Value Creation -- Brave New Product Worlds

Dec. 21, 2004
Breakthroughs come by having the guts to explore opportunities..

Ever met a CEO who thinks if there were an opportunity to enter a new market segment he'd have done it years ago? I know several. They dismiss markets they don't understand. They refuse to ratchet up the sophistication of their products. They justify inaction by citing low margins. Prudent? Perhaps. Then again, breakthroughs come from entering unexplored markets with new products rather than sticking with the same old, same old. Among the potentially most lucrative new-market segments are those that are fragmented. That is, the market is huge and the competition is many and scattered. There's generally low brand loyalty, and any advantages resulting from innovative technologies were diffused years ago. Some commonly fragmented industries are meatpacking, fabric milling, garment manufacturing, and sawmills. Another good example of a notoriously fragmented industry is jewelry manufacturing. This industry serves several market segments: mass merchandisers, department stores, large jewelry store chains, and small individual stores. The most fragmented among these market segments are the small chains and individual stores. There are tens of thousands of customers in this $20 billion group. Its size makes this segment worth pursuing for other jewelry manufacturers. Problem is, how does a manufacturer enter such a fragmented space as small chains and individual retail stores? The quickest way is to acquire a company that already has a share of the space. Next, offer something the others don't. If the market is used to getting only unfinished parts, then offer a complete line. Focus on small-order fulfillment and rapid order turnaround. Add specific and unique value to the customer relationship that the competition has not yet thought of. Create a new bond with this diverse customer base. For one manufacturer I'm advising, this strategy seems to be working. We expect adding small chains and individual stores to business will at least double the company's value within 24 months. Many companies have undiscovered capabilities inherent in their operations that lend themselves to either new related products or products completely out of their industry. The first challenge is to figure out what the new product is and where it resides in the product life cycle. Product life cycles have four stages: introduction, growth, maturity, and decline. During the introduction stage products are of lower quality and there's little standardization. The growth phase shows some technical differentiation and competitive improvements. The maturity phase has definite quality separation and less product differentiation. The decline stage sees the major players leaving with a consequent decline in quality from those left. Pick a product that is in the growth stage. One example is a garment manufacturer whose focus groups said improved comfort would make a 10-percentage-point move in consumer importance. Stretch denim seemed to be a potential growth segment. "Who's gonna buy stretch jeans?" asked the skeptical CEO. The mass merchandisers -- Wal-Mart, Kmart, and Target -- along with Victoria's Secret, for starters. Within two years sales had quadrupled from their decade-long steady level. Sometimes completely different products make sense. One manufacturing operation was particularly expert in working with gold. Their production facility enjoyed a very high waste recovery rate of the precious metal and their craftsmen had mastered working with its relative softness. The new product: multipin connectors, electromagnetic coils, and other zero-fault-tolerance products used in high-end, highly conductive electrical components. Profit margins went into orbit, where these new products are now flying on the world's most sophisticated spacecraft. Corporate value will triple within three years. Take the time to investigate potential products and markets that represent a departure from the conventional thinking of your management team. You'll be surprised at the breakthroughs that can and do occur. Chris Malburg is a venture capitalist with WAWMAC Partners LLP in Lake Forest, Calif. He is the author ofThe Controller's and Treasurer's Desk Reference (1994, McGraw-Hill Inc.)

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