Try Complementary Medicine
 

W. Chan Kim and Renée Mauborgne

Companies such as Compaq that focus on products or services linked to their own can release value, say W. Chan Kim and   Renée Mauborgne .

When Compaq created the server industry in the early 1990s, it found that the speed of imitation in the computer sector soon brought a swarm of competitors into the market. But rather than compete on improvements, Compaq set out to refashion the market. 

It looked beyond the server industry to the network of complementary services that surrounded it. In doing so, it realised that 90 per cent of customers' costs came from installing and servicing servers and only 10 per cent from buying the server hardware itself. Yet Compaq, like the rest of the industry, devoted nearly all its efforts to maximising the price-performance of the server hardware, even though it was the least costly element for buyers. 

Accordingly, Compaq brought out a new line of servers in 1993 called ProLiant. The ProLiant incorporates two innovative pieces of software. The first, SmartStart, automatically configures server hardware and network information to suit a company's operating and application software, making install-ation simple and error-free. 

The second piece of software, Insight Manager, helps companies manage their server networks by, for example, spotting overheating boards or troubled disk drives before they break down. Thus the ProLiant eliminated prohibitive costs and troubles associated with installing and maintaining PC servers. 

Before the ProLiant, small and mid-size companies had been sceptical of their ability to manage a network server. With the expense of information technology consultants and their own lack of expertise in IT, the total cost of owning a server appeared prohibitive. 

The ProLiant thus made owning servers attractive for a whole host of new customers. Compaq remains the global leader in the server industry. 

Rarely do the products or services of an industry stand alone; rather, they exist within networks of products or services of other industries that support or enhance them. These complementary products and services affect the value of each other industry's offerings. 

Yet in many industries there is tremendous convergence among all players towards maximising value within the bounds of their industry's product and service offerings - to the exclusion of complementary products and services. 

Before Kinepolis, how many cinema operators paid heed to the cost and difficulties of obtaining a babysitter? Not many. But they should have done, because the availability of qualified babysitters greatly affects demand among filmgoers with young children. 

In general, there are three types of complementary products and services to consider. There are those that are "consumed" before the products or services of an industry, such as babysitting and parking in cinema. There are those that are experienced simultaneously, as operating and application software are with computers. And there are those that are consumed after the products and services of an industry, such as ground transport in the airline industry. 

Eliminating costs and bottlenecks associated with complementary products and services can release tremendous untapped value. 

By the early 1980s, the UK vacuum cleaner industry was stagnant: companies competed on price and used expensive marketing to win incremental share from one another. Rival products were largely indistinguishable and profit margins were shrinking. 

Dyson Appliances revolutionised the market, overtaking every existing player, including Hoover, without price competition - its vacuum cleaners were premium priced - and almost no advertising. 

While other companies concentrated on making small improvements to the vacuum cleaner itself, Dyson saw trapped value in the complementary product of vacuum cleaner bags. Not only were vacuum cleaner bags costly, they were a nuisance to change and reduced the suction power of the machine. 

By designing a bagless vacuum cleaner, Dyson reduced cost and inconvenience and raised performance to unprecedented levels: its machines operate 100 per cent efficiently all the time. 

Similarly, Virgin Entertainment Stores successfully combined CDs, videos, computer games, and stereo and audio equipment to solve buyers' complete entertainment needs. Zeneca's Salick Cancer Centres provide all the treatments available within one building so patients do not have to travel to numerous appointments. 

Is your company striving to maximise the value of the product and service offerings of your industry, but struggling to find creative ideas that offer customers a leap in value? If so, ask yourself this: what is the "total solution" that your buyers seek? Which of the complementary products and services consumed before, during, and after your products and services are the ones that significantly affect the value of your industry's offerings? 

The key is not only to identify the range of complementary products and services, but to select and absorb those that can release new value for customers. 

Next week: how Enron, Cisco Systems and Burda Media capitalised on external trends in their environment to create new market space.