What attracts the wild-eyed attention of Wall Street, excites the best and brightest to want to work for you, creates tremendous opportunities for new employment, and wins the mass of customers?  Many things, perhaps.  But chief among these is creating new markets.  The profitable growth consequences are enormous.  In studying the business launches of 100 companies, we found that a dollar invested in businesses that create new markets yields four times the revenue and a staggering 10 times the profit of a dollar invested in businesses that improve existing products and services.

In today's hypercompetitive economy where supply often exceeds demand, competing for share in existing markets is a cutthroat and marginal strategy.  To sustain profitable growth, companies should go beyond competing in existing industry space to creating new markets or recreating existing ones.  One does not need to look far for evidence.  Think of Wal-Mart in home retailing, Charles Schwab in brokerage services, SAP in business application software, Home Depot in home improvement, Swatch in watches, Compaq in PC servers, Borders or Amazon.com in book retailing, Bloomberg in online financial information, Enron in energy, Cisco in routers and switches, or Starbucks in coffee.  In less than 40 years, Wal-Mart, for example, has grown into the world's eighth largest company in revenue and second largest employer with more than 825,000 people.  Or consider shareholder value.  Despite their much smaller sizes, the market value of SAP, for example, exceeds that of 150-year old Siemens while Schwab's market value recently soared past that of America's biggest bull, Merrill Lynch.

Consistent with this trend, Procter & Gamble, one of the US's oldest and most venerable companies, has realised that only a sustained effort to create new markets and recreate existing ones will make possible the goal of doubling the 160-year old company's $35 billion business in the next 10 years.  P&G is not alone.  In interviewing over 500 senior managers, we found that creating new markets was at the top of companies' strategic priorities across the globe.  Yet, few companies have learned to master this challenge.  In our study of 100 randomly chosen companies' new business launches we found that more than 85% of their so-called new business launches were no more than incremental improvements on existing businesses. Why?

Simply, companies don't know how to create new markets.  They have been defending and improving existing businesses for so long that creating sound a bit like sending a hero out into the night.  While tools and analyses abound on how firms can best position themselves against the competition in existing industry space, no practical advice exists on how firms can create new market space. Admonitions to be bold and brave, while inspiring, just don't cut it.

We spent the last decade studying companies that created new markets or recreated existing ones.  Undeniably, innovation stems from individual talent and creativity.  But, more profoundly, we found six systematic paths to the creation of new markets.  None requires any special vision or foresight about the future.  All come from looking at familiar data with a new perspective that breaks the conventionally defined boundaries of competition. These paths are invisible to companies whose strategic focus is on competing within.  They can only be found be looking across:  across substitute industries, strategic groups, buyer groups, complementary product and service offerings, the functional and emotional appeal of an industry, and even across time.

The following are the six basic paths identified in our study that opened up new market space.
 

Look across substitute industries
Most companies focus on beating their rivals within their industry.  Companies that create new markets look across substitute industries.  The key question they ask is not what does it take to win in this industry, but what are the key discriminating factors that lead buyers to trade across substitute industries?  They then build on the distinctive strengths of both substitute industries.  Look at southwest Airlines.  It created the short-haul air transport market by realising that for short-haul flights, surface transportation - namely the car - was a mean substitute for flying.  By zeroing in on the discriminating factors that lead buyers to trade across these
 

Consider other examples such as Intuit in personal financial software which offered the speed and accuracy of computerised solutions at the low price and ease of use of the pencil, CarMax which offered the variety of new cars at the low price of used cars, Home Depot which offered the expertise of professional home contractors at the low price of hardware stores, and Federal Express and UPS which delivered mail at nearly the speed of phone.
 

Look across strategic groups
Most companies focus on improving their competitive position within their strategic group or market segment.  To create new market space, companies should not focus on how to outcompete rivals within their strategic group.  They should ask, why do buyers trade up and trade down between two strategic groups?  Think of the Walkman.  Sony combined the key discriminating factors of transistor radios and the popular boom boxes of the early '80s to create the personal portable stereo market in the audio industry.  It understood that buyers trade up to boom boxes for their acoustics and "coolness" while they trade down to transistor radios for their far lower prices and size-weight convenience.  So Sony offered the best of both in its creation of the Walkman.  The Walkman drew share from these two strategic groups and virtually made them irrelevant.  Dozens of new customer types were also drawn into the market, from joggers to commuters.  Other examples abound.  There is Compaq's creation of PC servers between minicomputers and desktops in the computer industry, Chrysler's creation of the minivan market between station wagons and big vans, and Toyota's creation of Lexus between the high end group of Mercedes, BMW, and Jaguar and the low end group of Cadillac and Lincoln in the luxury car industry (see box).
 

Look across the chain of buyers
In most industries there are three groups involved in the buying decision - users, purchasers and influencers.  In children's medicine, for example, the users are the children, the purchasers the parents, and the influencers the doctors.  These three buyer groups often value very different things.  Yet, companies in most industries tend to converge on the same buyer group.  By shifting the buyer group of an industry, companies can discover fundamentally new sources of value and create new markets.  In the copier industry, for example, Xerox, Kodak, and IBM focused on corporate purchasers who value centrally located bit machines that can handle large orders and process them fast.  Canon, however, created a whole new market of personal copiers by shifting to the users - the secretaries.  This shift opened its eyes to the importance of distributed copying with small machines, low prices and smaller copying needs.  Today, Canon sells more copiers than any other company in the world.

By shifting the focus from IT managers who are corporate purchasers to users in the financial information industry, Bloomberg also created breakthrough value by offering built-in analytics against Reuters and Telerate who focused on IT managers.  In contrast, SAP created the integrated, real-time software market by shifting the focus from traditional departmental users to corporate IT managers.  Another good example is Philips Lighting.  The company created Alto, the first environmentally friendly light bulb which removed 13,000 kilograms of mercury from the environment per year, by shifting the focus from traditional corporate purchasers to influencers, in this case CFOs and public relations staff who have rising concerns on environmental issues and their attendant costs.
 

Look across complementary products and services
While most companies focus on maximising the value of the products and services of their industry, new markets can be found by looking across complementary products and services.  Consider Dyson Vacuum Cleaners.  The UK vacuum cleaner industry was flat, and Hoover and its competitors were increasingly fighting on price, promotions and marginal improvements of vacuums.  Dyson, however, created new markets, grew the industry and enjoyed higher prices.  While vacuum cleaner bags were considered by the industry as a separate product purchased and used alongside of the machines, Dyson saw that this complementary product aggravated people.  People found it a nuisance to buy and change the bags.  So Dyson designed its vacuum cleaners to eliminate the costly and pesky activity of purchasing and changing vacuum cleaner bags, and with this leapfrogged the competition.

Other examples include:  Borders and Barnes & Noble, both of which created book superstores that transformed the function of bookstores from selling books to learning about books and enjoying them by offering complementary products and services such as knowledgeable staff and café and lounge areas;  Virgin Entertainment Stores, which combined compact discs, videos, computer games, and stereo and audio equipment to meet buyers' complete entertainment needs;  Compaq's ProLiant which solved configuration and maintenance problems of servers by incorporating complementary software into servers;  or Zeneca's Salick cancer centres which combined cancer treatments under one roof so patients did not have to visit one specialised centre after another.
 

Look across functional and emotional appeal
Competition in an industry tends to converge around one of two bases of appeal.  Some industries compete principally on price and functionality, where people buy a product based largely on utility calculations - their appeal is functional.  There are other industries that compete largely on feelings, glamour and emotion - their appeal is emotional.  Companies can create new markets by shifting the functional-emotional orientation of their industry.

Consider Swatch.  Low-end watches were long considered a functional item that people bought to keep track of time.  Swatch changed all that by infusing its watches with fashion, emotion and a powerful message.  Before Swatch was introduced, people usually purchased only one watch.  With Swatch, however, repeat purchases became the standard because people viewed it as a fashion accessory.  Swatch did not compete - it made the competition irrelevant, as did the Body Shop which stripped away the glamour of the cosmetics industry to create the first functional line of healthy basic cosmetics and body care products.

There is a whole raft of new markets being created in service industries in much the same way.  Industries like insurance, banking and investing have traditionally been very emotionally oriented, often selling human relationships and client bonding - "the relationship is the business" - more than products and services.  These industries are being recreated by companies that are stripping away the emotional ties to create breakthrough price and performance.  Direct Line Insurance in the UK is a good example.  Direct Line cut out brokers and regional branch offices.  It instead invested in claim handling and turnaround time through advanced information technology, and passed on a part of the tremendous cost savings to customers in the form of lower insurance premiums.  US-based Vanguard in index funds and Charles Schwab in the brokerage industry are doing the same in the investment industry, creating new market space by transforming emotional human relationship-oriented businesses into high performance, low-cost functional businesses.
 

Look across time
The last way companies create new markets is to look across time trends.  Every industry is subject to one or two external trends at any point in time.  If a trend meets three criteria - it decisively impacts an industry, is irreversible, and is evolving down one clear trajectory - companies can create new markets.  The key question here is, if this trend were taken to its logical extreme, how would it affect value to buyers?  Then work backward toward a solution.  Take Cisco.  Cisco saw the decisive and irreversible trend for high-speed data exchange.  Cisco also saw that the world was hampered by slow data rates and incompatible computer networks that would only worsen as more and more people went online.  Cisco's routers, switches and other network devices were designed to create a breakthrough in value for customers, offering fast data exchange in a seamless environment.  Today more than 80% of all traffic on the Internet flows through Cisco's products, and its margins in this market are in the 60% range.  Similarly, Enron created a national market for gas by assessing the gap between the market as it stood under regulation-price controls and local gas monopolies and the market as it was to be with deregulation of the gas industry.  Think also of Amazon.com.  Jeff Bezos, Amazon's founder, saw the Internet emerging and the number of people going online dramatically rising.  The number of users on the Internet doubles roughly every 100 days.  Bezos used this trend by creating the first online bookstore with a compelling value proposition to buyers.  The key here is to understand that successful creation rarely comes from predicting the trend itself, but arises from business insights into how the trend will change value to customers.

No matter what the industry, there is always room to create new market space.  The key is to break out of the conventional boundaries that define how we compete and search systematically across them.  By so doing, companies can find the uncharted territories that represent a real breakthrough in value.  These actions of creating will allow small companies to become big and big companies to regenerate themselves.  They are and will increasingly be the dominant sources of wealth creation in this knowledge-driven hypercompetitive economy, whereby companies, buyers and society all win.