Subcategories: The Best Path to Growth and Profits

While market expenditures in brand preference competition rarely move the needle, the successful creation of new categories and subcategories does. There are plenty of case studies in every industry. In the automobile industry, the Chrysler minivan went 16 years with a viable competitor and to date has sold over 12 million vehicles.

Enterprise Rent-A-Car arguably went 35 years with no competitors. Prius dominated the market for ten years and still has a 50 percent share. But there are also quantitative data to support the premise. McKinsey, analyzing a database of over 1,000 firms from fifteen industries over forty years, found that new entrants into the database achieved a higher shareholder return than their industry average for the first ten years after entry. That return premium was 13 percent the first year, falling to 3 percent in the fifth. Thus, since new firms are more likely to bring new business models than existing businesses, the implication is that those creating new categories or subcategories will earn superior profits.

“Since new firms are more likely to bring new business models than existing businesses, the implication is that those creating new categories or subcategories will earn superior profits.”

Another study of fifty venture capital firms found that six had abnormally high profitability. The common characteristic of these six was that they identified a prospective area of promise such as Internet-supporting technologies and seeded companies around the area. They were thus investing ahead of others that waited for the trend to become more visible and mature. As a result, a proportion of their investments was successful at creating new categories or subcategories earlier than competitors and often enjoyed first-mover advantages.

More direct evidence comes from a study that considered strategic decisions within a firm. In their Blue Oceana book, Kim and Mauborgne looked at 150 strategic moves spanning a century. The 14 percent that was categorized as creating new categories had 38 percent of the revenues and 61 percent of the profits of the group. New product research suggests that new offerings creating new subcategories receive abnormally high profits. Dozens of studies have shown that new product success is substantially driven by differentiation—it must be one of the most robust empirical relationships in business.