The Magnet Strategy
How do you continue growth at scale?
The larger a company grows, the more difficult it becomes for it to keep growing at the same rate. For example, it is easier to grow 20% per year for a $1B company than for a $100B company. What do you do when the market a company is serving gets saturated, i.e. the company achieves a dominant share and it becomes difficult to acquire new customers in that market because of increased customer acquisition cost? You can expand to other markets but that might require different products and different prices. And, there is the risk of affecting the company's brand in its current market. You can acquire other companies but there is a risk of cultural misalignment in integration. Hence, there are limited options to continue growth when you are very big.
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| The Magnet Strategy |
Digitization is making it easier for the dominant tech companies to expand into new markets currently served by old incumbents. I call it the Magnet Strategy because the tech company sizes are so big that they attract other businesses. Digitization, which is powering the Magnet Strategy, has the following impact on businesses:
Digitization => Better User Experience + Faster Product Development + Faster Customer Feedback + Faster Market Expansion + Cheaper Distribution + Cheaper Marketing + Cheaper Operations + Better Pricing + Better Customer Support + Better Decisions => Groundwork For Artificial Intelligence (if you are labeling the data correctly)
The Magnet Strategy attracts the following types of businesses where:
1. User Experience (UX) can be made better
2. Value chain inefficiencies exist (healthcare, banking, etc.)
3. Margins can be lowered and passed on to customers
It is hard for the incumbents to compete with a tech company pursuing the Magnet Strategy because:
1. Compared with what exists in the incumbent's industry, the Magnet Strategy produces a better product that consumers like more. Hence, the adoption of the new product is much faster. For example, in the US, Apple Pay offers much better and more secure UX than swiping and signing (or chip and signature) a credit credit.
2. The tech company with the Magnet Strategy can live with lower margins in the incumbent's industry and that puts the incumbents at a disadvantage because if they respond with lowering prices, their margins and income go down. The stock market does not like that. Hence, the incumbents try to put off response as long as they can. This is a classic disruption case where the incumbents get disrupted because of slow response to new technologies and new players (startups). For example, Blockbuster got disrupted by Netflix and streaming. In the Magnet Strategy case, the technologies are not new and the players are not new. For example, Apple Card does not charge late fee or international transaction fee and the offers lower interest rates than traditional credit cards. Their credit card margins compared with the incumbents will be lower. However, the credit card business grows their top line, makes the existing Apple customers happy, and still adds to the bottom line. What would the incumbents do to compete?
3. The tech company can make the targeted incumbent industry value chain more efficient by eliminating the middlemen, connecting disparate systems, or by predictive analytics. An example of an industry with disparate systems is the healthcare industry. All the health monitoring data from fitness devices like Apple Watch and Fitbit is not available to doctors. The doctor's diagnosis is event based i.e. when you see a doctor, the doctor decides in the moment what the diagnosis is. Imagine if the doctor has access to all your health monitoring data all the time. If a tech company can connect the personal health monitoring system with the hospital and the insurance systems then the industry can become prevention, notificication, early warning oriented.
4. For the tech company, the Magnet Strategy offers no market risk and no technology risk because the market exists and the technology works. The risk is mainly in execution and in government regulation.
It is hard for the incumbents to compete with a tech company pursuing the Magnet Strategy because:
1. Compared with what exists in the incumbent's industry, the Magnet Strategy produces a better product that consumers like more. Hence, the adoption of the new product is much faster. For example, in the US, Apple Pay offers much better and more secure UX than swiping and signing (or chip and signature) a credit credit.
2. The tech company with the Magnet Strategy can live with lower margins in the incumbent's industry and that puts the incumbents at a disadvantage because if they respond with lowering prices, their margins and income go down. The stock market does not like that. Hence, the incumbents try to put off response as long as they can. This is a classic disruption case where the incumbents get disrupted because of slow response to new technologies and new players (startups). For example, Blockbuster got disrupted by Netflix and streaming. In the Magnet Strategy case, the technologies are not new and the players are not new. For example, Apple Card does not charge late fee or international transaction fee and the offers lower interest rates than traditional credit cards. Their credit card margins compared with the incumbents will be lower. However, the credit card business grows their top line, makes the existing Apple customers happy, and still adds to the bottom line. What would the incumbents do to compete?
3. The tech company can make the targeted incumbent industry value chain more efficient by eliminating the middlemen, connecting disparate systems, or by predictive analytics. An example of an industry with disparate systems is the healthcare industry. All the health monitoring data from fitness devices like Apple Watch and Fitbit is not available to doctors. The doctor's diagnosis is event based i.e. when you see a doctor, the doctor decides in the moment what the diagnosis is. Imagine if the doctor has access to all your health monitoring data all the time. If a tech company can connect the personal health monitoring system with the hospital and the insurance systems then the industry can become prevention, notificication, early warning oriented.
4. For the tech company, the Magnet Strategy offers no market risk and no technology risk because the market exists and the technology works. The risk is mainly in execution and in government regulation.
In the past the tech companies, in startup stage (Apple being an exception), have successfully created new markets or disrupted existing markets. For example, Google created the search advertising market, Facebook created the social networking (feed advertising) market, Apple disrupted the Smartphone market, Amazon disrupted retail with ecommerce, etc. A large established tech company going into an established non-tech industry is something new. Companies with billions of users such as Apple, Google, Facebook, Tencent, Ant Financial, etc. are also new . The prime example of a U.S. company pursuing the Magnet Strategy is Apple.
Apple TV, Airpods, Apple Music, etc. are the result of the natural evolution of Apple. These products are serving existing customers with new tech to support and enhance the iPhone or they are creating new markets. Therefore it is worth noting that Apple's expansion into these categories is not part of the Magnet Strategy.
Apple is getting into consumer finance and healthcare which are both large and established industries. This is the execution of the Magnet Strategy. In consumer finance, Apple has two products: Apple Pay and Apple Card; both offer the best User Experience in the market. Apple Pay is already processing more payments than PayPal. On a side note, the idea of a tech company providing consumer finance services was pioneered by Alibaba, a Chinese company.
In healthcare, Apple has the Health App, the Research App, and the Apple Watch which acts as an overall health monitor. One hundred plus healthcare institutions are part of Apple's Health Records which is part of the health app. This basically allows you to access your health records from the Health App.
Google, who’s parent company is now called Alphabet, has Google Pay which is similar to Apple Pay. They recently announced plans to offer consumer banking services. Furthermore, Google has been working on healthcare with Project Nightingale and recently purchased Fitbit, a company that makes health monitors like Apple Watch. How exactly they want to monetize healthcare remains to be seen.
Google is trying many other things such as Waymo (self driving cars), Verily (healthcare research), etc. This is part of a corporate strategy where they make big bets and hope that one of these bets will become a big business. However, there is market risk in these ventures, for example, the mass market for autonomous cars may not happen for decades. So, I don’t see it as part of the Magnet Strategy where a company takes share from the existing players or expands the market.
Other examples of the Magnet Strategy are Facebook trying to enter into consumer finance with project libra and Amazon Advertising, which is already a multibillion dollar business. In this case, the magnet was so strong, because people see billions of page views per month on Amazon properties, that the advertising business got attracted very fast.
Tencent, a chinese company, is the best example of executing the Magnet Strategy. However, they are mainly serving the Chinese market so I am not as familiar with their products.
Companies becoming involved in multiple businesses that are not related to one another is not a new phenomena. These companies in multiple industries are called Conglomerates and have been around for a long time. I used to work for one, SIEMENS. The main idea was that if you are in industries with different economic cycles then you can produce consistent earnings. Another idea was synergies, i.e. cost reduction by putting different businesses together and hence generating higher investment returns from a business under a conglomerate than if the business was stand-alone. It did not work out as planned. Most conglomerates don’t exist anymore, many got rid of non-core businesses, and we have not seen a new conglomerate in the last fifty years. What is new is digitization which is connecting all types of businesses and enabling tech companies to get into new industries.
The Magnet Strategy may produce Conglomerates 2.0.
