A Playbook for Moving Down Market

cite>Posted on Innovation Insights: April 1, 2008 9:08 PM

My last post talked about Microsoft's predictable struggles to move down market into the Web-delivered application market. Predictable struggles must be solvable, right?

Indeed, some companies have successfully managed to make the down-market move. One good example is leading silicone provider Dow Corning. Earlier this decade, the company (a multibillion dollar joint venture between Dow Chemical and Corning that was formed in the 1940s) recognized that it was struggling to compete in the commodity end of its business. It formed a separate unit dubbed Xiameter to target that segment.

Xiameter developed a distinct business model. While Dow Corning prides itself on high-end service and customizable orders, Xiameter offers basic, standardized silicones that can be ordered over the Web at market-competitive prices.

Xiameter has been a blockbuster success. As we note in the introduction to The Innovator's Guide to Growth: "In six short months, Xiameter went from ideation to test market. Three months later it launched in full. Three months after that, Dow Corning's entire investment had been paid back. In a year, Dow Corning went from an idea to a successfully launched business."

Other examples of companies that have managed this move include Charles Schwab (online stock trading), Dayton Hudson (discount retailing), Teradyne (CMOS and Windows based semiconductor test equipment) and Cisco (Linksys routers).

While each example is unique, there is enough of a pattern to suggest that the down-market playbook has four critical elements:

1. Strong senior management involvement. Strong senior involvement ensures that the new venture gets appropriate resources and has the freedom to attack the core business if that tactic is necessary for long-term success. Teradyne co-founder Alex d'Arbeloff was heavily involved in that company's disruptive venture.

2. Start with a clean sheet. Anyone who has participated in cost reduction programs knows how hard it is to whittle down to a target. It is far easier to start from zero and build up to your target. The same is true of down-market moves: The best approach involves starting with a blank piece of paper.

3. Provide substantial organizational autonomy. Every organization has unique DNA. That DNA can subtly reshape even the most disruptive idea to look like what has been done before. Autonomy can allow a new venture to organize and act in ways that are appropriate for its target market. The separate unit Dayton Hudson set up to go after discount retailing—Target—ultimately became the retailer's core business.

4. Don't involve the usual suspects. The most successful managers in the core business might be the exact wrong managers for a down-market move. Outside perspectives can be a critical way to develop a compellingly differentiated offering. Alternatively, managers who "don't quite fit" can thrive in new environments. Dow Corning expressly staffed Xiameter with non-traditional resources. The project leader tested people's tolerance for risk by forcing them to decide whether or not to join the project on the spot.

Success with innovation is never a paint-by-the-numbers exercise, but following these four tips can help incumbent companies seeking to move down-market.

Are there other examples you can think of where an incumbent managed to move down-market? Did it follow the playbook detailed here?

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