Owning a Category
The most successful businesses tend to be the ones that dominate the Category in which they trade. Examples include Uber, AirBnB and StarBucks. Although there are other businesses, that number from 2 through to 100+, in these Categories, the lion's share of the business goes to the "Category King". This article discusses some of the basics of creating a Category; and then dominating it. Yellow Belt
It is clear to any business person that some businesses clearly own their Categories. What is less clear is how that came about and whether it is something that we can do with our own businesses.
A business that creates, develops and then dominates a Category is known as the Category King. The examples above are major international organisations, but, on Day One, they were not anything like what they are now.
It is entirely possible for any business to dominate a Category, if they choose a category not already taken. They can be very profitable if the category is sufficiently large.
Experience and research have shown that a Category King can have a 70-80% market share of that category's profits and market value. Because the Category King specialises in the problem that it is solving, it is difficult for competitors to dislodge them from this position in the category; unless they make a mistake.
There is no doubt that there is a strong element of luck in any business. But even when luck raises its head, if you are not ready and sufficiently skilled to take advantage of it, luck will pass you by.
The trick is to develop your company's ability to make decisions and implement strategy at a speed which allows you to take the best opportunity of any good luck that comes knocking on your door.
Sometimes a Category King comes about by luck; but much more likely it has come about by design.
Category Design involves creating:
- A great product.
- A great company to execute it.
- A great category to dominate.
It's a discipline that involves every part of the company and, in particular, its leadership team.
Many people think that the "first mover advantage", that tends to accrue to the first company in a category, means it is the first in the category that always succeeds. This is demonstrably not the case. There are many businesses that have started and been passed by others. Apple is famous for being late to the category; and then dominating it. How many people know that Microsoft Excel was built on the back of a company called VisiCalc that invented the spreadsheet as we know it. Unfortunately, it did not move fast enough to lock up its domination of the category and lost that right to Microsoft Excel.
Some of the original thinking about the concept of Categories was developed in the 1970's in a landmark book named "Positioning: The Battle for Your Mind" by Al Ries and Jack Trout. Many of the criteria that they established for positioning a business as the owner of a Category still apply.
When one considers the abundance of product and service choices available today, the decision on what to buy rapidly becomes overwhelming. It is tempting for a potential customer to simply go with the business that is most likely to satisfy what they need.
In turn, that business is likely to be the most dominant business in a Category.
Hence, there is a natural tendency for the Category King to keep growing as they become more and more well-known to potential customers.
There are also a few psychological aspects to why this is the case:
- The Anchoring Effect: This is the tendency for the first bit of information that we get to affect the rest of our perception of information that follows.
Example: consider when you receive the agenda for a meeting. That tends to colour your thinking about what the meeting is going to do and block out any, perhaps more productive, things that the meeting could be considering.
- Choice Supportive Bias: This is the tendency to give a positive quality to some product that we have already purchased. Simply because we have already purchased it and clearly we want to be thought of as making that smart initial decision.
- GroupThink Bias: This describes a tendency to believe things to be true because other people believe things to be true.
The most important thing for any business leader who wishes to create a Category in which their business can excel, is the need to change the way people think.
- Your product, your company's culture, your marketing and everything else that you do has to be aligned with transforming the way potential customers think about your business as the one to trade with.
- If you manage to change the way they think, they will change their buying behaviour.
If you are fortunate to be in an area where there is no existing competition, then you have clean and fertile fields to cultivate.
The psychological phenomenon we discussed above, means that once people have begun to engage with you, the natural tendency is to continue to engage with you until they are disappointed by something that you do.
These three activities:
- Product design
- Company design
- Category design
need to happen roughly simultaneously.
However, you may need to decide what the Category is going to be before building the product.
Having chosen the Category, the theory of starting new businesses and creating new products can go through the Lean Startup system. This includes Minimum Viable Products (MVP's).
Go to the article: How the Plan/Do/Check/Act (PDCA) Cycle Builds Important Routines to learn more about Lean Startup and MVP's.
Well-known business writers, like Jim Collins, talk about the "Flywheel Effect".
The Flywheel Effect means that you can start small with a slow moving Flywheel and gradually speed it up. Any Flywheel needs to have the above three characteristics developed simultaneously so that it does not "stall" in its rotation.
Go to the article: How the Profit Flywheel Accelerates Your Business
How to Discover a Category
In order to establish what your Category is and whether it is viable, you can ask yourself the following questions:
- Explain clearly what the problem is that you are trying to solve
- If your business solves this problem, what is the definition of the Category that you are in.
- If you win the majority of this Category, what is the potential Revenue so that you can determine if it is a worthwhile Category.
When you are looking around for a Category, try to work out what is "missing" in your world.
Your world might be literally the whole world, but it can also be your particular geographic location. Depending on the aspirations of your business, one particular town or city might be quite sufficiently large for you to be the dominant player in your Category.
Example: the best Tibetan restaurant in Sydney.
If you do create a successful Category, you might try to develop a business that you can scale out to other geographic regions so as to make the best advantage of what you have to offer. Say, a Tibetan restaurant chain around Australia.
If you are a "virtual" business, this is much more likely than if you are a business that requires a lot of physical infrastructure to operate, thereby making it more difficult to scale.
A second source of potential categories comes from "Technology Insights".
People might typically associate this with new digital technology but the same thing applies to other types of technology.
The first business to come up with environmentally sustainable clothing, for example, may own the category of "Sustainable Clothing".
By definition, the Category that you are thinking of starting must not already exist. If it does, it will already have a Category King who will be, again by definition, a formidable competitor.
Your challenge is to find an un-ploughed field, get in there before everyone else does and dominate that particular field.
Define Your Category
Experts suggest there are 11 different aspects to defining your Category that you should address in order to establish, initially, that the could Category exist and then to be sure that you get a comprehensive ring fence around it.
The 11 different facets of a good Category are:
- Vision or Mission:
What is the driving force behind starting your company.
What are you, as the business leader, passionately interested in.
This will lead to a Category in which you can also be passionately interested.
Develop a mental image of who will be using this product or service. You need to establish in your mind if this is a target customer that you would like to work with.
Are there sufficient of them within your service area to allow you to run a profitable organisation inside this Category?
- Problem Statement:
Clearly articulate what you think the problem is that your customers have.
This will then guide your choice of a solution that best services your customers' needs.
- Usage Cases:
Specifically, how will people use this product?
This will help you determine how you will deliver the product in a manner that most satisfies your target customers needs.
- The Product Solution:
Clearly articulate the technology and methodology behind the solution that you propose to offer.
Make sure that this has a potentially long life so that you will not be replaced by other, more advanced and sophisticated products, too soon in the future.
Are there many other businesses offering complimentary products to yours?
Is there some way that you can work with these other businesses, perhaps in a referral basis, to grow your business?
The larger the ecosystem of supporting business, the more the "Network Effects" there can be between businesses operating and the ecosystem.
In a well-designed Category, there will not be a significantly large competitor. However, there may be many competitors that operate on the fringes of your Category, and who could move into your
Category if they choose.
Ideally, you are looking for a Category that precludes them from moving in. This is not necessarily as hard as it seems.
Larger, longer established, businesses are often very slow to react and to change what they do. They have a tendency to be operating in the "Cash Cow" stage of their business's life cycle.
It is very hard for a "Cash Cow" business to move to the innovation phase of a business's life cycle.
There are any number of large organisations that haven't successfully changed. Microsoft, for example, despite being an extremely successful organisation, has not done well in the internet search arena (owned by Google) or the mobile phone arena (owned by Apple). It has come very late to the whole "Cloud" digital sphere; probably owned largely by Amazon.
Go to the article: Why Boston Consulting Group Growth Share Matrix Helps
- Business Model:
Your customers are presently used to a particular business model. You need to offer a better business model than what they are used to in order for them to come across.
However, it takes a while for people to get out of the rut that they are presently in and move across to your new model.
You need to work through how people will transition from what they are familiar with to your better model.
You need to be clear in your mind how the product will be marketed.
Not only are we talking about the Marketing Channels but also the "personality" that your organisation will take on.
Go to the article: How to Choose the Best Marketing Channels for Your Business
Having found your Category, you will need to consider how your business will be restructured to allow you to spin up in this Category.
If you are an existing business, it may be a challenge for your existing staff to get out of their particular "ruts" and start off down this Category.
For that reason, over the years, larger organisations that are in the "Cash Cow" stage of their life cycle have used what has become known as the "Skunk Works" model. They start up a new organisation to move into the new Category to operate quite independently of the business that is already a going concern.
- Finance Strategy:
Any new activity will require a financial investment well in advance of receiving back sufficient income to fund the operation.
You will need to make decisions about how much you invest in the new Category.
At one extreme, if you want to grow quickly, you might seek Venture Capital; albeit at the risk of losing a substantial share of your business to other shareholders.
At the more conservative end, 12Faces has a philosophy of "Sustainable Business Growth" that allows you to grow out the operation in a sustainable manner.
Go to the Learning Resources: Sustainable Business Success Learning Resources
Name your Category
In order to own a Category, that Category needs to be "named". People can then use the term in their general conversation and this helps mental recall.
You know that you are the Category King when the brand becomes synonymous with the Category.
- Think Xerox for photocopy.
- Think Google for search.
- Think Uber for on demand transportation among other examples.
People get used to saying that "I took an Uber" irrespective of what service they actually use.
Some experts argue that this dilutes your brand. It becomes a verb rather than a noun. However, it is hard to imagine that having someone talk about "I took an Uber" can damage the Uber brand. Especially when they are constantly repeating the brand name, irrespective whether they used Uber or not.
Imagine yourself at a business function and someone asks you what it is that you do. You should be able to respond with the Category name and have that name instantly conjure up in the mind of your listener what it is that you do.
Internally Promoting the Category
A newly created Category, by definition, didn't exist before. For you to become the Category King, you need to start to do several things:
- Your business has to change to fully embrace the full "Category space" so that there is no room for someone else to move in.
- This change will need to be driven by the Business Leader personally. The company needs to understand that this is a major strategic thrust.
- Because the Category does not exist in the customer's mind, your business will need to move formally to establish that Category and build "authority" in their mind.
As the Business Leader:
- Get the idea straight in your mind, then
- In the minds of your senior leaders and then
- In the minds of all staff in the business and finally
- Into customer's minds
You need a clearly written, short, description of how you propose to package up this Category for your business. Ideally, this write-up fits on no more than 1 page. Place in plastic sleeves and leave on everyone's desk while they fill their minds with this new strategy.
This one page Category Briefing should cover the following:
- The Category Landscape: the brief phrase that describes the Category and the geographic cover.
- The Category Ecosystem: all of the customers, competitors, suppliers, media and complimentary businesses that are part of the ecosystem for your Category. Who will need to be introduced or will need to be indoctrinated or repelled (if they are a competitor).
- The Category Journey: Customers are not presently familiar with your Category or using it. There will be steps involved in getting them to try your Category and ideally to become recurrent users. Even better if they become advocates of both the Category and your business as Category King. The steps in this journey should be outlined in the one page description.
- The Category's Name and Short Description.
- The Category's Reason for Existence: Why this Category is needed and how you would explain to a friend why this Category is important.
- Short Term Goals: Your staff may only be able to see ahead for about 12 months. You will also be unclear about what direction your efforts to open this Category will take and you do not want to commit to a long term strategy. It is far better to remain "agile" and modify your strategy according to events. However, it is also very wise to have a general destination in mind. For this reason we suggest a 12 month goal/destination and perhaps the first quarter's activities towards reaching that destination.
One of the increasingly common phenomenons in business is the impact of "Network Effects".
Consider Social Media: there have been several earlier versions of the presently successful Social Media. The ones that survive and thrive are the ones that get the most people interconnected.
- Think about a group of 2 people, there is 1 possible one-to-one connection.
- Now think about a group of 4 people, there are 12 possible one-to-one connections.
- Take a membership of several hundred, there is a vast number of one-to-one interactions that are possible.
The organisation that supplies these interaction possibilities the best, is the one that will grow.
These Networking Effects are likely to be important in establishing you as the Category King of your market segment.
Having decided what your Category will be, it now becomes a matter of executing that vision.
The execution process is far too detailed to expand in this article, but there are some well-established principles that you might keep in mind.
The first one is the phrase, "Getting the Right People on the Bus" by Jim Collins. You will need your entire organisation, working this Category, to be on-board. Depending on the nature of your business, you may need to spin off an entire new division to handle the Category, if your existing business is in the "Cash Cow" stage of its life cycle.
You will also find that many staff simply do not respond well to change. You may also find that some of the skill sets that you have will become redundant within your Category. Unfortunately, this may require redundancy or re-alignment.
You will need an entirely new Marketing Plan to implement the approach to your Category. This will require human resources to set it up and financial resources to execute. You need to be confident that you have both available to you or you start up in the new Category will keep hitting road bumps.
Some experts suggest that you need a galvanising event to focus your staff on the new Category. This can be the expectation of a "launch" where the public is introduced to the Category. The advantage of having a "launch" is that staff are focused on the things that need to be in place for the "launch" to be successful.
Examples of a "launch" would be:
- Opening a new physical premises
- Launching a new website.
You ideally have a "destination" in mind. Perhaps this is the goal you might have for the end of your first quarter in your roll-out road map.
Go to the Menu: Secrets to Staffing Your Business
The Diffusion of Innovation
Back in the 1940's, scientists wrote about the "Diffusion of Innovation". This showed that any new innovation, such as your Category, went through 4 stages of adoption with different types of customers.
Your plan will need to allow for these stages by adapting your marketing plans to whichever stage you are in.
Go to the Diffusion of Innovation article: Introducing the Diffusion of Innovation AKA Crossing the Chasm
Go to the Leaders Briefing: LB1 Innovate1000: Double Growth Through Innovation
The Nautilus Effect in your Category
As we often write about in our articles, you need to apply the Nautilus Effect to a successful mobilisation into a new Category.
Go to the article: How the Profit Flywheel Accelerates Your Business
This means that you roll your business out as quickly as you wish to take advantage of the market in your Category.
At one end of the spectrum, you could take on Venture Capital and grow very quickly.
At the other end of the spectrum you might stop growing at some point at which you feel "comfortable" and convert to a Cash Cow.
In the middle lies the12Faces Strategy of "Sustainable Business Growth". This allows you to grow the business according to your human and financial resources and your level of comfort and stress. This is called the Nautilus Effect (see link above).
A Category King has several potential directions of growth:
- Geographic: Expanding into other areas.
- Line Extension: Moving into complimentary products.
- Organic Growth in the Category: Simply growing the existing market share of the Category's product within whichever area you live. This can be by sheer competition with other people in the Category or by buying out direct competitors or complimentary businesses.
- Managing the Ecosystem: Many of the complimentary businesses in your ecosystem can feed you leads. In turn, if you can feed them back leads there is a complimentary and positive networking side. You can devote resources to better networking to grow your business.
Moving to Cash CowStatus
At some point, you may decide that "enough is enough" and move from Growing your business in the Category to harvesting Profit from that Category with a "Cash Cow Strategy".
This is a very normal process in the Life Cycle of businesses. If you decide to do this, it will need a considerable re-think on the way the business operates in the Category.
Go to the article: Living With a Cash Cow
You will also need to consider your personal orientation as a business leader. It may be that you have reached the point in your life when you can become a "Cash Cow" operator.
Alternatively, you may be a natural Growth leader. If you are a Growth leader in a "Cash Cow" company, you will be just as guilty as your staff of "embroidering".
In this instance, you might give thought to hiring a Manager specifically to run the "Cash Cow" element and keeping your hands off it. Perhaps develop a new Category where you can rinse and repeat your success as a Category King.
One of the original books on Categories is the book by Al Ries and Jack Trout - "Positioning: The Battle for Your Mind" (03/01/2001)
A more recent book on Categories is by Al Ramadan, Dave Peterson, Christopher Lochead and Kevin Maney - "Play Bigger: How Pirates, Dreamers and Innovators Create and Dominate Markets" (14/06/2016)
Richard Koch looks at Categories from his 80/20 perspective - "The Star Principle: How it Can Make You Rich" (1/5/2010) and "Simplify: How the Best Businesses in the World Succeed" (11/10/2016)
Books in the "Lean Start-up" genre will suggest excellent ways for a Start-up to spin up their operations.