As industries first begin to gain real traction with customers, a predictable story unfolds. Companies chase after their first customers through offering whatever the buyer needs to close the deal. They put together a full solution to the customer's unscratched itch, leading to what Harvard Professor Clayton Christensen has called an integrated industry architecture. For example, the leading Chinese solar energy firm Yingli Solar prides itself on vertical integration from polysilicon through to a completed module. This sort of integration allows an early mover to provide a high quality and consistent solution to potential buyers.
Alas, an industry's growth brings changes. The initial quality hiccups common in the industry's nascent stages typically fade away, and specialists using proprietary technology, scale seconomies, assets from a parent company (e.g. unused factory capacity, a salesforce, brand, etc.), or other resources tend to build presence in particular links of an industry's "value chain" that leads from raw inputs through to final sales and service. A company may provide the world's finest integrated offering, but many customers will start to prefer the lower-cost alternatives made possible by the modular industry architecture that takes root during this period.
To survive a shakeout, companies with the flexibility to adapt to this modular industry structure can choose from a handful of typical plays:
- Most obviously, focus on your competitive advantage. If you have the best technology for a sub-component of an overall process, double down on that investment while starting to partner for other aspects of the offering
- Define market segments not as they are, but as they will be. Oftentimes performance attributes such as cost and convenience will begin to trump focus on quality and reliability as these factors become table stakes for shakeout survivors
- Focus on enabling technologies. While solar module manufacture is getting ugly, there are good margins to be earned in the equipment that makes these modules. Similarly, e-readers are becoming hyper-competitive, but enabling technologies such as E Ink are more attractive (in fact, the company was recently snapped up by a Taiwanese LCD manufacturer)
- Consider services. While every venture capitalist's dream is to fund a high-margin product company that gains scale and wins in a shakeout, most companies do not live this story. Services can be a way to earn money and differentiate products, while providing a long-term path to survival. The services could lie in providing technical expertise, but equally there may be ways to productize a service. For example, Skiff is an interesting platform for re-purposing magazine and newspaper content for e-readers; News Corporation recently acquired it from Hearst
- Dominate a geography. Friendster still lives...in China. Orkut thrives...in Brazil. Even while Facebook cleans up in key developed markets, these orphaned social networks have managed to do well in targeted countries where they can have critical mass. In time the companies could be acquired by a global leader, but equally they can survive in these niches
This post was written by Steve Wunker. Click for more of New Markets' thinking about finding new sources of growth.