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Compete in Known Businesses, or Carve out New Markets?

Often a general manager for a sports team which has been performing poorly will declare the goal is to make the team more competitive. Indeed, championships are won by the teams that develop a competitive advantage through talent, organization and execution. Such proclamations, however, are not as wise for business executives charged with the long-term success of a company.

According to a study of 108 companies by Chan Kim and Renee Mauborgne1, most new product launches were line extensions—incremental improvements to an existing market value set—as opposed to new market ideas (86% vs. 14%). Understandably, managers are more comfortable sticking with what they know, but consider the results of these two types of launches: line extensions accounted for 62% of revenue and only 39% of total profits. Thus, while making up less than one-seventh of new launches, new market ideas accounted for 61% of profits.

Sporting events operate under strict rules; businesses operate in markets. While sports teams cannot change the rules nor create new ones, firms conducting businesses can create or change markets and thus create demand where none existed before. Still, as evidenced by the data, many business managers choose to slug it out in existing markets rather than stake out new market spaces. The payoff, when done correctly, of creating new market spaces—called "blue oceans" by Kim and Mauborgne—is significant and quite consistent with the business life cycle.

Efforts to retrench or be more competitive in mature businesses—"red oceans"—means a bloody game of competing for existing demand. With the primary goal of market share coming at the price of cutthroat price competition, it is no surprise that profits are squeezed, and it takes a lot more revenue to make the same profit as before.

Finding new business opportunities provides for growth potential beyond simply stealing customers from your direct competitors. It involves finding opportunities in the market (unmet needs) and finding ways to meet those needs. Most often it does not have to be a new industry fueled by cutting-edge technology. That is, managers can find spaces in their current industries by changing the offering, appealing to a different market, or using different means (or technology). For example, Dell Computer created a blue ocean by focusing on a direct channel in the existing computer industry appealing to the needs of business and Internet customers, and developing the necessary means to do it economically.

The good news is that unattractive industries are amenable to second curve moves. For example, in 1984, Chrysler came out with the first minivan, creating a new value proposition: a vehicle that drives like a car but has seating capacity like a van. Southwest Airlines, with its short-haul routes and cost-efficient business model, turned car travelers into air passengers. And Apple's simple-to-use personal computer in the late 1970s brought computer technology to a whole new set of computer illiterates. In all these cases, the new market launch was based on existing technology and in an existing, and mostly unattractive2, industry. Importantly, each new concept was proven to be market viable—customer needs and specifications were met in terms of offering and price.

Unlike the rather stable parameters of sporting rules, the boundaries and definitions of the industries themselves are always changing. Consider that the 50-year old SIC classification code for industries has been replaced by the North American Industry Classification System (NAICS). The change was made because the old SIC included only 10 industry sectors; the NAICS has doubled that to 20. Baseball for well over a hundred years still has 90 feet between bases, 3 outs per inning, and the same formula for success—score more runs in more games.

Because markets are changing—and faster all the time— conventional textbook strategic tools are of little help for managers in mapping out second curve opportunities. For the long-term survival of companies, managers at all levels must think of new business opportunities, second curves, to stave off the inevitable maturing of existing businesses. Even Dell, riding for over a decade its build-direct model, is finding that no business model is bulletproof as the environment changes and competitors react. Thus, managers should not think like the football or baseball executive, but should look for ways to compete less, not more. The ancient Sun Tzu explains: "Therefore one who is good at martial arts overcomes others' forces without battle, conquers others' cities without siege, destroys others' nations without taking a long time."

1From article titled "Blue Ocean Strategy," Harvard Business Review, October 2004.
2Unattractive if you apply textbook analysis such as Michael Porter's 5 forces model.

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