Like an amoeba dividing in a petri dish, the marketplace can be viewed as an ever-expanding sea of categories. During my career as a management consultant with Deloitte, I experienced this Law of Division many times.
I joined Deloitte when the consulting profession, within the Big 4 (Big 8 at that time) Accounting and Consulting firms, was in its formulative stage. At that time, the consulting business was a single entity Live Sports.
Over time, we divided into Advisory Services, Implementation Services, and Quality Review Services. These various service categories further divided into Strategy, Operations, Organization, and Technology specialties. These categories divided again according to industry specialties such as Telecommunications, Technology, Financial Services, Healthcare, Consumer Product Goods, and so forth.
Another division occurred according to geography in terms of Emerging Markets and the Industrialized Regions; and then there was another layer of specialty in terms of the Americas, EMEA (Europe, Middle East and Americas), as well as APAC (Asia Pacific Countries) regions.
While at times these layers of granularity and focus were done for internal purposes, a majority of the time it was the marketplace valuing expertise according to these categories. Each step of the way, we would face new competitors and had to learn how to adapt to these new entrants to the consulting business.
Like the consulting business, the automobile industry started off as a single category. Three brands (Chevrolet, Ford, and Plymouth) dominated the market. The category then divided and today we have luxury cars, moderately priced cars, and inexpensive cars. We also have full-size cars, intermediates, and compacts. And we have sports cars, four-wheel-drive vehicles, RVs, SUVs, and minivans; another example of the ever-expanding sea of categories.
In the television industry, ABC, CBS, and NBC once accounted for 90 percent of the viewing audience. Now we have network, independent, cable, pay, and public television with both instore, interactive, and even IPTV networks (niche oriented programming streaming across the internet)… ever watch CNBC online? This programming is available on both my cable TV network and on my PC or laptop (at no charge).
Beer started the same way. Today we have imported and domestic beer; premium and popular-priced beers; light, draft, and dry beers; we even have non-alcoholic beer.
Each segment is a separate and distinct entity. Each segment has its own reason for existence. And each segment has its own leader which is rarely the same as the leader of the original category.
In the computing world, IBM is the leader in mainframes; HP in mid-range computers; Dell and Apple in laptops; and Sun, now a part of Oracle has been the leader in workstations.
Instead of understanding this concept of division, many corporate leaders hold the naïve belief that categories are combining. Synergy and its kissing cousin, the corporate alliance, are the buzzwords in the boardrooms around the planet.
We saw AOL and Time Warner combine to take advantage of the convergence of television, music, publishing, and computing. How did that work out?
Benefits from synergy, and mega mergers, are seldom realized. Categories are dividing, not combining, into a sea of niche categories (and this is well described by Chris Anderson in his book The Long Tail: Why the Future of Business is to Sell Less of More).
The riches are in the niches.
The way for the leader to maintain its dominance is to address each emerging category with a different brand name as General Motors did with Chevrolet, Pontiac, Oldsmobile, and Cadillac.
What keeps leaders from launching a different brand to cover a new category is the fear of what will happen to their existing brands. General Motors was slow to react to the super-premium category that Mercedes-Benz and BMW established. One reason was that a new brand on top of Cadillac would enrage GM’s Cadillac dealers.
Contrast this with an operating principle of Andy Grove, former CEO and Chairman of the Board of Intel, the world’s largest semiconductor chip maker and one of the world’s most admired companies, where “only the paranoid survive.” Essentially this principle drove Intel to cycles of survival and leadership based on an ability to cannibalize themselves and make the leap to cross the chasm into the next product area. They were continually dividing successful product areas into new categories generating wildly successful and profitable new markets and avoided joining others at the bottom of the high tech abyss.