A systematic framework for value innovation
Expansion stage software companies, such as our portfolio companies, usually encounter a couple of obstacles in their growth trajectory. Typically, they face the issue of expanding outside of a limited market, similar to that of an early adopter’s market, or looking for growth outside of a crowded market with numerous competitors. For instance, one of our portfolio companies, Central Desktop, has been competing in the really competitive market of “project management and collaboration software”. Recently, the maturation of this market led to speedy price erosion and commoditization of common feature sets, forcing competitors to uncover new markets or niches that enable them to distinguish themsleves by some degree of specialization.
How can a new startup reinvent its product to deal with new markets, or to broaden its present market enough to acquire the speedy growth their venture capital advisors are always urging?
These issues concern not just product strategy, but also the whole corporate competitive strategy and positioning. There are some well-studied examples and framework in innovation management that can be readily tailored for these situations. Kim and Maubourgne, in their 2005 book “Blue Ocean Strategy”, posted 6 “frontiers” or “perspectives” into which innovations can be aimed to produce new markets or revive present ones. They are:
1. Substitute industries: That is, to look past direct competitors and perceive the market as the aggregate of both substitutes and direct competitiors. For example, the most potent competitor to all project management tools is in fact Microsoft Excel.
2. Strategic groups within industries: That is, to redefine market segments existing within a current market, deliver excellent, differentiated value directly to those segments, and develop the market from within.
3. The chain of buyers: Most companies will only focus on the instant buyers yet they neglect to address influencers and users who might eventually turn into buyers, given a sufficiently attractive value proposition. For instance, for a long time RIM took over the smartphone market since they served the demands of corporate IT departments very well. Apple doesn’t have stellar corporate email on the iPhone, but its excellent form factor, user friendliness and versatile nature makes it possible for it to appeal instantly to the corporate users who are running to the iPhone, in spite of their IT department’s misgivings.
4. Complementary product & service offerings: Integrate with other products and services that serve the same market segment in order to expand a product horizontally. 37signals performs this genuinely well by integrating with many other web-based software tools that form the backbone of small business software systems.
5. Functional or mental appeal to buyers: Many times, the correct way to differentiate is to go in opposition to the industry norm. Again, Apple has basically written the book on this, as they keep coming out with models after models of beautifully designed, expensive looking laptops that are priced at a premium to the market, even as other PC manufacturers attempt to soup up their offerings with more and more powerful processors.
6. Time: This is possibly the most subtle of the perspectives. Essentially, Kim and Maubourgne determine “shakers and movers” in the industries who, instead of waiting for outside forces to form their markets, take part entirely in the growth of the market, either through internal innovation, strategic investment or regulatory alterations. They turn into the headliners, the frontiers moving vanguard that genuinely define brand new markets.
Tien Anh Nguyen is an Associate at OpenView Venture Partners, responsible for delivering strategic value-add services to the portfolio companies as part of the OpenView Labs team.