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.
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A New York start-up called Vringo aims to become the next big trend among young people seeking to express themselves. Providing a twist on the relatively longstanding practice of downloading ringtones to your cellphone, Vringo allows its users to choose the ringtones that will play when they call their friends. Is your phone ringing with a tune from Motley Crue? Pick up some hairspray and get ready to rock. Your friend could even send you a video to play during the ringtone -- perhaps of him playing air guitar.
It's a neat idea -- some people's need to express themselves is almost never satiated, and the business builds on an already established behavior of paying for ringtones. There's just one problem: both phones need to have Vringo's software installed. It would be wonderful (for Vringo) if everyone had their software, but it's unclear how the company will arrive at that destination.
This is shortcoming associated with many early movers. Network effects in new markets can be very strong. There is big potential to create innovative interactions among groups of people -- a field that has generally been under-targeted by marketers compared with their efforts to change the behavior of individuals. When firms win at creating networks, the payoff can be huge. Think of eBay, SMS, Facebook, "dark pools" of liquidity for investment banks, and Microsoft Office. By creating a critical mass of users, firms providing these innovations made the usefulness of their offerings stand out from competitors. Once leaders emerged, they tended to gain strength as their networks grew, creating a virtuous cycle of growth.
This Nirvana can tempt many start-ups to adopt a business model based upon network effects. Yet it is extremely challenging to get the network started. Typically it happens only under a few set conditions:
- The network is already latent and just needs to be activated (SMS capability shipped with all 2G cellphones)
- A firm can laser-target a small foothold market that then bridges into other markets (eBay's first winning network lay in fans of Pez dispensers, and Facebook first triumphed with college students)
- The minimum size of a viable network is modest ("dark pools" first targeted commonly traded securities traded in large lot sizes, where only a few market makers were needed)
- Customers foresee the development of the network and rush to belong so that they don't miss its benefits (Microsoft has this enviable position with its Office franchise)
- A firm owning another type of network can create a new network
This last circumstance is likely Vringo's best hope. Telecom carriers such as Verizon or Vodafone have the muscle to push innovations out to their subscribers. They need to choose carefully what to market, as consumers have only so much capacity to absorb new offerings, but one might imagine a concerted push of Vringo to certain demographics.
The problem for Vringo is that the carrier is likely to demand the lion's share of the profits in exchange for creating the network. If Vringo balks, the carrier can very easily find other applications to take its place, e.g. friend finder services like Foursquare that show people's physical locations. The carrier wants to sate demand for a general job that consumers are trying to get done, e.g. have fun or express myself. There are a great many ways that this need could be satisfied.
In short, early movers seeking network effects need to consider which archetype of network creator they seek to be. If their success is dependent on aligning owners of other networks, the road to market creation may be a rough one.
Click for more of New Markets Advisors' thinking on business models and telecom.
With much fanfare, Google launched its Nexus One handset in January 2010. Not only was this powerful cellphone a showcase for what the company's Android operating system could do, but it also introduced a business model innovation -- Google would sell its own handsets directly to consumers while simultaneously licensing Android to other handset makers who would sell handsets through the traditional channel of wireless carriers.
Just because the model was innovative doesn't mean it was a good idea. With a few months hindsight, did Google have a smart strategy? What does the Nexus One tell us about channels for new markets?
One explanation for Google's move is that it wanted to enter the $100 billion market for smartphones as a new source of growth. Certainly the revenue numbers may
have looked enticing, but the industry is highly competitive and profit margins are thin (except for Apple's). Moreover, Google relies on handset makers like Motorola to license Android. The strategy would seem to undermine Android's long-term prospects with these manufacturers.
Another explanation has been that Google wants to reduce the wireless carrier to a "dumb pipe", much as Apple has with the iPhone. By owning the whole user experience, Google could own the customer and create huge leverage over its carrier partners. This can be an effective way to pioneer a new market, reducing dependence on channels less motivated than Google to showcase all that the Nexus One can do. The approach could have a high pay-off (look at Apple's nearly 50% profit margin on iPhone sales of almost $5.5 billion in the last quarter). Yet the strategy would be very risky. Carriers have a major retail presence, own many enterprise customers, and provide critical subsidies for handset purchases. Alienating carriers could backfire on Google. Indeed, the company recently backed down in a dispute with Vodafone, allowing this leading global carrier to sell the phone like a traditional handset, through normal channels. A dispute with Verizon Wireless has led the #1 American carrier to drop the Nexus One from its planned line-up. If the Nexus One were targeted at a niche, perhaps it would make sense to circumvent the huge carrier channel. But the N1 has seemed to have mass market aspirations, so spurning carriers is a perilous move.
A final explanation is somewhat devious, but perhaps the most sensible: Google never intended to be a major player in handsets, or to create a viable direct channel. It used the Nexus One as a ploy to force operators to embrace Android and Google Search on other handsets so that they could compete with the device. Now that phones such as the Droid showcase Google's mobile capabilities as effectively as the N1, the company can gradually back away from the direct business model. If this was the strategy, it was a brilliant success. Oftentimes a new market pioneer won't have the visibility to pursue this route effectively, and it may lack Google's resilience had carriers and other handset makers come to view the company as a major threat. But Google is Google. It had the credibility, customer reach, and deep pockets to make this strategy work.
The moral of the story is that companies should choose direct channels for new markets only if they are pursuing a focused niche of customers (usually, this is a good idea). Companies will run big risks if they rely on third-party channels for part of their business while competing with those same channels in other endeavors. A direct approach might be effective for initially launching an offering for mass markets, but after the initial wave of customer enthusiasm fades channel conflict can be as real in new markets as in any industry. Google seems to have walked this tightrope with great skill.
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In a speech today at a major innovation conference, Dartmouth Professor Vijay Govindarajan talked at length about how Grameen Bank turned upside down all the traditional notions of financial services in Bangladesh: small loans, no risk officers, no collateral, bringing the bank to the village, and so on. The Grameen model earned its Founder the Nobel Peace Prize, in addition to creating a very large and sustainable enterprise. The lesson can applied broadly in financial services innovation, as well as to other industries.
In a famed episode of the TV series Seinfeld, the cast encounters a set of four friends who look just like them, but behave in a totally opposite manner. Feldman, for instance, lives across the hall from his best friend, but always knocks before entering, brings groceries, and has well thought-out schemes. This new crew becomes known as the Bizarros.
It can be very useful to think through what the Bizarro version of a company might be. The exercise can lead firms to consider how they might violate long-held rules of an industry in a compelling way. Companies find the exercise especially fruitful when they focus their analysis on a customer set that is poorly served by traditional models today.
Grameen turned the banking model upside down with respect to poor villagers. Another firm, AllLife, has done the same for sufferers of HIV and diabetes in South Africa. AllLife, which is an unabashedly for-profit enterprise, targets these large groups of people that are highly motivated to buy life and disability insurance but viewed as unacceptable risks through typical financial services lenses. The company pursues customers that other insurers shun (violating the maxim that insurance is sold, not bought). It requires its customers to regularly submit medical information showing compliance with therapies for these diseases. It regularly interacts with customers to remind them to adhere to their treatment protocols.
Because Bizarro endeavors can lead to offerings which look alien to the core business, it is extremely challenging to formulate these ventures within existing business units. The mindset required, partners, metrics, and incentives may all diverge signficantly from norms. The reality of most businesses is that there is not flexibility to separate a venture totally from the core, and indeed it may be essential to commercialize the concept within the main business to exploit the company's unique advantages (a network of bank branches, for example). However, the process of creating the concept should be as divorced as possible from the day-to-day definition of the business. It should, for example, be focused on the needs of a particular customer set rather than be defined by how a certain family of existing products might be grown. If the business potential is shown to be sufficiently strong, then commercialization may succeed even if it happens within the core.
Bizarro companies are rule-breakers. For financial services innnovation and other endeavors, this approach can enable escaping commodization and creating new markets that a company can own.
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