Opportunity from Adjacency – Profit Zone and Blue Ocean 1 of 2

I coin the phrase “Opportunity from Adjacency” for the approach to innovative entrepreneurship using the industry value chain. Two such approaches are currently popular. The “Profit Zone” finds opportunity in adjacent links with financial analysis as the starting point. The “Blue Ocean “ finds opportunities in adjacent links with product-market analysis. This post will have one example for each. See the strategy authors and their books at the left margin.

For Profit Zone, we will use “cloud computing” as Google likes to call it or “virtualization” as VM (a leading, independent software supplier) labels it. From 1999, it has also been called data centers, software-as-utility and software-as-a-service (SAAS).

Cloud computing is the current battleground of the information hardware-cum-software wars. The trajectory of innovation can be roughly tabled as follows:

The table shows tht the main hardware component technologies have largely been developed by the 1980s. In the schema of Utterback (see Post #5), succeeding efforts in hardware were in the areas of cost reduction, integration, miniaturization, new combinations and the like. The battleground shifted to software.

In software, two adjacency trends can be seen. The first trend is use of software in relation to consumer use migrating from marketing Portal, through Search and through Social Media. The second trend is a business designed with operating systems and applications resident at the user’s computer (Microsoft from 1980s), to cloud computing. Sometime around 2008, cloud computing – where the business design has same systems residing in data centers from which users may access and buy like a utility – became mainstream.

Consumers of software can save a lot in operating expense and investment when theypay-per use in the “cloud” business desgin like the way we buy electricity today. Having individual computers to handle resident applications is inefficient because the actual utilization rate of both hardware and software is very low. Much like the savings from national logistics (Post #50 and #51), savings from cloud computing allows utility providers and users to profit at the same time. The Profit Zone approach finds the link with the most profit in a value chain. It recommends that players acquire profits by moving into that link just as it recommends for Google to own the cloud..

Google is at the forefront of the software-as-utility war using its edge in Search to try and get get customers to buy into the cloud. Microsoft has its profit legacy-driven from the sale of software resident in computers. It is working hard to defend this long-held turf but has hedged by acquiring part of Facebook. Google, the Search leader, has also hedged in the social media side by acquiring You Tube.

From my own experience today, I am almost evenly split between Search (Google) and Social Media (Facebook) in accessing the Internet. If cloud computing wins out, Microsoft could very well fully acquire Facebook and latch on a simpler version of its Office Suite for users to use and pay as utility. On the other hand, Google can add video search via You Tube to strengthen itself in social media even as it gears up on software as utility, too.

The battleground for the opposing adjacency strategies is set along the same value chain. It would be interesting to watch the fight and see which behemoth wins the big bucks.

(Click here for Part 2 of 2)