“Yes, what kind of normal business will you open now? Everything was invented before us”– my friend Nikita said something like this more than ten years ago, when we were sitting in the car in the evening, drinking beer and discussing various ways to make money.
Even then, this thesis seemed strange and contradictory to me, since the observed reality spoke of the opposite. People kept creating new ideas or updating existing ones.
Around the same time, I started doing advertising and thought that this is the very tool that helps companies grow. For about eight years, working with both small companies and large brands, I had the feeling that neither advertising nor branding could be the foundation for continuous development. Research say the same thing, 75% of new CPG brands don’t survive the first year.
Disillusioned with the communication part of the business, I started working on the product. First, as CEO of an American company Adtile in Russia and the CIS, and then as the founder of the startup Grocerly, a shoppable widget for CPG brands and retail. Neither project showed its stability against the background of external circumstances of the last three years, although the first project certainly had chances.
If advertising, a brand and a product are external manifestations of a business that are not able to ensure long-term development, since they are highly dependent on external circumstances, then you need to look somewhere inside the company. The reluctance to spend more time and effort on projects with a dubious level of sustainability and competition for existing demand prompted me to start looking for an answer to the question: “How to qualitatively change my approach to entrepreneurship?”.
The first part of the article describes three types of companies: winners, best and others. I note that both the “winners” and the “best” at the very beginning belonged to the third type, but then they chose a different path.
The problem is that it was written on the basis of non-Russian data and the examples of companies are also originally foreign. Since the article is in Russian, I would like to give our companies as examples to make it more clear. In the process of selecting examples, I made two unpleasant and one pleasant discovery.
“Winners”, in the case of Russian reality, are all state or quasi-state companies. There remains a certain number of private companies, mainly from FMCG and retail, but this is rather an exception. In general, it’s not good in this segment with examples.
The “best” focus on technology, R&D and strive to produce the best products in their category. It is not difficult to guess that this is also a problem, with technological sovereignty somehow did not work out.
So companies, as examples, of the first two types will be well-known, but not Russian. But what pleases me, remembering examples of the last type – “others” was not a problem.
Disclaimer. The article contains two misrepresentations: sampling bias and possibly survivor’s error.
But observation, data, the test of time*, and the mechanisms built into us** explain why this model of reality can work.
It is worth remembering that all models are wrong, but some of them are useful.
Three types of companies
If you look closely at the leading companies in a particular market, small or large, consumer or corporate, international or local, you will find that they belong to one of three types:
Xerox, Delta Airlines, Ford, Verizon
The goal is to beat your competitors and become the market leader. These companies believe that “brand value” is the reason customers choose their products or services.
Companies where when they say strategy they mean competition, and when they say competition they mean strategy. They constantly compare themselves to others using words like “most trusted”, “historically rich”, “customer favorite”, “award winning”, etc.
These words signal to buyers the immutable nature of these companies’ offerings and, by using status words, hope to convince customers not to switch to the next best alternative or competitor.
The main indicator that the company is the best in the market is the dominant share and … antitrust lawsuits.
Andy Grove made Intel a major player in the chip market, and this led to the fact that from 1990 to 2009 the company was subject to lawsuits from all possible institutions involved in antitrust regulation in the US, Japan and Europe.
Fast-forward to 2021, Intel over the past three years changed three CEOs. Multiplier P/S Intel = 3, at the same time Nvidia P / S = 25 (now Intel = 2; Nvidia = 38). Apple is announcing a transition to M1 chips, and Tesla is releasing its own chips for software that uses autopilot.
And what happened?
Intel’s neglect of market expansion in mobile, cloud, and gaming. Apparently, this accelerated most of all the process of transition from the status of an outlaw monopolist to a company that is losing its leadership position in the product.
Perhaps having the best product is not enough.
The “best” want to be seen in the marketplace as having the best product or the best technology. They focus on innovation development and R&D. But almost always solely for the opportunity to win the “be the best” debate in the market.
These companies stand out a lot. First we see the headline: “We are the best, fastest, cheapest, most efficient…” and only then a description of what they do or how they do it.
The difference between the “winners” and the “best” is that the former are short-sightedly focused on owning market share, while the latter are more concerned with dominating one particular area or niche in the market as a whole.
If the “winners” choose the “cost leadership” strategy according to Porterthen the “best” prefer “differentiation” or “focus”.
For example, in the CRM market, the “best” company will strive to be the “most intuitive” or “cheapest and most accessible” CRM by making product and marketing decisions that support and protect this state of affairs.
Leadership positions are maintained as long as the company remains “best” in the same category. For example, the production of chips for personal computers. The position of the business depends on the fact that no one else will ever come to its territory or the market will not change.
But at some point, a competitor (often a startup) releases a new, better, faster and cheaper product, or the world becomes mobile first. The cycle repeats itself sooner or later.
Tinkoff, Scooter, Apple, Airbnb, Netflix
Companies that write or rewrite the rules of the game and force all “winners” and “best” companies either out of business or render them irrelevant. The difference between this type of company and all the rest is that they are in the business of creating new (often non-disruptive) things and not competing for old ones.
Tinkoff did not turn the banking industry around, but rethought the process of providing banking services.
The scooter didn’t take the job from the salespeople, but came up with yet another alternative to the convenience store.
Airbnb has not disrupted the hotel business, which would have meant “taking market share” from Hilton or Marriott. Instead, Airbnb created the shared living experience.
All three companies have expanded their market offering. This means that their goal is to create an opportunity and offer a different solution to an existing or new need.
One way to do this is to rethink the status quo. I will not go into the details of this approach, but I will suggest reading an article by Mikhail Rudenko “Meaning as a Competitive Advantage”. I will return to one example from it later.
others to be good
Strive to be a monopoly
This is the first thing I wanted to hear when I opened my own advertising agency, shortly before talking in the car over beer. The second is that perfect competition kills everyone sooner or later.
On the spectrum from perfect competition to monopoly, only those who constantly strive for the latter survive. Neither end is in most cases unattainable, but if perfect competition itself attracts us, then in order to go in the direction of monopoly, we need to make an effort.
It’s like rolling down a hill, with perfect competition at the bottom and monopoly at the top. But to get to the top, you have to overcome a couple of tens of meters in a rustling jacket, heavy boots, gloves that are soaking wet, and even pull the sled behind you.
In “Competition Is for Losers” by Peter Thiel speaksthat the dichotomy of perfect competition and monopoly is one of the most misunderstood economic concepts in business. In a situation of perfect competition, no one earns.
The most illustrative example of approaching perfect competition is some popular section on the marketplace, where products are confusingly similar, and it is not possible to sell without a discount. The monopolists, in turn, become category kings.
Take away most of the pie that you baked yourself
Monopoly is a new category created by the company. We stop competing head-on with other players or looking for disruptive innovations, and start expanding the market offer.
To find out how profitable category creation can be, Eddie Yun and Linda Dicken conducted a study in 2013, published in Harvard Business Review.
They studied the Fortune 100 fastest growing companies in the US from 2009 to 2011. Yoon and Dicken found that only thirteen of the Fortune 100 companies were new offerings in the marketplace. Nevertheless, these thirteen companies accounted for 53% of additional Fortune 100 revenue growth and 74% of market capitalization growth.
Self-made monopolists make up a small part of the Fortune 100’s fastest growing companies, but they account for most of the group’s growth.
Creating a new market offering is not an easy task in itself, but it is even more difficult to keep creating more and more new categories. A monopoly in its small category gives you the opportunity to make good profits and reinvest in development, strengthening your position and moving forward.
Don’t die in price wars
Only very, very, very large companies can afford price wars, but for some reason, almost everyone participates in them. An interesting fact, according to research For every $1 spent on marketing, Nielsen gets only $0.7 in additional revenue.
This problem becomes especially urgent during recessions and crises that have been in the past and will be in the future.
Good news #1. Any crisis clears systems of inefficient businesses and models.
Good news #2. Approximately 10% of companies are growing during downturns. But to get into this small percentage, you have to try hard. Examples of those who did: ’00 – Google and Amazon; ’08 – Uber, Spotify, Airbnb.
I would like to note that none of the companies then was the company that we know now.
Google: Brin and Page in 1999 want to sell company for $750,000.
Uber: offers rent limousines through the app at the San Francisco show.
Airbnb: sells cereal with Obama’s presidential campaign slogan to make some money.
When the crisis hits the head, the following happens:
First, demand falls. There is less money, people are tightening their belts, and that’s it. Those goods and services that were very necessary are moving into the category of “we’ll live without it somehow.”
Companies are starting to get into the rat race, and the whole strategy is to catch the dwindling demand. To earn as much money as a few months ago, you need to put in twice as much effort. Here messages like “my kung fu and discounts on it are better than the rest” appear. Such companies believe that there are only a limited number of people who are willing to buy their product in given circumstances and they are trying their best to sell them their goods, and at the same time, competitors are doing the same.
The cost of acquiring new customers is on the rise. Instead of one ruble that was spent on attraction, the company starts spending 2 or more rubles. The company’s profits are declining. The main beneficiaries of this are Google and the banned social network.
When revenues and profits fall, the company’s stock of free funds also decreases. Now you need to spend more money to earn less money.
The cycle repeats until the company runs out of equity, and it will no longer be possible to attract from outside.
The only thing that separates the companies above from other non-survivors is that they have made an offer that has not yet been made. This, of course, is also not a guarantee, but a way to significantly increase your chances.
Examples of “others”
A project by OKB “Monday” (former Bureau of Service Design) from an article by Mikhail Rudenko, in which they rethought the existence of a liquor store.
What does “rethink” mean? This means endowing the product with a fundamentally different reason why people need it.
Example. In our case with vinoteca one of the reasons people needed the store was to remember their travel experiences. If we generalize and create a store in such a way that the main reason to go to it is emotional, not utilitarian, we get a rethink. Instead of a store that you have to go to (and therefore easy to replace with delivery), we get a store that you want to go to, even if there is no special need. The emphasis in this store is not on the result (a bargain), but on the process (a pleasant choice). Such a store does not compete with delivery, because the purchase itself is an important part of the experience that the customer will not want to refuse.
“The concept of the emart store network” – another example from the practice of OKB “Monday”, which almost completely describes the process from research and creation of meaning to communication and implementation.
Sew Dept (production)
Sewing shop that produces corporate merch from recycled materials: PVC, recycled films and bags, recycled fabrics and advertising banners.
Badges, mugs, pens, T-shirts are a thing of the past. Merch actually shows the commitment of the customer company sustainable and which you want to use, and not throw away when you leave the office.
Daversa Partners (services)
Real bounty hunters.
Company Daversa Partners, which at the very beginning was called Resource Systems Group, provided a full range of HR services for all companies in a row. In general, they sold everything like everyone else. They needed to understand how they could differentiate.
Paul Daversa, the founder of the company, thought about it something like this:
Most HR companies deal with people who are looking for a new job. The problem is that if a client company is looking for an executive who can help the company reach new heights, the likelihood that such a person is looking for a new job is almost zero. Such people already work in large companies, earn good money.
For more than 20 years, Daversa Partners has been helping other companies “hire executives who are not looking for a new job” while having their own international business and a staff of more than 200 people
How writes Blueprint “a small fashion empire whose history is begging for business textbooks.” I advise you to read the article in full, but I will note the following points.
12storeez was launched as a store of basic things that will not lose their relevance in a year – a new category. All this happened in the wake of falling incomes and changing consumer habits in 2014.
Growth in sales almost 200 times year on year at the very beginning, which can serve as proof of the value of the new offer for people and the opportunity for the company to develop on the money earned, and not seek investment.
“All the details at the link in the description” or how to solve the problem created by the new solution. Linktree removes the limitation of posting only one direct link on your social media profile. This is how the founder of the service, Alex Zaccaria, himself describes your company:
When we launched Linktree, we created an entirely new category. We were the first to enter the market and with over 12 million users worldwide, we still have 88% market share. Inevitably, as a result, many competitors appeared …
A new category, a larger market share and an attempt to enter the next category of social commerce and attract investments for this. The company made a good bet in the beginning.
The first attempt to put the model in my head category design I did last September. One example of a new category was Miro, whose category I then described as “collaboration on a single digital board.” It was just my guess that they deliberately created a new category.
But while writing this article, I came across an interview Barbra Gago V Lenny’s Podcastwhich came out at the end of October. Barbra was the CMO and was in charge of scaling at Miro. So, RealTimeBoard turned from the online whiteboard category into Miro and created a new category of visual collaboration with the latest evaluation at $17.5 billion. Here’s how she talks about this transition:
The real motivation behind the category design was the question, “How can we get really big?”
Barbra also tells in which cases to create a new category, such an idea. For example, when an existing category is so bad that it is better to work on increasing its value in the eyes of the consumer. In this case, CX transformation may be one solution to become the company the category is associated with, but without the added complexity.
If suddenly all these stories may seem far-fetched or far from reality, then vc also has great examples of new categories: workshop Nikita Anokhin Storecompanies Hidlace and robot Masha. One of the clear signs of the creation of a new category is copying. This happened in all three cases.
Start with one question
If advertising is a way of conveying information, a brand is an attempt to create, most often, an imaginary difference from competitors, and a product is just an interface to company resources, then a category is a reflection of the very essence of a business. What he actually does and what processes, knowledge and skills he uses to create and deliver value. The category is almost impossible to fake, and it can become the foundation for a company’s sustainable and long-term development.
A good place to start thinking about how to expand your market supply is to ask: “How can I avoid competition?”.
Starting from this question, the discussion of new projects or strategic initiatives for existing ones, the space of possible development options immediately expands greatly.
It is not yet clear how best to structure the process in order to shift it into a working framework, and not assemble it every time on the knee. I continue to explore, experiment and look for limitations of the approach. And yes, being the first in a category is not the same as being successful, you have to be the first to tell the right people about it in the right words.
* Create a new demand, read a new category, an approach that has been used for a very long time. You’ve probably heard the phrase that people don’t want a quarter-inch drill, they want a quarter-inch hole. It belongs to T. Levitt. In his equally famous article “Marketing myopia” he gives an example of the creation of demand for kerosene by John D. Rockefeller. The latter, in search of an opportunity to earn money, sent lots of free kerosene lamps to China, and himself became a fuel supplier for them.
** Two important biological mechanisms that suggest why the category design approach works. We (people):
1. Constantly design social reality. Money is the most popular social construct.
2. We think in categories in order to spend less energy processing incoming information. The first object that forms a new category and is remembered.
Yes, there are others, but then. A category is associated only with the one who first spoke about it. A bank without branches is Tinkoff, not Alfa. The fast food restaurant is McDonald’s, not Burger King. Bank for entrepreneurs – Point, not Blanc. The marketplace is Wildberries, not Ozon.