Appearing in In The Black, May 2016
Living on the edge
A new focus on near-field possibilities can provide an alternative way forward, according to a new book.
The search for new business opportunities is a never-ending process but Alan Lewis and Dan McKone, authors of a new book Edge Strategy: A New Mindset for Profitable Growth (Harvard Business School Press, $40) and directors of Boston-based consulting firm L.E.K., believe that many people are looking the wrong way.
“There is a lot of emphasis on new markets and new products, big strategies with big costs and big risks,” says McKone. “But many companies overlook an enormous, untapped source of profit that exists in the near-field – on the edge of the core business through the sale of ancillary goods and services that can make a customer’s interaction with the business more complete. It is often the periphery of core businesses, rather than the core itself or some distant horizon, that glows with opportunity.”
A critical advantage of expansion at the edge is that it can often be done with existing technology and infrastructure. One example is telecoms, which once sold value-added services like call-waiting and caller ID at high margins. Eventually, these products were re-bundled into plans that motivated the typical subscriber to trade up.
Equally, retailers in categories with extremely thin margins, such as consumer electronics, found that they could generate strong profits selling warrantees and other services. For movie theatres, important profits have been discovered in areas such as premium seating and exclusive memberships.
“Doing well at the edge requires focusing not on the question ‘What are we best at?’ but on the equally important ‘What should our solution include?’,” says Lewis. “This takes us from a framework that is competencies-based – inward out – to one that is needs-based – outward in – and more naturally centers on the customer, the absolute key to any profit-expansion effort.”
The authors are not saying that the core of a business is not important. Only by executing well in the core will customers give a company permission to play at the edge; but the economics that can be realised there often trump those captured in the base business.
Lewis emphasises the priority of understanding the general market and specific customer needs, by analysing trends and patterns of behavior. He discusses one client, Whole Goods Grocer, an organic food market, which found that many customers did not make bulk purchases but instead bought only enough for a meal. This prompted the idea that the company should provide meal-ready packages, which were very successful. The next step was an in-store restaurant capacity, which also worked well.
“Compared to disruptive innovations in the core, edge moves like this often require a relatively smaller incremental capital investment or allocation of resources,” notes Lewis. “Edge strategies can accumulate many smaller elements to create significant sources of strategic advantage, eventually building powerful differentiation.”
One of the most interesting cases examined in the book involves Amazon, which realised a few years ago that its technological infrastructure was itself a crucial asset which was easily scalable. It could be hired out to other companies that needed a network but did not want to, or were unable to, build it themselves. This was within Amazon’s existing expertise, and within a fairly short time turned into a significant revenue stream.
“The key is developing a new mindset, a new way of looking at opportunities,” says McKone. “But the new technology that allows businesses to learn more about what their customers want and are willing to buy has made playing on the edge easier than ever before. Our experience shows that an edge strategy approach to discover ancillary business opportunities will grow profit lines and create shareholder value while investing less money, taking less risk, realising benefits sooner and keeping customers happier.”