Why did Google win in search?
Then lose with Google Docs?
Why did Amazon win with AWS?
Then lose in smart phones?
And why did Colgate win in toothpaste?
Then lose with lasagna?
In a word, categories.
It turns out attacking existing market categories with new, “better” offerings is often a disaster. Even if a company has proven to be a category king in its core market.
A lot of venture capitalists like to say, “We invest in teams.” Every CEO likes to say, “We hire A-players”.
I like to say, “A great team isn’t enough.” Neither is a great product or a great company.
A great team, with a great product from a great company is nothing without a great category.
Categories make companies. Not the other way around. I know that sounds crazy, but stay with me. Please try on this idea. (Keep reading or click here to listen to my podcast.)
Your category is your single point of failure. No category, no customers. No market, no market-ing. It’s the category that makes the company.
And a lousy category with little “pull” or demand is generally a dogfight to the bottom.
Also horrible, is being in a red-hot category as the category king emerges, beats you and everyone else, to win most of the economics. More on that in a moment…
Remember Dell? A great company with great products. In 1999, everyone admired them. Today, no one cares about Dell.
Dell is still a great company, with great products. However, the categories of laptops, servers and storage have been over-taken by mobile, the cloud and virtualization.
Today, no amount of product innovation will save Dell. They are a category disaster. And until they pioneer and ultimately dominate some new categories, no one will care about them.
Other companies changed the agenda in computing and moved buyers attention to new categories. Now Dell’s view is old and their growth rate, margins and EBITD are shadows of what they once were.
Why? Dell’s categories have been made irrelevant – not because their products failed.
Categories make companies.
While writing, Play Bigger: How Pirates, Dreamers, and Innovators Create and Dominate Markets, we analyzed every venture-backed tech company founded since 2000.
We discovered that category kings in tech earn 76 percent of the market capitalization (aka total value created) in their space.
In his landmark Harvard Business Review article, “Why It Pays to Be a Category Creator,” category design guru to the Fortune 500, Eddie Yoon writes that category-creating Fortune 100 companies capture, “53 percent of incremental revenue growth and 74 percent of incremental market capitalization.”
The numbers make high-stakes category dynamics worth exploring – for startups and more mature companies too.
Google is a great brand because it is the category king of a great category: Search. But in the category of “Productivity Suites” the Google brand is a loser. Because Microsoft is the category king of productivity apps.
Categories make money.
As a matter of fact, Microsoft Office has a whopping ninety-five percent market share and does over $12 billion in sales.
When Amazon attacked the entrenched category king of smart phones – Apple – they got crushed too. Same story.
And, you can guess what played out when Colgate entered the lasagna space…
In some cases attacking an existing market, with an established leader, is financial arson. In other words: Don’t do Bing.
Case in point: Microsoft’s search engine. In 2009, Microsoft’s then-CEO, Steve Balmer, launched Bing saying that the search market “deserves a good feature war.”
As you know, it didn’t work. Microsoft has invested more than $10 billion in Bing. Yet Google still rules with over 65 percent market share.
If Microsoft cannot beat Google, the category king in search, with a $10 billion frontal attack, why do so many tech companies pursue existing categories versus designing new ones?
These category disasters happen over and over and over.
Unfortunately many executives make an unconscious, un-questioned choice to position their products, services and companies in an existing category. They accept the rules as defined by a competitor.
On the surface, it seems to makes sense. You see a big market, you have an idea for a good product/service. Maybe you can lower the price a bit and pick up the “fast follower” position in a big space and make a bunch of money. Then maybe one day, you’ll become the category king on the strength of your superior offerings. On paper, it looks like a perfect strategy.
But it’s for losers. Less than 2% of venture-backed tech companies are ever worth much.
“Category creation is the exception for large companies, not the rule,” writes Eddie Yoon in HBR.
In other words: These multi-billion dollar category disasters do not have to happen.
Categories can be designed – just like products and companies are designed.
Categories can also be reimagined. If you can get the world to see your offering as truly different than what’s out there currently.
Look at what Facebook did to MySpace or what Palo Alto Networks did to Symantec in firewalls.
Neither Facebook or Palo Alto conducted head on attacks in existing categories. Both companies re-designed their spaces with a different point of view, around a different problem, and positioned their products around that new and different point of view.
And when the market accepted their definition of the problem solved by a social network or firewall – POW! – the entire category moved from using the “old” definition to the new one.
Some executives talk about “the market” like it’s the weather – something that happens to them – rather than something they can affect – even create, drive, control.
Leaders know problems create categories. What problem are you solving?
New problems or a re-imagination of existing problems create – or re-create – categories. The “ridesharing” category pioneered by Lyft and Uber is a reimagination of the “personal transportation” category. The “smart phone” category solves a new problem we didn’t know we had until Steve Jobs explained it to us.
The most successful innovators are category designers.
They are business leaders who intuitively understand that to win, you have to have the courage to change thinking, behavior and ultimately purchasing in a market.
Reed Hastings, founder of Netflix taught us that it was stupid to drive to a video store to get a movie and re-trained us to go to a website, instead. Now Reed’s a billionaire and Blockbuster is bankrupt.
By changing thinking, category designers change the rules in a market. They condition the market to see things their way. Here is where Jobs was the master sensei.
The challenge for most CEOs and CMOs is their love of talking about their products and features. They make an unconscious assumption that the world will just “get” why their awesome new IoT, A.I., machine learning, deconfibrillation platform matters. Sometimes this works. Most of the time it does not.
No one buys a drill. They buy holes. But most CEOs are crazy in love with their drills.
So unless Google can re-imagine the problem Google Docs solves, Microsoft’s $12 billion is pretty safe.
On the other hand, the reason Amazon AWS was a legendary success is because they designed a new category and – this part is SUPER important – evangelized the problem they solve (avoiding the cost, time and complexity of setting up your own data center). Once the world agreed the problem existed – POW! – a $14-billion-revenue business materializes in just 11 years.
Yet Amazon’s brand in commerce meant nothing in the existing category of smart phones. The Amazon Fire Phone failed for a simple reason: Amazon never explained why the Fire represented a new category of smart phone. So, when the world asked, “Why do I need this instead of an iPhone?” Amazon gave them a list of features. Said the world, “We don’t care.”
Categories make brands.
Both big companies and startups commit category suicide all the time. It is the single biggest killer of new companies, products, and brands. And it is an easy way for big companies to burn tons of cash.
Too many companies jump into new categories without thinking how they will position themselves to either design or re-design the category.
Losers failure to differentiate.
Some believe, like they believe in gravity, that the best product wins. But, great products without a purpose-built, differentiated category design, don’t matter.
Context matters. Legends make sure that their companies, products, services and brands are positioned in the context of their creation. And that’s why they never leave their category design to chance.
Christopher Lochhead is the host of “The Podcast Silicon Valley Needs”, Legends & Losers, co-author of Harper Collins’ Play Bigger: How Pirates, Dreamers, and Innovators Create and Dominate Markets, and a retired three-time Silicon Valley, public company CMO. Click here to listen to Lochhead’s podcast on this and other controversial tech business topics.