June 23 2010
In Winners and Losers I aim to describe and explain, not to prescribe or predict. The success factors I identified for organisations that create new markets and establish lasting industry leadership certainly contain lessons for any business, but they’re mostly implicit. In my workshops for business audiences, I suggest ten any business entering a new market needs to consider before it makes too heavy a commitment to a new venture. Most are deceptively simple, which may explain why they’re so often overlooked – with fatal consequences.
None of the winners described in Winners and Losers had clear answers to most of them at the outset – they discovered them as they went along. But for them the market was tabula rasa; for new entrants, it will be at least starting to take shape. Entrepreneurs shouldn’t spend too much time on analysis, but every now and then, entrepreneurs need to ask themselves some fairly fundamental questions.
In this post I’ll consider the first five:
1. What exactly is the market?
2. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player?
3. Do we have all of them? What would it take to acquire them?
4. Who is/who will be the customer and why should they choose us?
5. Who pays? Does our business model add up?
The first question is: what exactly is this market? How do we define it? People often talk loosely about ‘the online market’ or ‘the retail market’, as if they were made up of comparable groups of buyers and sellers, with broadly similar products and prices. They are of course made up of several distinct markets, each with very different competitive structures, even if the boundaries are fuzzy and frequently shifting. Any new market is always likely to be a moving target, and our first impressions will probably be proved wrong.
The point of the question is to think harder about the market or segment we’re looking at. The more narrowly we define it, the closer we’ll be to understanding whether it represents a real business opportunity for us. We could start by asking who’s selling what to whom, but in virtually all the new markets I’ve examined, at least one of those things wasn’t clear – and sometimes none of them. Customers and competitors are the most difficult to pin down, but it can take a while to make out what the generic proposition is. There are also complementary markets to consider – for mobile phone markers in the 1990s, the retail sector became crucial, but it too was a completely new, unfamiliar market with its own structure. Sometimes it makes sense to think in terms of ecosystems, rather than markets, with many firms co-existing, rather then competing directly.
Another starting point is the characteristics of any new or transformed market. (See New markets.) These are all likely to be hazy at first, but they do provide a framework for thinking about it. If for example we find a wide range of capabilities, customer needs and business models, we’re looking at more than one market. We need to decide which one we’re interested in, and why.
The most important difference from any market we’re familiar with will probably concern capabilities. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player? (And what role do strategic assets like brands and network effects play? If an incumbent has powerful assets they can be show-stoppers.)
The most crucial question of all is: do we have these attributes? And how easily could we acquire them? Not asking this question, or not really answering it, is probably the commonest reason for failure. Apple in the early 1980s thought it knew infinitely more about personal computers than IBM, but it didn’t have a clue how to sell them to businesses, and it was squeezed out of the overall mass market that evolved. That market changed so fast that eventually IBM realised it didn’t quite have what it took either.
It’s also possible to overestimate the difficulty of acquiring capabilities. Many old economy businesses did this in the 1990s – the online world seemed so exotic that they thought only a new caste of digerati could understand it. There was some truth in that initially, but it soon became quite easy for conventional retailers, for example, to establish an online presence. It was particularly easy for mail order companies, as they had most of the capabilities already – customer knowledge, direct marketing skills, expertise in prompt fulfilment – which is more than many dotcoms had then.
The business that most tragically exaggerated the mysteries of the Web was Time Warner which thought AOL could sprinkle some digital stardust on its resolutely analogue old business, and gave away billions of dollars of shareholder value in the most misconceived merger in corporate history.
Acquiring companies isn’t generally a good way of acquiring capabilities. I’ve only come across one business that did this successfully on any scale, Cisco. (See Must mergers always be dangerous?) But this wasn’t reckless diversification – these were capabilities within a field it knew well.
The next deceptively easy question is: who is the customer? Or who might the customers be, when they eventually emerge? The people who invested in Webvan, mostly time-poor millionaires living around San Francisco, thought that other people would attach the same importance to avoiding supermarkets as they did. Even now, this is still a fairly narrow market segment.
Mistaking early adopters for the advance wave of a mass market’s a common mistake. A big part of Nokia’s success came from treating each market segment differently, and consumers with respect. Its rivals thought their customers were network operators.
Understanding who your customers are can be a very difficult question and it gets harder when the most important customer isn’t the one who’s paying. Many business models now don’t require the end user to pay directly. One of the quickest ways for a web business to build market share, and sometimes an impregnable competitive position, is to give customers something for nothing – something they really value of course. But this strategy can be dangerous, unless the business finds at least one group of customers, such as advertisers, prepared to pay something. Not many are as fortunate as Google, which has something to offer both its sets of customers.
One of the problems with providing software or content free is that competitors may be able to match you and go one better, make them an offer they really can’t refuse. Another danger is that you may never find a way of making enough money from other customers, or from charging a few users a premium. Many newspapers now rue the day they put all their content on the Web free – their online advertising revenues haven’t remotely compensated for the loss of sales. Only titles like the FT, with something really valuable to its customers, can get away with charging for it.
In a competitive market, the important supplementary question is why should the customer choose us, rather than any other supplier? Or which customers might choose us? If we already have customers in an adjacent market, that makes entry much easier. When supermarkets started selling books and DVDs, they knew that a proportion of their existing food customers would pick one up occasionally. That’s a very different kind of market entry, the sort Microsoft was rather good at, and that Google is pursuing now. For most new ventures, winning the first customers is an enormous challenge,
That leads directly to another question, which I’ll consider in the next post.