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 / Summer 2006 / Issue 43(originally published by Booz & Company)


Complementary Genius

Profitable Amusements
The most obvious benefit that complementary innovations provide is an increase in sales for your main products. But there can be other important paybacks as well. As the Michelin Guides became more popular with motorists, for instance, they ended up serving as a powerful and proprietary channel for marketing and brand building. They not only encouraged the sale of more tires in general, but they also led buyers to Michelin tires in particular. In time, moreover, the guides became successful and lucrative in their own right — something the brothers probably never anticipated. Today, Michelin’s red and green guides are the bibles for travelers looking for smart lodgings, superb food, and spectacular sights all over the world.

In some cases, complementary innovations can bring operating as well as marketing benefits. At about the same time that the Michelin brothers were trying to pump up demand for tires in Europe, the operators of streetcar systems in U.S. cities were struggling with a different challenge: earning a decent return on their capital-intensive rail networks. Although many people traveled on the lines during weekday rush hours, commuting back and forth to work, few rode them at other times. The imbalance in demand undermined the profitability of the operators. They had to build their systems to accommodate the peaks in usage, but most of the time their expensive systems generated little revenue.

Realizing that they needed to boost ridership during nonpeak hours, the streetcar operators hit on a brilliant idea: Build amusement parks outside city centers. In the summer of 1897, for example, Boston’s Commonwealth Avenue Street Railway opened Norumbega Park, complete with a zoo, a theater, and a carousel, at the end of its line in the suburb of Newton. By 1901, according to historian David Nye, more than half of the country’s urban transit companies had opened such “trolley parks” — and they proved a great complement to streetcar service. They not only increased the lines’ passenger load during nights and weekends, but they enabled the companies to operate much more efficiently. Since at the time transit companies owned the electricity generators that powered their trains, they were able to significantly increase the capacity utilization of those power plants, making their businesses much more capital-efficient. And a side benefit would later emerge: The technological innovations required to build safe roller-coasters and other rides could be used to improve the rail lines themselves.

There’s another potential advantage as well. Smart innovations in complements can deal a blow to competitors. Look at what Intel did in the Wi-Fi networking market. At the end of the 1990s, the biggest producer of the semiconductors used for Wi-Fi connections in personal computers was a small company named Intersil. The rapidly growing popularity of Wi-Fi made Intersil a rival to Intel, threatening to weaken its control over the chipsets that run personal computers. In response, Intel introduced its own Wi-Fi chip — the Centrino — and offered it to PC manufacturers at a dirt-cheap price. According to press reports, Intel sold the Centrino for considerably less than it cost to produce it. The collapse in prices quickly destroyed Intersil’s business.

Why could Intel afford to sell the Centrino at a loss? Because Wi-Fi was a complement to its core microprocessor business. By helping to make Wi-Fi service cheap, Intel encouraged companies and individuals to buy portable laptop computers rather than traditional desktops — and Intel made far more profit by selling chipsets for laptops than for desktops. Because Wi-Fi was simply a complement for Intel, it was in the company’s interest to push the price down as far as possible. For Intersil, unfortunately, the Wi-Fi chip was not a mere complement but its core product.

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