01 Dec 1996
Laurel without Hardy? A Lesson for BusinessTopics:
This column, which first appeared in the August 18, 1996, edition of the New York Times, was adapted from Adam M. Brandenburger and Barry J. Nalebuff's new book, Co-opetition, published last summer by Doubleday.
To succeed in business you have to outsmart the competition, capture the market, make a killing, and then bury the competition, right? Well, half right. Competitors aren't the whole picture. Providing complementary products - or making sure they are available - is the other half of the game.
A complement to one product is any other product that makes the first one more, rather than less, attractive. Hardware and software are complements. So are hot dogs and mustard, cars and car loans, cable television and TV Guide, the Internet and high-capacity digital phone lines, catalogues and overnight delivery services - even red wine and dry cleaners, or Siskel and Ebert.
In new markets, paying attention to complements is a necessity. Without key complements, the market may never take off. In established markets, attending to complements has less dramatic but still valuable results. Here, complements most likely exist, but you can make your product more attractive by making the complements better, more plentiful, and less expensive.
Traditionally, business strategy has largely focused on competition - Coke versus Pepsi - and in the process underplayed complements. There hasn't even been a word to describe providers of complementary products. So we have created one: "complementor," the natural counterpart to "competitor."
Although you probably know your competitors, chances are you have thought less about your complementors. More to the point, do you know which complementors are missing? Even a great product can sit on the shelf until key complements are developed. You can't assume that the essential complements to your business are going to be there. And if they are missing, you can't assume that the market will solve the problem. You have to work with others to create them or create them yourself.
Companies involved in today's information revolution are prime candidates for this focus on complements. A new system of creating and sharing information is evolving, and it has many complementary parts. It is not enough to invent one part of the new system; you have to pay attention to all the parts at once.
Intel understands this idea and provides a lesson for every business. The company's engineers have done a brilliant job of developing increasingly powerful computer chips. But the chip is only part of a larger system, and most of us already have more processing power than we need to run our favorite applications. Thus, outpacing competing chipmakers is not enough: Intel must also engineer demand for its next-generation chips. So Intel is on the lookout for complementors: It has teamed up with MCI to provide more bandwidth for networks. It is working with others to develop interactive games on the World Wide Web.
Intel is even venturing outside its core business to ensure that essential complements get off the ground. As desktop videoconferencing takes off, so, too, will demand for Intel's newest chip, the Pentium Pro. That is why the company has invested more than $100 million in developing Proshare, a video-phone product.
The point of all these initiatives is to promote applications that push the limits of processing power. Upgrading to Intel's latest chip becomes a necessity, not a luxury.
There is a hundred-year-old analogue to Intel's strategy. At the turn of the century, the car was a technological revolution. But the value of a car - and hence the demand for one - was severely limited by the lack of many essential complementary products: roads, gas stations, mechanics, and more. The fledgling automakers did not leave the development of these markets to chance. For example, through the Lincoln Highway Association, they helped promote highway construction.
Some complements to the automobile already existed. One was loans - but here, too, carmakers took an active hand in making them more accessible and attractive. First General Motors and then Ford set up operations (GMAC and Ford Motor Credit) to make car loans directly to consumers and thereby fuel demand for their cars.
Entering a complementary business requires that companies do their accounting a little differently. You cannot measure the profitability of the two businesses independently, nor can you demand that each pay its own way. The right question to ask is whether you are maximizing the combined profitability of the two businesses. For example, subsidizing Proshare makes sense for Intel: increased sales of the Pentium Pro will more than make up for anything the company loses on Proshare.
Of course, it is possible to have a complementary business that makes money. Over the last decade Ford has earned more on car loans than on car sales. You can say that car loans help stimulate car sales, but you can also say that car sales help stimulate demand for car loans. The fact is, with complements, you cannot look at one part of the business in isolation. You have to look at the whole picture.
What businesses should you be in? With the fallout from the conglomerate era fresh in people's minds, the prevailing wisdom is not to expand beyond your core business. People say, "Stick to your knitting." But this mantra is too simplistic. It does no good to click your knitting needles if there is no demand for sweaters. You should get out of your rocking chair and prod the market.
Managing complements is a smarter way of doing business, and there are endless possibilities: Michelin tires and Michelin guides; Ikea and play areas; Hallmark cards and in-store reading glasses; bookstores and coffee bars. Identifying and assembling complements is often the best way to compete.
Adam Brandenburger is a professor in the Competition and Strategy unit at HBS. Barry Nalebuff is a professor at the Yale School of Management. Copyright © 1996 by The New York Times Co. Reprinted by permission.