A wave of deals—SBC and AT&T, Procter & Gamble and Gillette, MCI and Verizon or possibly Qwest—has companies keeping a watchful eye on their closest competitors. But there's another threat lurking out there: the unknown competitor out to eat your lunch.
McDonald's, for example, never regarded Campbell's Soup as competition until the latter, thinking outside the can, began to sell ready-to-serve soups at places like 7-Eleven, aiming for the same on-the-go customers as the fast-food behemoth. This kind of surprise attack, known to strategists as "cross-category competition," is sometimes so unexpected it seems to verge on the oxymoronic.
Take Gillette's assault on the fresh-breath market. The company had avoided this category altogether until it recently introduced Brush-Ups. This product allows users to discreetly wipe their teeth clean of bacteria, while also delivering, the company promises, a "burst of mint flavor." And, to make sure everyone knows who is under attack, Gillette's product launch asserted that Brush-Ups are superior to breath mints and gum, which "only mask breath odor."
In another example of competition coming from out of the blue, candy companies have learned that they are competing with mobile phones, of all things. One confectionary firm's probe discovered that European teens were using their pocket money for text messaging, at the expense of candy bars.
Such free-for-all segmentation will only accelerate, according to our research, which looked at consumer and business trends over the next 15 years. We interviewed 80 retail and consumer goods companies and did case studies of categories and companies in the five largest consumer sectors in the U.S., U.K., France, Germany, Italy, China and Australia.
The inevitable result is that companies will have to introduce new and different goods and services faster than ever. Becoming more dexterous at picking up customer trends and innovating products and experiences to meet new needs and desires, may be the best preparation for cross-category competition. A CEO in 1974 would have expected new products or categories to account for roughly 15% of sales by 1984. Today's CEO can expect new products or categories to constitute roughly 30% of sales in a decade.
How can companies increase their innovation agility? Smaller firms often can point the way. For example, John Fluevog, a Vancouver-based shoemaker, has devised a creative but simple system for generating successful new offerings by rapidly mining ideas from its customer base. Fluevog urges customers to submit designs for shoes they'd actually like to wear. It then rates these ideas in Web-based polls. Out of 2,000 suggestions, six were quickly produced, and sold briskly.
Like Fluevog, companies that want to prepare for the new competitive reality should get closer to consumers to glean more and better ideas for meaningful innovation and engage them more closely with their brand. This means looking for ideas beyond the usual sources and seeking insight from industries like telecom and financial services, which have been talking to their end users for decades. That's how credit card firms, for example, learned that card rejections at restaurants and store counters were their problem (the No. 1 root cause of a cardholder defections), not their merchants'.
Some companies are on the right track: Kimberly-Clark, known for Kleenex and Huggies diapers, is investing in customer relationship management systems that gather information not just on their retail chain customers but also on retailers' own customers, their consumers. For example, it created its Huggies Supreme diapers—the first disposable entirely covered with stretch plastic-based on feedback from moms.
P&G, which estimates that its own pace of innovation has doubled in the past decade, is looking outside its walls to capture ideas. Using a technique known as "open-market innovation," it stages innovation fairs to trade ideas across its business units and proactively seeks and acquires ideas on the outside, from inventors, vendors, customers, even competitors. For example, it purchased rights to the hit SpinBrush electric toothbrush from solo inventor John Osher in 2001, and even teamed with rival Clorox to produce a plastic wrap, Glad Press 'n Seal, which has knocked S.C. Johnson's Saran Wrap out of first place in domestic sales of food wrap.
Engineers at Intuit, the maker of Quicken financial software, visit users in their homes to see what kind of financial systems people build for themselves. This led the company to create the QuickBooks accounting system for home-based entrepreneurs. Indeed, field studies are so important to Intuit that a few years back it started leaving tape recorders behind so that customers could make suggestions without an engineer being there. Today, this is done online.
Such deep, almost anthropological observation of customer behavior, along with constant customer feedback, helps companies to spot new customer needs and trends early in the game. Cross-category substitutes-such as the fact that Starbucks' wireless "hot spots" are actually causing its coffee shops to compete with high-speed cable providers—won't cease to surprise the unwary. To defend territory, companies will need to be alert. Industry consolidation may make the devil you know easier to spot, but other competitors can come out of nowhere-even thin air.
Allen, based in London, co-directs Bain & Co.'s global strategy practice. Gruver, based in Boston, is a leader in Bain's North American consumer products practice. Contact: kara. email@example.com and firstname.lastname@example.org.