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CAPTURING NEW MARKETS
How Smart Companies Create Opportunities Others Don't
By STEPHEN WUNKER The McGraw-Hill Companies, Inc.
Copyright © 2011Stephen Wunker
All rights reserved.
ISBN: 978-0-07-176752-1
Excerpt
CHAPTER 1
WHY NEW MARKETS MATTER
On April 3, 1973, Martin Cooper turned the heads of even jaded New Yorkers as he strolled the sidewalks while talking into a bricklike device. Cooper, head of Motorola's Communications Systems Division, was placing the world's first call on a cellular phone. In his triumphant moment, he mischievously dialed his archrival at AT&T's Bell Labs. A new market was born.
Cell phones are representative of new markets and their huge potential. Like the steam engine discussed in the Preface, they had been years in gestation. People with money to burn could use primitive car phones with an operator's help in setting up calls. Humphrey Bogart used one playing the mogul Linus Larrabee in the 1954 movie Sabrina. But there were many problems that prevented systems from being scaled—for several years, Britain's Prince Philip had the United Kingdom's only mobile phone. Motorola's technology removed these issues. It allowed many people to use a network simultaneously, traveling between cells, calling through a totally automated process. The dawn of a new era finally seemed at hand.
In a press release issued that historic day, Motorola confidently projected that cell phones would be in public use by 1976. Yet it took until 1979 for the first commercial cell phone networks to be deployed, in Bahrain and Tokyo, and a U.S. network did not exist until 1983. Motorola's sales of cellular equipment were exceptionally small for over a decade after that first call was made. The first handsets cost $3,500, weighed 28 ounces, and appealed to a sliver of the population. As is frequently the case in a market's early days, the future seemed uncertain.
In 1980, AT&T commissioned a study to project the total number of cell phones in use worldwide by 2000. The study's answer: 900,000. The company decided to sit out as others built the first U.S. cellular networks. The correct number for the year 2000 ended up being 750 million, and by 2010, worldwide users stood at 4.6 billion. AT&T was forced to pay $11.5 billion in 1994 to buy McCaw Cellular, one of the early movers in the industry. Motorola had been too optimistic, but AT&T had been expensively pessimistic. Both had severely misjudged the market.
Following the pattern of many new markets, the cell phone spawned several other industries. Wireless networks became a business exceeding $150 billion in the United States alone. Mobile mapping has taken off so rapidly that Nokia recently spent $8 billion to acquire a navigation company. The iPhone has created a market for over 400,000 software applications, and that number keeps growing. The cell phone enables mobile marketing campaigns by giant brands such as Coca-Cola and Adidas. People using this small device now transact nearly 5 percent of Zambia's gross domestic product (GDP).
Perhaps the most astonishing thing about these markets is that they were latent for years. The potential for over 400,000 applications of a mobile device existed long before the iPhone came around to unlock that demand. For millennia, people have wondered about tomorrow's weather, played games, and sent messages to friends. The cell phone allowed that latent demand to be channeled into a commercial transaction.
As often happens, the cellular industry did not so much cannibalize an old one as create an entirely new source of growth. Think about the calls you make today on your cell phone—how many would never have been placed if your only option was a landline handset? Think too about the leaders in the cellular business—giants such as Nokia and Vodafone were not present in traditional telecoms.
Cellular telephony also was typical in other respects. Initial takeup was slow. Expensive and bulky handsets hindered the industry's expansion, yet the tiny market seemed not to warrant big investment to make these devices significantly better. Competition generated awareness but also created problems as companies rolled out conflicting technical standards and offered pricing plans that made it costly for customers of one carrier to interact with subscribers on rival networks. Behavior change at first took root through leveraging existing habits, such as checking the weather, and then rocketed into new directions, such as finding friends' locations. The industry shifted from a handful of vertically integrated players to today's gaggle of competitors. Advances in component technologies, like digital photography, enabled totally new and unexpected uses of the device.
Given the criticality of new markets to business growth, it is essential for companies to pursue these opportunities in an appropriate manner. Unfortunately, when firms assess and enter new markets, they often cross-apply the principles, strategies, and analytical tools used by mature industries. The results can be profoundly misleading. As we shall see throughout this book, there are clear patterns that govern the creation and growth of new markets, and these principles contradict common behavior in established fields.
In this chapter, we will look at
• What defines a new market
• How new markets create big industries
• How new markets build great companies
• Why ignoring new markets is perilous
• How new markets can become a source of corporate renewal
• What trends make new markets particularly critical today
What Is a New Market?
The words new market are often used loosely. Google references over 8 million pages with the term. This book does not focus on new technologies catering to existing markets (Blu-Ray replacing DVD), ways to enter an industry by seizing a share of existing customers (Walmart becoming America's leading grocer), or new competitors entering an existing territory (South African winemakers rising to equal France's share of the British wine market). These other topics involve different customer and competitive dynamics than the creation of new markets.
This book's focus is on markets that have not existed previously. It is concerned with tapping latent demand to create new sources of consumption, much as the cell phone did. A new market might cannibalize some of the old, but it also expands overall consumption—cars significantly hurt the makers of buggy whips, but they greatly expanded the use of transportation. If fighting competitors for share is a zero-sum game, new markets are about positive sums that create economic growth.
There are two general ways in which new markets create growth:
• New customers. A new market often will lead to people or institutions buying products or services that they had not purchased before. Sometimes these products may be new-to-the-world, such as Apple's iPad, whereas in other circumstances they might be newly affordable or accessible, like cell phones have become in developing countries.
• New consumption occasions, A new market also may result from new consumption occasions. Colgate created a new market with its Wisp toothbrush, an ultraportable single-use brush meant to be used on the go. E*Trade enabled consumers to trade stocks far more frequently than they could with traditional brokers.
New products, services, or technologies do not necessarily lead to new markets. The key distinction is whether they ultimately lead to new consumption.
As with many definitions, there are gray areas. Wind energy is not a new market for electric utilities because it does not materially change the amount of power that people consume. However, for turbine companies, it is clearly a vast new market. This book does not dwell on exploring fine definiti
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Excerpted from CAPTURING NEW MARKETS by STEPHEN WUNKER. Copyright © 2011 by Stephen Wunker. Excerpted by permission of The McGraw-Hill Companies, Inc..
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