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Updated: June 26, 2010 13:13 IST

Tapping opportunities outside your core

D. Murali
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A lot has been said about Amazon, one of the few winners from the dot-com bubble which continued to blaze a trail of impressive growth, but an unexamined facet of its high-profile success is its unabashed embrace of transformational growth in its ‘white space,’ says Mark W. Johnson in ‘Seizing the White Space’ (www.harvardbusiness.org).

Amazon survived the dot-com bust initially because, unlike many of its contemporaries, it had a viable and innovative business model built around a market-changing customer value proposition and a radical profit formula, which upended the staid book industry, the author recounts. “Then it quickly expanded beyond books to include all sorts of easily shippable consumer goods, growing from its core into near adjacencies. But Amazon didn’t stop there…”

What is white space?

White space, for starters, means generally uncharted territory or an underserved market. The author, however, uses the phrase to mean the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies that require a different business model to exploit.

White space is a subjective valuation, he concedes. “One company’s white space may be another company’s core. What matters is that it describes activities that lie far outside a firm’s usual way of working and presents a series of unique and perplexing challenges to that organisation.” It is an area where, relatively speaking, assumptions are high and knowledge is low, the opposite of conditions in the company’s core space, distinguishes Johnson.

The book outlines how businesses in their adolescent stage, when their products and systems are just maturing, and those companies that have just made innovative leaps can rely almost exclusively on growth from the core; and how these businesses can then move to adjacencies, serving new customers or existing ones in different ways by leveraging the existing business model. “And when new market expansion slows down, process innovations can yield significant efficiencies and continued growth.”

But there comes a time, as Johnson reminds, when established product lines fully mature, when process innovation reaches the upper thresholds of efficiency, and when new product development slows. “Then companies face a looming shortfall – a growth gap – between their desired growth path and the growth that the existing business and envisioned adjacencies can deliver.” What can widen this gap are commoditisation, technological discontinuities, disruptive threats, changes in government policy or society’s expectations, and intensified competition, he notes.

Apple of the ‘i’

An interesting example is about Apple, once a major in the personal computer market which watched its market share fall from 20 per cent to less than 3 per cent in the 1990s. Then returned Steve Jobs, the cofounder, determined to refloat the sinking ship.

He followed the well-trodden path of product innovation, quickly rolling out the iMac (whose fashion-forward industrial design integrated the processor with the monitor) and the iBook low-end laptop, recounts Johnson. “He also made sure that suppliers like Microsoft and Adobe continued to develop software for Apple. The new products were by all accounts smash hits, but they did little more than stop the bleeding.”

In 2001 came the iPod, a digital music player that revolutionised the way we consume portable entertainment, created an entirely new market, and set Apple on the road to exponential growth, the author narrates. He observes that, while the iPod was not the first company to bring a digital music player to the market, what Apple did was something far smarter than wrap a good technology in a snazzy design: it wrapped a good technology in a great business model.

“Apple’s genius lay in its realisation that making it easy and convenient to download music to the iPod would fuel demand for its high-priced music player. Eighteen months after introducing the iPod, Apple launched the iTunes Store, a service component that tightly locked hardware, software, and digital music into one user-friendly package.”

Handles and blades

Apple’s model is a reverse of Gillette’s – one of the great business model innovations of all time – says the author. While King Gillette revolutionised men’s shaving by choosing to give away the razor handle (a durable) in order to lock customers into purchasing his consumable, high-margin blades, Apple essentially gave away the ‘blades’ (low-margin, consumable iTunes music) to lock in the purchase of the ‘handle’ (the iPod) whose high margin returned high profits, Johnson explains.

In just three years, the iPod/iTunes combination became a $10 billion product, accounting for nearly 50 per cent of the company’s revenue, the author traces. “Apple’s market capitalisation skyrocketed from around $2.6 billion at the end of 2002 to $133 billion at the end of 2007, during the key years of the iPod/iTunes’ growth.”

More importantly, he finds that the new digital platform redefined Apple – from being ‘simply one competitor among many in the rapidly commoditising PC hardware space’ to becoming ‘a leader in the world of lifestyle media.’

Was the iPod a natural fit for Apple, a low-risk extension of its core hardware/software system-integration expertise? No, it was a white-space move, feels Johnson. Because Apple, a computer maker, had limited experience with the world of music or media and virtually no identity in the public’s mind as a provider of entertainment technology.

“To enter hostile territory and propose an unproven technology with little or no track record in the space was risky indeed for Apple. It would have been impossible if Apple hadn’t devoted as much creative energy to innovating its business model as it did its products.”

The Dell model

One other technology example in the book is about Dell. Its computers were not initially as good as those of the established PC manufacturers, but Dell chose not to compete on the features and functionality of its products, which were already good enough in the eyes of most consumers, Johnson reminisces.

“Instead it introduced a new level of customisation and convenience to the PC industry. Dell’s unique business model allowed customers to pick up the phone (and later, log on to a Web site) and order exactly the computer they wanted, preloaded with exactly the software they needed, delivered to their door almost overnight.” Today, with prices and margins dropping fast, Dell may have to reinvent its business model to address a new CVP (customer value proposition), the author advises.

The Internet, and the Web 2.0 tools in particular, give businesses an unprecedented ability to deeply understand their customers, instructs Johnson. Companies can now connect directly with customers and potential markets to learn highly specific information about them, abrogating the need to rely on phantom segments, trend spotters, or needs-based analysis, he elaborates.

A Threadless community

An example in this context is of Threadless, an apparel maker, which uses social networking technology to sell T-shirts entirely designed by its customers. “Threadless accepts design submissions on its Web site from its rapidly growing community of amateur designers and young trendsetters and lets them vote on the products they want to buy. It can then manufacture popular designs within hours using mass-customisation technology, fulfilling the job of keeping its customers’ fashions up to the minute through the efficiency of a just-in-time supply chain.”

By giving the customer direct control of the company’s product design, Threadless has built a thriving community of consumers who feel an ownership stake in its brand, the author explains. Producing a predetermined demand keeps costs low and margins above 30 per cent, he adds. “And because community members tell it precisely which shirts to make, Threadless never has a flop; every product eventually sells out… Success now more than ever flows from the outside in, from the market to the company.”

Returning to the Amazon example that we had started with, the author is of the view that the company at its roots is built to transform. When it finds opportunities to serve new customers, or existing customers in new ways, it conceives and builds new business models to exploit them, he states. “Amazon has the unique ability to create and operate at the same time – to invest for the long term by launching and running entirely new types of businesses while simultaneously extracting value from existing businesses.”

Suggested study for those who seek clarity in a cluttered market space.

**

Tailpiece

“To break the silos within the company…”

“You put everybody in a big hall, around a massive table?”

“No, we ran a program to allot the workstations, randomly across the floors, every morning!”

**

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