “big insight” was that by approximating the competitors' pricing they were mis-categorizing their offering.

All language materials were selling for between $5 and $30. And RST, following standard business school logic, had decided to sell the first unit of their product for $20, nicely in the middle of the field.

But RST’s product was entirely different. It was not designed to replace the classroom learning experience. Instead “we compared ourselves to the immersive experience of going to a foreign country, not being able to speak the language, and learning it there,” says Tom.

RST’s management realized that if they wanted to really own the immersion positioning, they should be selling their product at a far higher price. “We were thinking in terms of category,” Tom explains, and so it became obvious that they needed to sell the experience not for $20 or even $100. They immediately repackaged the product (bundling multiple $20 modules) and sold it for $300.

“Price is a proxy for quality,” says Tom. “When you make a promise that people will learn and you charge $300, then you really must deliver.”

Today’s language tools are battling to replace the classroom learning experience. But the battleground of the future is to apply technology to replace the experience of immersion, and RST crafted its lesson around that premise. By choosing the next battleground early, RST was able to break away from the current competitive field.

Choosing the next battleground or “category” may seem superficial. But this tactic explains the success of numerous breakthrough companies such as Gatorade, which was the first to move to the sports-drink category. The key to building a long-term advantage with this strategy, however, is to weave together this positioning with a long list of interlocking strategic decisions. This way you raise your competitors’ costs of copying you.

“Choose your competitors wisely, for they will define you,” says Tom.

Last month RST launched a new product called “Totale.” It is a combination of the Rosetta Stone core product (a series of interactive computer lessons) with two new services bolted on: a web-based, video coaching session with a live tutor and online game room in which customers can play language games with other RST users.

But Totale has the potential to be much more because it moves RST yet deeper into the next battleground. How so? Well, to start, Totale is entirely online. It requires no CD or heavy program to install. As such, it steps RST into the software-as-service field, or “cloud computing” as many call it. If the world is moving into one in which we no longer need disk drives or large hard drives because we access our applications through web browsers, as Google and increasingly Microsoft believe, then RST is already there.

Ask yourself the questions below to see how you can create a new category or find a new battleground to give your business a competitive advantage that you can build upon.

1.      Where do I see my industry going?

2.      What customer needs are not being met?

3.      How can I offer a new product or service that my competitors don’t expect?