New Markets Blog

Market entry through creating a new category -- Fiat's model

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Fiat's return to the United States has been preordained since the company took control of Chrysler in 2009.  Yet the way it chose to enter the U.S. was far from certain, and its path speaks volumes about the perils and potential of creating new categories.  Fiat has launched through stand-alone dealerships emphasizing Italian style and built to handle substantial traffic, despite there being just one model available at first.  It also has kept advertising minimal.  In other words, it has inverted the traditional model of launching a new car.  This heresy has earned the wrath of the industry press, which has attacked Fiat for slow initial sales.  Yet the launch -- while not ideally executed -- follows a strategy that works in building new markets for the long-term.  Read more in my piece for Harvard Business Review.

Stephen Wunker is the Managing Director of New Markets Advisors and the author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't.  Read more of our perspectives on winning in emerging markets.

Foothold markets -- starting in unlikely places

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The Bajaj RE60 is a sinfully ugly car with a one-cylinder engine, simple engineering, and a lousy name.  It's also a brilliant illustration of how to target new markets.  India's Bajaj has chosen to
pioneer the ultra low-end car market by laser targeting an interesting audience -- rickshaw
drivers.  Read more about the compelling logic of this foothold market strategy in my piece for Forbes. 

Stephen Wunker is the Managing Director of New Markets Advisors and the author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't.

A new healthcare business model and its surprising parallel

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Industries that might appear vastly different on the surface can show powerful parallels on close examination.  Business model innovation in genetic testing and electric cars shows how new kinds of intermediaries often arise in new markets.  As they build strong strategic positions for themselves, these intermediaries can also turbo-charge the growth of markets by removing several common barriers to adopting bold innovations.  Read about their lessons in my piece for Forbes. 

Click for more of New Markets' thinking about business model innovation and healthcare.

Bringing a global brand to an emerging market

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Italy's Piaggio is a 127-year-old firm with a proud heritage and iconic global brands such as the Vespa scooter.  Companies with such deep roots often have trouble adjusting to an emerging market, yet Piaggio has succeeded through creating a new market segment and targeting mid-sized countries.  I interviewed Costantino Sambuy, the head of Piaggio's efforts, about what approaches worked.  Read more in my piece for Forbes.

Stephen Wunker is the Managing Director of New Markets Advisors and author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't.

Does the Pickens Plan for natural gas vehicles create a new market?

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This past week in Congress, a rare bipartisan coalition introduced a bill known informally as the Pickens Plan, after the Texas natural gas magnate T. Boone Pickens who has talked it up incessantly for the past two years.  The Pickens Plan would spend $1 billion a year for five years to subsidize the manufacture of heavy trucks that would burn natural gas, as well as provide tax incentives to truck stop owners who install natural gas refueling equipment.

The thesis of the Pickens Plan is that natural gas is cheaper than oil (true), that it can come largely from supplies in the US and Canada (true), and that it produces less greenhouse gas emissions than diesel fuel (sort of true).  The 8 million heavy trucks in America constitute only about 3% of country's vehicles, but a whopping 23% of transportation fuel use (or 16% of total oil use).  Pickens claims that moving this fleet to natural gas would halve U.S. imports from OPEC (sort of true). Of course, moving the fleet to cost-effective biofuels would accomplish this objective too, but don't hold your breath.  Electric vehicles may impact fuel use as well, although for technical reasons they are unlikely to take root in the heavy trucking fleet.

Let's leave aside the issue of whether this is a good way to spend at least $5 billion, and focus solely on whether the Pickens Plan for natural gas vehicles creates a viable new market.  New markets get their start in footholds that may be a sliver of total consumption but which 1) avidly adopt the new solution and 2) provide a stepping stone to broader market penetration.  Think of the effect of World War I on aviation, or the role of sports programming with early adoption of HDTV.  Are heavy duty trucks a good foothold?

Undeniably, they are a small, high-impact segment of the market to target -- which cannot be said of some other energy subsidy programs such as for wind and solar.  18-wheelers often travel predictable routes along Interstate highways, so the lack of natural gas filling stations can be addressed through converting a relative handful of truck stops.  Earlier steps toward natural gas vehicles targeted city buses and trash haulers, which can be refilled a central depots.  This was also an effective, concentrated market to tackle.  By giving manufacturers an incentive to produce natural gas vehicles, the Pickens Plan will make them cheaper, so the bill would target two major barriers to adoption.

What else could impede adoption?  Dealers may not be incented to sell the trucks (this is an issue for electric vehicles, known as EVs).  Skilled mechanics for unfamiliar engines may be tough to find.  Resale values may be uncertain.  New markets require a view of the total system, and the legislation only targets a couple links in the chain.

The bigger question is whether natural gas vehicles would spread beyond this foothold to light trucks and passenger vehicles.  A federal approach may be the wrong way to target the market.  The key for broader uptake is not the number of vehicles, but the number in a given area.  Filling stations and vehicle repair is an inherently local business.  There is a greater penetration of early passenger natural gas vehicles (e.g. the Honda GX) in Southern California in part due to fleet filling stations being open to the public.  However the vastness of Southern California does not really correspond to the sort of tightly-packed, motivated market that typically demonstrates the value of new technologies.  A city like Portland, Oregon would be a better fit for a proving ground.

Of course, Portland would prefer to go electric, which gets to the other issue facing broader penetration of natural gas vehicles.  With battery technology rapidly improving, consumers may opt to go for EVs or wait for a better EV.  New markets do not take off when consumers have strong incentives to wait.  So there is little to suggest that natural gas vehicles would penetrate the market quickly, and much in the works in laboratories to make them an uninteresting long-term choice.

The upshot:  the Pickens Plan could impact oil imports in the medium-term, to the extent that these are affected by fuel use in heavy trucks.  But that's it.  A rare bipartisan push for legislation, and it has to be about this?

Click for more of New Markets' thinking on energy.

Dealers -- the hidden roadblock to electric vehicle demand

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"It's a different product.  Expenses will outweigh revenue on the product for this time, and some dealers may not want to make the investment."  This honest opinion, expressed by the President of the New Jersey Coalition of Automotive Retailers, sums up a key challenge that has been lost in the excitement around electric vehicles.  Sales channels are essential to successfully creating new markets, yet they often lack motivation to push new offerings.  Their influence can be neglected, but it is massive.

As often happens with new markets, the technology of electric vehicles (EVs) has received tremendous attention.  Huge budgets are dedicated to improving battery capacity, charging times, and vehicle weight.  The industry is focused on end users' demand, and estimates of their speed of adoption range vastly.  In the midst of this hubbub, the comparatively dull endeavor of moving EVs through dealerships seems straightforward.  It is not.  Channels frequently squelch innovation due to their short-term orientation, focus on costs, inability to train customers, and adherence to traditional business models. 

Each of these factors threatens EV take-up.  The pay-off from unleashing demand for EVs will come as sales grow in a few years, not immediately.  With margins already thin, many dealers will not have that patience.  They also may not have the stomach to take on the costs of training staff, financing expensive inventory, and dealing with extensive questions from buyers who may well go back home to ponder the decision before taking the plunge.  Their staff may be ill-suited to training customers, and they may calculate that other firms should do the customer education first before the dealer gears up to reap the rewards.  To cap it all off, they see their current profits being generated largely through their service operations, and EVs should require less service than internal combustion alternatives.  So, why sell a Leaf when you can sell an Altima?

It is easy to hope that dealer resistance will be neutralized by buyer enthusiasm.  Certainly that is likely to be true for the very first wave of sales.  The customers pre-ordering 20,000 Nissan Leafs did not need dealers to persuade them.  But this is a sliver of the market.  A huge proportion of customers walk into dealerships uncertain of what they will buy, or whether they will buy at all.  As banks, insurance companies, cellular firms, and many others have found, a face-to-face channel can be essential for sales, despite all the channel's inefficiencies.  Dedicated EV dealers may help to address some of the initial hurdles, but given the crowded dealer landscape they may struggle to find a long-term customer base.

To circumvent the roadblocks, auto manufacturers will need a multi-threaded strategy that addresses financial concerns, provides staff training, and reaches out directly to end customers like never before.  Super Bowl ads are great fun, but they are unlikely to create committed purchasers.  BMW's Mini has stood out as one brand that tightly integrates direct marketing with a distinct dealer experience.  We shall see if others adapt that playbook.

New products are typically created by enthusiasts who like new technology, and they tend to focus on the technical side of the offering.  But ultimately market creation is about sales.  If sales channels are not fully on board, they can cause havoc for even the most elegant technical solutions.

Click for more of New Markets' thinking on the energy and automotive industries.

Can crowdsourcing uncover new markets?

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Fiat Brasil's Mio is an unusual car.  Not only is this two-seater, city vehicle a clear design standout from the generic-looking cars found on Brazil's streets, but it also originates from an odd source -- the Internet.  The Fiat Mio is the first "crowdsourced" automobile.  The company has received over 11,000 ideas from a community of interested consumers submitting thoughts on topics ranging from interior design to propulsion, via a dedicated website.  The result is intriguing and sure to appeal to the program's participants.  Can this kind of crowdsourcing uncover new markets?

The Mio illustrates not only a pent-up demand for alternative forms of urban transportation, but also the popular appeal of helping to create a car, which can be one of the most visible forms of self-expression (BMW's Mini understood this years ago).  It provides the company with useful information about leading edge consumer preferences.  However the people using the Mio website are likely distinct from the great majority of carbuyers, and participants will probably be proudest if their input results in something that is obviously different from the norm.  This is typically the case with crowdsourcing.  Pepsi's Mountain Dew DEWocracy program recently sought input on a new flavor -- enthusiasts opted for a clear formulation that would stand apart from other Dew offerings.  The insight from this kind of program lies in what it says broadly about changing types of demand, and occasionally in the originality of some individual suggestions.  The actual product resulting from the effort is something that will appeal to participants, but perhaps not much further.  

Crowdsourcing is a valuable source of information about new markets under a handful of conditions:

• Fast changing popular demand -- In industries where the nature of demand quickly shifts (fashion, telecom services, gaming, etc.) crowdsourcing can provide immediate input on what is appealing
• Deep participation in the program -- Quick reactions to concepts are unlikely to provide truly novel or meaningful inputs.  Unfortunately the Mio program has become this sort of voting-oriented initiative, which isn't very distinct from traditional voice-of-customer research.  Deep participation would involve discussion of how products fit into everyday lives, not voting on the color of a vehicle's trim.  As Henry Ford famously said, "If I'd asked my customers what they wanted, they would have said a faster horse"
• Broad mandate for what is being created -- Fiat asked participants to create a concept car.  Just in that mandate, the company biased the program toward existing ideas of cars.  Mountain Dew asked for a new flavor, not a new idea of energy on-the-go.  This approach is fine if firms are seeking product enhancements, not ideas for new markets
• Focus on use of product vs. its design -- Fiat's emphasis has been on details of product design.  Given that the car's unveiling is just a month away, their focus on these details is understandable.  Still, we are unlikely to learn much from what people desire in the product's paint trim.  An alternative would have been to seek more input on how a two-seater fashion statement would be used.  This could have led to insights that product designers could have leveraged into a variety of development efforts

An alternative approach to crowdsourcing is illustrated by the telecom giant Vodafone.  The company keeps close tabs on the changing use of its network and mobile devices.  This week,
CEO Vittorio Colao said that just 20% of data subscribers are using their devices for e-mail -- less than the proportion using them for browsing or games.  Vodafone uses this real-time input to adjust its network of applications, allowing subscribers to source what they want in real-time.  According to Colao, "We need to avoid the closed, vertically-integrated models...We want a truly open environment...in which the OS, devices and apps are decoupled as much as possible."  Vodafone can learn from user demand in this environment to understand where to build its capabilities; for instance, it is enhancing its data network to better support entertainment apps and provide higher quality of service for some of these. 

Too often, crowdsourcing can be a PR gimmick rather than a source of important business insight.  While online voting has its place in industries catering to fickle popular tastes, the right kind of crowdsourcing can go far beyond selecting paint colors to generating substantive input into changing markets.  Fiat's Mio seems to have gone half-way to this destination.

Click for more of New Markets' thinking on innovation capabilities.

5 lessons from companies moving into services

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Moving into services has become a hot business strategy.  Consider just some recent examples:

• Intel is purchasing security firm McAfee for over $7.6 billion, aiming to integrate its chips with McAfee's software and  services to constantly monitor new threats
• Ford is enabling customized configurations of its cars' software, which could range from transmission preferences to music, GPS software and much more
• Nokia spent over $8 billion to purchase a single company specializing in mapping software, and has supplemented that move with big spending on buying and developing other software and services to differentiate its handsets
• Procter & Gamble has created a string of car washes branded "Mr. Clean" in an attempt to move into this highly fragmented, $35 billion industry
• Scotts has moved its lawn care brand into the lawn services franchise industry 

The list goes on and on.  Across a wide range of traditionally product-oriented industries -- medical devices, chemicals, high-tech, and more -- companies have moved into services to augment their offerings.  What can we learn from these experiences?

The attractions of the strategy are clear.  Moving into services allows firms to target vast pots of money spent after products are bought, services are often sold at higher margins than products, tight integration of product and services can differentiate offerings, customers can be locked into a single supplier, and new markets can be accessed through creating a full solution to customers' problems.  Some companies have exploited the strategy to great effect -- IBM's move into services during the 1990s powered the company's growth, entrenched its customer relationships, and helped its hardware business as well.

But this is not easy to do.  The experience of companies that have transitioned from products to services shows 5 lessons:

• Create a new experience, not just a new business model -- While Nokia phones now offer excellent mapping and a range of other services through the company's Ovi app store, the experience is not that distinct from what is available on competitive handsets.  Nokia gets modestly more revenue from providing both the hardware and the software/services, but at a real cost in terms of reduced flexibility and sales channel alienation.  Contrast this to Ford, which needs to control the hardware to enable services like tuning transmissions to individual preferences, and can therefore offer customers an experience unmatched by other carmakers
• Be certain about an industry's direction before abandoning flexibility -- One clear lesson of new markets is that a number of variables can impact a nascent industry's evolution.  Eventually the shape of the industry becomes clear.  An integrated product-service solution may be hard to iterate, or it may make things more malleable versus having to rely on outside partners.  The flexibility of integrated vs. modular solutions depends on both system architecture as well as industry dynamics.  It is important to retain the ability to evolve quickly during an industry's early days.  Once a business is more mature -- e.g. computer security -- it can make more sense to invest fixed costs into product-service integration, as Intel will do with McAfee
• Have a crystal-clear channel strategy -- When IBM moved heavily into system integration, it alienated prior sales channel partners that made hardware recommendations to their IT services clients.  IBM understood the ramifications, and it had a substantial direct sales capability.  In many industries, sales channels not only move boxes but also install and service products.  Companies must have a very well-defined view about whom they will alienate through moving into services, how they will fill this gap in their ecosystem, and how they will keep other key partners on-side during the transition
• Set up the organization to handle distinct control systems -- Running a services company is extremely different from managing a product firm.  The ways that companies discover service shortcomings, the autonomy given to front-line staff, planning processes, and much else is distinct.  This seems to be obvious, but countless companies have put executives with product backgrounds into service management roles without a roadmap on how to act differently.  This can create all kinds of problems from service development through to execution and performance measurement
• Prepare to balance -- There is no cookbook approach to manage the transition to services.  Rather, executives need to constantly balance competing imperatives -- service customization vs. the need for scale economies, leveraging the product salesforce vs. creating skewed sales incentives, locking in customers over the long-term vs. winning wary customers in the short-term, and so on.  It can be extremely useful to execute this transition with people on board who have seen this movie before, so long as they recognize the need to adjust their approach according to circumstances that include product lifecycle, channel economics, value created for the customer, competitive intensity, trackable frontline performance data, and others

The business strategy of integrating products and services can be compelling.  Indeed, it may be vastly underexploited in some sectors.  To take one example, Abbott's recent acquisitions of Indian pharmaceutical companies makes it the leader in this major growth market, but without a complementary services offering that differentiates Abbott's therapies it is not clear how the firm makes itself a better owner of these properties than local Indian managers.  As companies embrace this strategy, they should take great care to learn from others' experiences on this road -- it reaches a compelling destination, but the journey is challenging.

Click for more of New Markets' thinking on business models.

Market penetration in new markets -- how fast for electric vehicles?

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Nissan CEO Carlos Ghosn made news this week by predicting that the market for electric vehicles is ready to accelerate quickly, leaving car manufacturers with insufficient capacity to make them.  Ghosn is not known for being a starry-eyed dreamer, yet his forecast bucks conventional wisdom in the automotive industry.  What can patterns of market evolution tell us about the future for electric vehicles?

New markets begin to blossom when they surmount a handful of early obstacles.  Specifically, success begins when:

• The new offering appeals to a readily-identifiable market niche, enabling firms to focus product development, marketing communications, and effort by sales channels
• Major technological inter-dependencies are resolved, allowing the product to plug directly into an infrastructure (physical or economic) that supports its use
• The value of the innovation has been demonstrated by customers whom the mass market views as credible endorsers
• The perceived risk of adopting the innovation is low
• The buying decision is made simple
• Incentives exist for near-term adoption of the innovation, vs. continuing to wait-and-see how the market develops 

In the case of electric vehicles (EVs), the industry seems to be at this kind of tipping point.  A certain type of buyer -- e.g. socially-conscious, status-oriented, buying a second vehicle for everyday use -- finds these cars attractive.  Charging docks can be easily installed in people's homes, and a handful of public docks are now emerging as well.  Service for the vehicles is reasonably good, and dealers are beginning to push their sale.  Many potential customers know satisfied EV drivers.  Resale values are strong.  Metrics are emerging to compare the energy-efficiency of EVs.  Critically, tax credits incent early adoption; in the U.S., these can amount to $8,600, which can be a quarter of the vehicle's price.

Nissan is investing heavily in its forthcoming Leaf, an all-electric vehicle (not a hybrid) that it projects will sell 500,000 units in 2013.  By contrast, some industry watchers predict that total EV sales for all manufacturers will amount to 500,000 by that year.  Clearly, Nissan is putting serious money behind its vision.

While technology will improve over the next decade on several fronts, particularly on the capacity and cost of batteries, and while the public charging infrastructure is quite nascent, the market seems to have reached the point where offerings are good enough for a significant segment of customers.  Given the social-status and tax-credit advantages of buying an EV sooner rather than later, we can expect this market to begin growing fast.  Nissan may be in an excellent position to seize early leadership, much as the Prius made Toyota the leader in hybrid vehicles.  

Click for more of New Markets Advisors' thinking on energy.