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Published: May 30, 2006

 
 

Complementary Genius

Sometimes “sticking to your knitting” is exactly the wrong way to build your business.

Illustration by Lars Leetaru
What were André and Edouard Michelin thinking? In 1900, shortly after the two brothers took control of their family’s venerable rubber business in Clermont-Ferrand, France, they suddenly decided to publish a guidebook for tourists. Their Michelin Guide provided information on gas stations, hotels, restaurants, and roadside attractions along with various maps and driving tips. The brothers printed 35,000 copies of the first edition — and gave them away free.

According to our contemporary notions of business logic, the move seems hard to justify. After all, book publishing has little to do with rubber processing. Management gurus, if they had existed then, might have chided the brothers for losing sight of their “core business” and expanding beyond the scope of their “organizational capabilities.” They might even have used the story as a case study on why family businesses should bring in professional managers.

But the diversification turned out to be an act of genius. The brothers had already realized that they needed to shift their company’s focus from the production of rubber, a basic commodity, to the production of rubber products — goods that they might be able to differentiate in the marketplace and sell at a premium price. They started by launching a line of pneumatic bicycle tires, which quickly became popular. As the turn of the century approached, they realized that car tires might turn out to be an even more lucrative extension of their traditional rubber business.

There was just one problem: Automobiles were still rare and exotic products. They tended to be purchased by a fairly small set of well-heeled thrill-seekers, who drove them only occasionally. Before the Michelin Group could make a go of the car-tire business, more people would have to start buying cars and they’d need to drive their vehicles more frequently. That’s where the Michelin Guide came in. The brothers saw that by giving motorists a practical, problem-solving handbook for traveling by road, they’d encourage the sale and use of automobiles — and in turn boost their company’s nascent tire business.

Tourist guides and automobile tires are what economists today call “complements.” Simply put, complements are products that tend to be consumed together. Think of movies and popcorn, or plywood and nails, or personal computers and digital cameras. Economically, complements have an interesting symbiotic relationship. If you expand the supply or reduce the price of one product, demand for its complements tends to go up. Cut the cost of electricity, and you’ll increase sales of vacuum cleaners and washing machines. Make it easier for motorists to find a decent hotel room, and they’ll take longer trips in their cars and, in turn, replace their tires more frequently.

Innovation in complements is an important exception to the commonly heard command to “focus on the core.” Sticking to your knitting has become a popular rule for good reason, but as the Michelin brothers’ experience shows, it’s not ironclad. Although 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. Most products exist in an ecosystem of complementary goods and services, each of which influences the others’ sales and prices. A ski manufacturer, for example, would benefit from the opening of a new ski resort. The resort would profit from a reduction in the price of skis. Both would gain from the introduction of more efficient ski lifts or snowmaking equipment. And all the players in the industry would likely get a boost from a new textile that makes parkas lighter and warmer or from the expansion of an airport near the resort. By studying the dynamics of your own company’s product and service ecosystem, you may discover fruitful opportunities to be creative not only in your core product but in its complements as well.

 
 
 
 
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