Two consultants argue that firms should look for their next opportunity on the edges of their existing businesses.
The search for new business opportunities is a never-ending process. Alan Lewis and Dan McKone, authors of new book Edge Strategy: a New Mindset for Profitable Growth and directors of Boston-based L.E.K. Consulting, believe many people ought to be looking for it right under their noses.
As they point out, the business world is full of advice on finding new markets and new products, committing to big strategies with big costs and big risks, and sailing into uncharted blue oceans. McKone says that approach leads many companies to overlook “an enormous, untapped source of profit” that exists in what he and Lewis call “the near-field” – the area on the edge of your current core business.
Here, the two consultants note, lie ancillary goods and services you can sell to make a customer’s interaction with your business more complete.
“It is often the periphery of core businesses, rather than the core itself or some distant horizon, that glows with opportunity,” they write.
Such expansion at the edge can often be done with existing technology and infrastructure. One example is telecommunications providers, which developed edge markets for high-margin value-added services such as call-waiting and caller ID.
“It is often the periphery of core businesses ... that glows with opportunity.” Alan Lewis and Dan McKone
Equally, retailers in thin-margin fields such as consumer electronics found they could generate strong profits selling warranties and other services. Movie theatres have found rich profits in areas such as premium seating and 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 competency-based, inward out, to one that is needs-based, outward in, and more naturally centres on the customer – the absolute key to any profit expansion effort.”
The authors are not saying that the core of a business is unimportant, but rather if the core is well executed, customers will give a company permission to play at the edge. They maintain the economics that can be realised at the edge often trump those captured at the base business.
Lewis stresses the priority of understanding the general market and specific customer needs by analysing trends and patterns of behaviour. He discusses in one particular case study – that of US organic supermarket chain Whole Foods Market – it was discovered that many customers only purchased products for one meal during each visit to their stores, rather than buying in bulk.
This prompted the idea of the company providing meal-ready packages, which have been very successful. The next step was an in-store restaurant, which has also worked well.
Another benefit of the edge strategy is that it’s cheaper. “Compared to disruptive innovations in the core, edge moves often require a relatively smaller incremental capital investment or allocation of resources,” says Lewis.
“Edge strategies can accumulate many smaller elements to create significant sources of strategic advantage.”
One of the most interesting cases examined in Edge Strategy involves Amazon, which realised a few years ago that its technological infrastructure is a crucial asset that is easily scalable. It can be hired out to other companies that need a network but do not want to, or are unable to, build it themselves. Because Amazon already understood web services so well – it was already one of the world’s biggest users – it could quite quickly turn Amazon Web Services into a powerful player with significant revenue.
“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 an edge strategy ... will grow profit lines and create shareholder value, while investing less money, taking less risk, realising benefits sooner and keeping customers happier.”
Lewis and McKone list three types of “edge” into which a business can expand.
- Product edge Alter the elements and composition of an existingcore offering. Example: a software firm might add new capabilities into an existing program.
- Journey edge Find a new way to meet the needs that an existing offering is already helping to fulfil. Example: an accounting business might offer clients business consulting services.
- Enterprise edge Apply resources and capabilities in a different context, for a different offering or to a different set of customers. Example: a sports car company might start making SUVs.