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Complements can pay

Complements can pay

Innovative decision-makers are challenging the conventional wisdom that it's foolish to stray from a core business into associated offshoots and events.

Talks by writers, artists and thinkers are now common. But 17 years ago, bookseller Dymocks broke ground by hosting lunches and wine-and-cheese evenings fronted by popular authors spruiking their newest release. Their initial appeal has endured, with each event today attracting between 300 and 1000 fans, according to Dymocks chief executive Don Grover. Literary events are an example of what economists call a "complement" to books: The more literary events people attend, the more books they tend to buy. Grover agrees this link is behind the Dymocks program. "It is absolutely a commercially sensible thing to do," he says. Discount chains such as Kmart and Target will always offer bestsellers at a lower price, so literary events help to build a class of book buyer who values the wider range available at Dymocks.

For the author of the influential Does IT Matter? Information Technology and the Corrosion of Competitive Advantage, Nicholas Carr, innovation in complements is an important exception to the conventional wisdom that organisations should stick to their core business. "While it's important for innovation to be disciplined, focused on earning a return on investment and gaining a competitive advantage, there's a danger in narrowing your sights too much," the former executive editor of the Harvard Business Review wrote recently. "Most products exist in an ecosystem of complementary products and services, each of which influences the others' sales and prices."

Perhaps the most famous attempt to create such an ecosystem was by French tyre company Michelin. At the turn of the last century, Andre and Edouard Michelin started making tyres for cars. But the few cars around at the time were infrequently on the road. So the brothers decided to a publish a guide to petrol stations, hotels, restaurants and other roadside amenities to encourage more frequent driving and, consequently, the replacing of tyres.

To this day, the Michelin Red Guide to hotels and restaurants helps to increase tyre sales around the world. Importantly, by providing a proprietary channel for marketing, it increases sales of Michelin tyres in particular. In the same way, Dymocks' events, with the aid of its booklover loyalty program, encourage book sales at Dymocks stores.

The more contemporary example of IBM highlights another benefit of complementary innovation: Wrong-footing competitors. The information technology giant used to be known for tethering companies to its own closed systems. That is why IBM's decision in 2001 to invest more than $US1 billion in Linux surprised everyone.

Developed mostly by volunteers, and free to use, the open-source Linux operating system is the antithesis to the old IBM business model. Yet it marries perfectly with customers' business models, IBM Australia's Richard Dowling notes. In a fast-paced business environment, customers prefer the flexibility of an open-source system to being locked in to a single supplier.

Besides, IBM realised early on it could do a brisk business helping clients knit Linux together with other systems and applications. (The company claims to have recouped its Linux investment within a single year.) And while Dowling, from IBM's software division, is too polite to say so, boosting Linux harms rivals Microsoft and Sun Microsystems, which have stuck with closed operating systems.

Still, business theorists and analysts have good reason to implore organisations to keep to what they know: For every Dymocks, Michelin or IBM, there is a complementary innovation that has gone wrong.

Consider C7, Seven Network's failed attempt set up a pay-television platform and create a new outlet for its core sports content. While the network blamed a conspiracy led by rival pay-TV operator Foxtel for its demise, a Federal Court judge found recently that Channel Seven was simply outmanoeuvred by superior deal-makers in losing crucial rights to broadcast Australian Football League games in 2000.

The demise of C7 is an illustration of what one business theorist, Professor Grahame Dowling, believes is a general risk with all complementary innovation: Ending up out of your depth. Dowling, a marketing expert at the Australian Graduate School of Management, says it is tempting for big companies to push established brands into new markets. "With a strong brand name, it is easy to win in the short-term. The danger is that over the longer term, you begin to erode the equity in that brand. The bigger the footprint in the marketplace, the bigger the chance of upsetting somebody."

Dowling says it is also important that organisations don't use complements to make up for underlying weaknesses in their main business. He points to the big four banks, among the pioneers of corporate social responsibility in Australia. If their hope was to ease customers' suspicions about doing more business with them, the effect, as evidenced by their declining popularity, has been to deepen them. Corporate social responsibility simply doesn't address the source of those suspicions - that is, ever-rising bank fees, argues Dowling.

If complementary innovation poses risks for individual companies, it can also, under certain circumstances, stifle innovation more broadly.

One of those circumstances is where a company's main product is generating so much profit it can afford to give away complementary ones. According to Carr, this is exactly what Google is doing with its free online applications such as Gmail and Blogger.

"Basically, anything that anybody does online is a complement to Google's main business of selling advertisements," Carr notes. Consequently, Google is busy acquiring fee-charging sites and making them free at a rate of almost one a week.

While this can provide a lucrative exit for the founders of these sites and their investors, Carr fears the longer-term consequences. "As soon as big companies move in and give away a particular product or service for free, there's not much incentive for entrepreneurs to innovate in that particular area any more because there's no clear way they're going to make money," he says.

Yet finding new ways to make money is where businesses should focus their innovation effort, according to IBM research. Comparing the financial performance of respondents to its 2006 survey of global chief executives with particular types of innovation, IBM found that firms that emphasise business model innovation have increased their operating margins faster than those prioritising innovation in products, services or operations.

It is a message Dymocks' Don Grover has heeded He accepts the retailer will need to offer digital, as well as physical, books to meet the expectations of future generations. But unresolved issues with formats (there are a multitude) and devices (no iPod-equivalent for reading) hold digital books back from the mainstream.

So, just as the bookseller did with literary events almost two decades ago, Dymocks is working on a format solution of its own. Grover expects to announce the results of this latest complementary innovation before the end of the year.

Five questions to unlock innovation opportunity

Business writer and former Harvard Business Review executive editor Nicholas Carr lists five questions that should be asked to uncover complementary opportunities for innovation outside a core business.

1. What complements are constraining demand in our markets?

2. What new product might boost demand for our core product or service offerings?

3. Would our customers buy more if they had better information about the use and availability of complements?

4. Would we learn valuable lessons for our core business - whether in operations, marketing, or other functions - by innovating in complements?

5. Do we have competitors whose fortunes are tightly tied to the price of a complement?

BRW

© Fairfax Business Media

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Tags innovationchange managementNicholas Carr

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