Creating and Dominating Markets - The CEO's Role

Business & Economic Review

New markets require that you add a key skill to operational excellence. Not only must you choose the right market. You must also guide your resources to work where they have never been before. Both are skills for the CEO or General Manager must wield.

Do you stay awake worrying about which market to enter? You have good company. One of the primary problems that keeps CEOs awake at night is creating and dominating the next market for their company's products.

Why this worry instead of operational issues? Why not let the marketing and sales people focus on creating and dominating markets? Some things can be delegated, but the CEO (or General Manager for a division ) still has a specific role that he or she cannot delegate. This article will discuss that role and how to accomplish it.

Maintaining a profit in today's markets is not easy. The barriers that might keep others out of your market never seem high enough. Competitive activity constantly drives your marketing costs up and operating margins down. A way out of the crunch is to create and dominate a new market, one where there are no competitive pressures. This is the holy grail for many executives both in established and start up companies.

6. The Attraction

At first it seems easy. After all, you might ask, if all these 30 year old technical wizards can have an idea and then dominate a new market - why can't you? And once you do, like Microsoft with Windows and Glaxo-Wellcome with AZT , you can maintain a healthy margin.

Another part of the attraction is the idea of changing the rules. Geoff Bezos started a bookstore, Amazon.com, without a physical retail shop. Amazon created and dominates a new market. Mirabilis created an Internet product and gave it away free. America Online paid over a quarter billion dollars for Mirabilis last June.

The problem is that it is far from easy to create and dominate a market. For every Amazon Books there is a Pointcast (see sidebar.) To succeed you have to plan to test every idea and tear it apart - and ask the correct questions (See sidebar.) More importantly, you have to look where most functional managers are unwilling and untrained to look. Then you have to guide your team to ask the right questions.

Success starts with the CEO of a business or General Manager of an intrapreneurial division. It requires his or her ability and willingness to keep the team focused on the right things. Making this work requires the executive's drive to get the right questions asked and answered.

8. New Markets Are Hard

It's easy to think of ways to extend a product into an existing market. You need operational skill at many functions to make the right results occur. Consider the effort to develop a new version of a digital cell phone. Success will require high quality work from each of your engineering, manufacturing, marketing, sales, and financial teams. That puts you into a highly competitive market that will reward your ability to choose the right channel and to offer a little more value at a lower cost.

These forms of operational excellence require superb functional skills. They are also tasks that the CEO is usually willing to delegate.

New markets are different. Here cost is less of an issue than finding the combination of channel, features, and abilities that is so attractive that it will create a new market and allow you to dominate it. It is the search for the "killer application."

Two paths can do this. Path One is to extend into a previously unthought of market. Path Two is to extend a proven product into a known but never tapped market.

Netscape provides an example of Path One. Before it started, Internet browsers were free but low quality. There was no cohesive market, or even really a market at all.

Netscape broke a few rules (e.g., the company gave its product away to create the market, it delivered unfinished products to users as part of the testing cycle) and then used a close connection with the product's advanced users to create and dominate a new market.

Edwin Land did the same thing with his instant camera. He had a new idea that broke a few rules (asking the user to participate in the development of the film was a significant risk) and created a new market. Polaroid dominated that market for decades, successfully keeping competitors out. Where Netscape used speed and closeness with users to create a barrier for entry, Polaroid used patents and aggressive marketing to make its product name synonymous with instant photography.

However, not all new markets require new products. A good product can be applied to a known but untapped market. Sometimes, it is only a question of finding a new group of users or a new geography. This is Path Two.

AZT was created thirty years ago as a cancer treatment but it did not sell well. Twenty years later a new market emerged, patients with Acquired Immune Deficiency Syndrome (AIDS.) AZT was moved to that new market and today it is the standard for use in most initial HIV treatment plans.

Cell phones provide another example of Path Two. While Motorola was planning to enter existing analog markets with digital cell phones, the company also aimed to enter markets that had never had any cell phones at all. After all, someone had to be the first cell phone provider in China.

Entering a new cell market in another country has great risk. You don't know that the users will actually accept the idea of wireless. You are going to make large investments to adapt your technology and to modify your systems so that they work with the local voltages and dial tones. You will have serious political and regulatory issues to resolve. The considerable resources that you must dedicate to a single geography might be better used for other projects.

Simultaneously, you will have tremendous opportunity. Not only can you become the dominant supplier of phones, you can supply the infrastructure to make those handsets work. Someone has to sell all those towers and switches, why not you? A cell phone supplier could dominate whole countries by a combination of political and business agreements.

Here the new market is not defined by product but by previous availability. You may have done as well as practical in a saturated market while a parallel market has not yet been touched. As Glaxo Wellcome has done with AZT and Motorola with cell phone systems, you too can look at new, parallel markets for your key products.

10. Time and People

Running a company is often no more or less than deciding which resources go where. Whether you have an existing or a new business, your resources are going to be spread thin when it comes time to invest in new markets.

For either the established business or a startup, time is the most important resource. While most manufacturers focus on time to market, it should not be the key concern for new markets. The rewards for being the first company to achieve market acceptance are much higher than those who deliver first.

Today Microsoft dominates the market for PC office software suites, and WordPerfect/Corel and Lotus/IBM have little to divide up. It might have been different.

WordPerfect was the dominant supplier of word processing software in the DOS market, so dominant that neither Microsoft (Word) nor IBM (DisplayWrite) could use their significant market presence to make an inroad. As first to market acceptance, WordPerfect won that contest.

However, Windows users began to become the dominant population and there was no word processor that worked well in that Operating System. Both WordPerfect and IBM were slow to garner acceptance on Windows and Microsoft delivered software that gained market acceptance first. Today Microsoft controls over three fourths of the market. Again, the first to market acceptance was the victor.

Acceptance by the media and influencers (consultants and analysts) is important but not enough to make the product work. Acceptance by the users must come first. In the race to provide the first working Protease Inhibitor combination for AIDS patients, Saquinavir was first to market. However, Merck used a quirk in the approval process to help Crixivan become more acceptable. Today, Crixivan is the dominant drug.

The worst case is when you gain the acceptance of the wrong people. Like other companies developing Internet Push Technology, Pointcast earned acceptance from almost everyone but the users. The result was a highly touted company that has yet to succeed. (See sidebar)

Your second key resource after time is people. Here you will find that the CEO or General Manager is the only person who can act as a focal point. You cannot rely on Marketing, Sales, or Finance to take the lead role. Entering new markets requires someone to bridge those roles.

New markets can be focused on driving innovation or on taking an existing product to a new geography or group of users. Both new markets require that you add a key skill to operational excellence. Not only must you choose where to open a market, you must guide your resources to work where they have never been before. This is a skill that the CEO or General Manager must wield.

12. Guiding Your Resources

Your marketing team can help to define what will sell to existing customers and how the product should look to a defined market. The problem comes in uncovering new markets. There modern marketing is less help.

Customers often have no idea that they make up a new market. As an example, the first fax machines were priced at around a thousand dollars each, marketed to work with a limited set of customers. Participants in the market that eventually evolved (small businesses, departments, and home offices) continuously said that they did not see a need for the product and would not spend the money required to buy early fax machines. Marketing teams listened to the customer and focused the product and the pitch on the high end. They did what they are supposed to do. Someone else broke that set of marketing rules and had the faith to enter with a low-cost solution even if the customers did not know they wanted a fax. Marketing is usually not much help at finding truly new markets.

Your sales team is another important resource that cannot lead the effort. To compete successfully you will need to dedicate your best sales people to known markets. Diverting these specialists into other areas, even for a short while, puts your existing revenue stream at risk. But your sales people and channels still play a role in creating new markets.

The value of your sales team or channel is in accidentally exploring new markets for you. Occasionally, you'll find a sales person or sales situation that goes outside the rules and finds a new place to sell your products. For example, if a set of doctors take your pharmaceuticals off label (use them for another treatment) find out how and why. These are serendipities that you can watch for and use to your advantage. While serendipity, like mutation, rarely works there is always one that may become a billion-dollar product like AZT. Make sure you know when that happens.

Financial modeling is an attractive tool but usually misleading in creating and dominating new markets. The skills that your financial team uses on existing markets are less useful here. When you decide to extend an existing product line numerous financial report cards can immediately be applied. You can systematically choose the volume, margins, and price elasticity for a spreadsheet. The answer is predictable.

Creating a new market does not lend itself to such accuracy. The problem is that by definition, you can't know the market yet. That means that you can't know the volumes or attractive price points. Your costs are just as unknown. Even if you know what it would cost to make your product, how can you know what it will really cost to attract the buyers?

For example, if you decided to develop and introduce a vaccine that prevents HIV, you might assume that your market is the world. However, you would quickly discover that you are wrong.

In the developed countries, you can sell to individuals. In the developing world, individuals do not have the financial means to buy your product. Instead, you are selling to governments. Each has different needs to be met that could cause you to develop a slightly different drug.

You cannot know in advance if your product will become accepted as the standard of care. If you are first to market but unable to set yourself as the standard of care, your sales will be a fraction of what they would otherwise be.

All of this nearly guarantees that any traditional financial analysis will be wrong. The CEO or General Manager has two choices. The first is to downplay the accuracy and enter the market anyway. The second choice is to downplay the accuracy and not enter the market. The financial analysis has one primary use - it will show you the break points you must reach to become operational and profitable, or when to leave the new market. The rest is up to your judgement.

14. Betting the Business

Rose Rambo, Vice President and General Manager at Polycom, notes that "Product line extensions fund the new markets, but can't become them." You will leave your proven products and markets behind as you find the new ones.

In the end, the analysis will float to the manager or team that can feel comfortable making the call. You can see the paths to unthought of markets and markets in new geographies. You can't decide to create and dominate a new market with numbers, market data, or sales data. As uncomfortable as it may be, the real data will never be there.

You are betting the future on a problem, the one you hope to solve. Your decision comes down to:

… Are you solving a problem that people will resonate to, like getting a word processor on Windows, or

… Do you have a solution in search of a problem, like Push Technology.

The new market becomes a gut call. That is the province of the Chief Executive or General Manager. You have to ask the right questions, determine if you can get to market acceptance, and then make the call.

16. Sidebar - First Becomes Last - Push Technology

Being first does not mean success. One of the most highly touted "firsts" in the Internet world is Push Technology. But the company that established itself as the standard for the market has not been able to convert that market presence to economic success.

Push Technology is a tool that allows users to choose what they would like to get from the World Wide Web and have it continuously delivered to them. Users just sign on and the information they select flows across their computer screens while they are not actively doing something else. The cost is paid by advertisers. They get the opportunity to "buy eyeballs" whom they hope will see their message. The market definer and leader has been Pointcast, a company in Sunnyvale, California.

Pointcast was successful in defining and dominating the market. They signed up a quarter million new users per month for a period, making them a major success in delivering eyeballs to advertisers.

Pointcast grew in clout and perceived value. In 1996, less than two years after it shipped their first product, the company was rumored to be negotiating its own sale to News Corp. for $450 Million. Not bad for a company with a product it gives away at no cost.

Unfortunately for the company and the advertisers, there was little in the equation for the user. Users got updates on the news, but that turned out to be fairly unimportant to most. With the updates many also got reliability problems that far outweighed the advantages of bulletins. Many Information Services departments started to limit the use on corporate networks so that they could save network capacity for the business.

Push Technology became a product viewed as good for advertisers but not for users. The wrong market, companies with a message to push, was accepting it. The right market, "eyeballs," was not. The number of people disconnecting the service started to exceed the number signing up. The users did not care enough to want Pointcast's service. Advertisers could no longer count on a return. The economic equation started to fail. The company recently sought support for an Initial Public Offering that would have valued it at less than half the 1996 price. It was not well supported.

It is the CEO or General Manager's responsibility to ensure that the target market sees the value. New markets should not be delegated.

18. Sidebar - Questions for A CEO Or GM To Ask

As you look at the opportunity and risk from new markets, here are some key questions to ask. Ask the users, ask your team, and ask yourself.

To the users:

… If you, could do this, would you get really excited? What would get you really excited?

… What problems keep you up at night?

To your team and yourself:

… Are you solving a real problem? Or do you have a solution in search of a problem?

… What are the unexpected common denominators among your end users? Do these common denominators suggest more than a product line extension?

… Are you watching your sales team for unexpected markets?

… What do we have to do to be first to market acceptance?

… What are our customers doing in today's market that we never expected? Can we see a new market from that?

… Where are the break points to hit before we can first enter a market and second make a return? What is the point to leave?

… Is the inherent value there for the end buyer or for a third party?

… Can we identify a channel that will get that value to the buyer very quickly and efficiently?

… Can we establish a good relationship directly with the buyers no matter which channel we use?

To you:

… Does your instinct support your analytical decision to try and create the market?