Looking at your Target Market through a Different lens

I recently attended Communitech's Tech Leadership Conference 2010 to hear Clayton Christensen, author of Innovator's Dilemma speak and have been applying his principle to a client's business. Christensen argues that new technologies will disrupt and defeat existing companies when they enter the market and fulfill demand by either serving a market that is currently over-served by existing products or by fulfill demand in a market of non-consumption.

Consider Christensen's examples of both the North American steel and automotive marketing in the 1970's which were disrupted by new entrants. In the case of steel, the large Integrated Steel Manufacturers were challenged by the Mini-Mills with their electric furnace technology which could produce steel at 80% of the cost of the large integrated players. In automotive, the Japanese (Toyota, Datsun, Honda) entered the market in the under-served sub-compact and compact market. In both cases, the new entrant used lower price, lower quality, less feature rich products to gain their footholds.  By entering into low margin business areas, the new entrants discouraged the established vendors from competing against them because to do so would diluted the established players overall margins. Over time, as the new entrants became established, improved quality and built their Brand, they moved up market to consume more of the established players' turf. Today, Mini-mills own a 60% market share of steel production, while Toyota, Datsun, Honda and others that have followed now dominate at all levels of the North American auto market.

So what does this mean to a small tech company?  Recently, one of my clients was considering a "Buy versus Make" decision. They need to expand their offering into an adjacent space. To do so, they could acquire a product already in the space; partner and license the technology; or build it themselves. Due diligence showed that to acquire or license the product would require significant development effort and that they would not be able to launch their new product until mid-2011. Building from scratch had a similar timeline and cost. As a result, both alternatives seemed equal from a cost and go to market timing stand point  except the "build" decision would only have 50% of the features of the acquired product alternative, but would have the advantage of being built on their architecture platform.

Using Christensen's principles of "Over-Serviced" or "Non-Consuming" markets, we looked at the market or prospects that they were targeting. Their current customer base is mid-market sized organizations that are not yet adopting the existing solutions that they considered acquiring or licencing, often because the product is too expensive, too feature rich, and therefore,  too complex for them to operationalize and receive enough benefits to justify the expense. These mid market customers recognize their future need for this technology but cannot justify the project today. For my client to acquire a feature rich, established solution, as part of their product portfolio would not benefit this market and in fact, building a new product with only 50% functional richness, will actually be a benefit versus liability. By producing a 5 year vision for the new product and a year-by-year product feature roadmap, any objections to less initial functional capabilities can be quickly handled.

For my client, the decision became obvious. Build a new, less feature rich product, and sell it into their existing customer base and new prospects of similar size and characteristics. Over time, deliver enhancements based on the product vision and roadmap and move up market to challenge other competitors from a position on strength.