Create categories and profits


Many CEOs grapple with a fundamental problem:  how do you profitably build revenues in low growth, hyper-competitive markets?  Grabbing business from a competitor is a difficult and expensive proposition.  Raising your prices — unless delicately handled — can be risky.  Driving incremental product innovation is a common strategy but one with low odds of success when the value-add is minor and the product remains comparatively undifferentiated.  There is a better approach to reigniting growth:  create your own category.

Pursuing incremental innovation is a tough road to travel.  Various estimates put the success rate of each new product or upgrade at only 10%-20%, resulting in wasted investment, unhappy customers and damaged careers.  However, there is a superior alternative for exploiting innovation.  It is called Category Making (CM).  This proven innovation approach combines cutting-edge product and business model innovation to create an entirely new offering, which by itself establishes a new category. There have been many successful examples of CM including ultra-low-cost, portable ultrasound machines for the Chinese market (GE), Minivans (Chrysler), Xbox Live Gaming system (Microsoft), Greek-style yogurt (Chobani) and iTunes/iPad (Apple).

According to research published in the Harvard Business Review, category makers generate much higher financial returns than incremental innovators.  Specifically, 13 ofFortune’s 100 fastest-growing U.S. companies between 2009 and 2011 were considered category creators.  They alone accounted for 53% of incremental revenue growth and 74% of incremental market capitalization growth of the top 100 over those three years.

Category creators do many things right to produce their industry-leading returns.  First and foremost, they appeal to consumers by:

  • Providing a unique offering that delivers compelling packaging, convenience, functionality or experiential benefits.  Xbox, for example, enables friends to play each other over the Internet.
  • Creating a new pricing model that is attractive to consumers.  For example, iTunes allows consumers to buy only what they want (i.e. individual songs) at a low price.
  • Re-engineering how a product is delivered and distributed.  Consider how Netflix revolutionizes the delivery of movies by leveraging internet-based, home delivery.

Secrets of their success

As a go-to-market strategy, pursuing CM innovation makes a lot of sense for companies:

Less competition

Most incremental innovations launch into existing categories — and right into the teeth of competition.  Category makers seek to outflank competition by introducing a new product into new market space.  This enables the innovator to secure ‘first mover advantage,’ thereby rapidly attracting customers while establishing barriers of entry around distribution, brand image and business partnerships.

Differentiated value

Incremental innovation often comes up short because it does not add enough extra value (or incentives) for consumers who are typically reluctant or unwilling to change behaviour.  On the other hand, category makers rely on a novel customer offering and value proposition. These products can more easily get the market’s attention and deliver compelling benefits previously unavailable.

Better use of scare capital & time

Often, the scope of innovation is dialed back in order to minimize capital outlays, limit market risk or because of managers’ risk aversion.   This  “penny wise and pound foolish” approach can hamper the initiative, reducing its chances of success. Category makers see risk but cope with it differently.  They focus on fewer but bigger ideas, and make sure they are properly supported by the organization’s culture and systems.  Raising the internal stakes ensures adequate investment, diligence and management attention.

Making it work

Becoming a CM requires firms to alter their visions, change the way they view risk, and allocate sufficient resources and capital.   Not surprisingly, they will look at innovation in a comprehensive fashion.  For example, category creators:

  1. Use financial, distributional or technological constraints as a catalyst for breakthrough thinking (GE)
  2. Investigate offerings that exist at the intersection of different but complementary technologies and business models  (Apple’s iPad).
  3. Look beyond existing consumer requirements to explore unmet or emerging needs, future trends and adjacent segments (Chobani, Chrysler, P&G).
  4. Seek out the best delivery and distribution model, either by building in-house, purchasing another company or partnering with a complementary firm.  It is not uncommon for organizations to leverage all three (Microsoft)
  5. Think creatively around how they generate profitable revenues without alienating consumers (Apple iTunes)

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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