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


Complementary Genius

The role of complements as competitive weapons, in fact, explains a good deal of the recent innovation in the computer business. Take open source software. In today’s information economy, software is a complement to many other products, from computer hardware to consulting services. Many companies thus have an economic incentive to make software as cheap and freely available as possible.

IBM, for example, realized a few years ago that the open source operating system Linux could be a complement to its lucrative IT services business — after all, users of Linux would need trusted partners to provide advice and maintenance — as well as its server, storage, and related software lines. At the same time, IBM saw that if it promoted the adoption of Linux, it would hurt competitors like Microsoft and Sun Microsystems, which had major businesses selling the operating systems that would be displaced by Linux. In 2001, IBM shocked the information technology world by proclaiming that it would invest a billion dollars in Linux innovation. A year later, it announced that it had already earned back the investment through higher sales of its core services and products. More recently, the application-software giant SAP made a similar move, promoting the adoption of the open source MySQL database as a way to steer its customers away from the database software sold by Oracle, SAP’s fiercest competitor.

Innovation in complements lies at the heart of Google’s strategy. Because Google makes its money by selling Internet advertising, anything that promotes people’s use of the Internet — from software applications to online auctions to telephone service — is simply a complement to its ad business. It’s in Google’s interest, therefore, to develop and give away as many of those products as possible, or at least to keep their prices low. That’s exactly what it’s been doing — and why this upstart has struck fear in the hearts of companies as diverse as eBay, Microsoft, Verizon, and Time Warner.

There’s a risk in what Google is doing, though. It’s possible to take the free-complements strategy too far. After all, giving products and services away can require big investments, and if you end up spending more than you take in, you will undermine your own profits as well as those of your competitors. Google’s high-flying stock fell sharply last February when the company announced that its costs had been increasing more rapidly than investors had expected. As with much else in business, innovating in complements requires a careful balancing act between costs and benefits.

Five Good Questions
So how do you uncover and evaluate innovation opportunities in complements? Here are five questions that can guide your thinking and help you set priorities.

1. What complements are currently constraining demand in our markets? Examine all the products and services that are used in conjunction with your own goods. Are any of the complements in short supply? Are any expensive? Are any difficult for customers to find and use? It may be possible for your company to spur advances in the production or distribution of complements in order to make them cheaper and more plentiful. The opportunities might involve the kind of direct investment that Intel made in Wi-Fi technology. But there may be cheaper options as well. You might use creative marketing programs to raise awareness of new or alternative suppliers of complements, thus promoting the kind of competition that will drive prices down. An automaker might, for instance, partner with a new hotel chain to provide discounts to anyone who arrives at the hotel in one of its cars.

2. What new product might boost demand for our core offerings? There may be opportunities to launch new complements that will expand the market for your core offerings — as the streetcar companies did when they pioneered the amusement park or as Michelin did with its Guide. A provider of cellular telephone service could work with retail chains to launch a text-messaging service that provides subscribers with customized “telecoupons” for use at local stores. The key here is to think beyond the current ways that customers use your products to see if new complements might spur new uses. Ask yourself if there are other contexts in which your products or services could be used. At best, this kind of brainstorming may lead to new products or services that become profitable businesses in their own right. It may also produce ideas for how you might reconfigure or reposition your existing offerings to be attractive to different sorts of customers.

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