The Category Design Scorecard

What type of company are you?

Dear Friend, Subscriber, and fellow Category Pirate,

In a previous letter, we wrote how category design is the strategy for dealing with the  “winner take all” reality that has taken hold in business. 

We also shared the discovery that only 19 percent of Fortune’s 100 fast-growing companies are category designers. And yet, they captured 51 percent (of the prior three years cumulative) of the revenue growth, and 80 percent (of the prior three years cumulative) of the market capitalization.

But how do you know when you’re looking at a category creator versus just another high-growth company fighting tooth and nail for market share in an existing category?

The Category Design Scorecard will tell you.

We created this scorecard after reviewing companies from the Fortune 100 Fastest-Growing Companies list and analyzing their 10Ks, Annual Reports, Investor Presentations, and Investor Relations websites. 

Companies were scored in five key areas on a 0 to 2 scale: 0 being the company does not successfully accomplish each area’s goal, 1 being the company partially accomplishes the goal, and 2 being the company successfully accomplishes the goal.

  1. (Area 1) Category POV: Does the company have a clear “Point of View” of their category? Are they able to frame a powerful problem, articulate a compelling vision, and most importantly, communicate the core compromises, trade-offs, and problems inherent to the way the category is today, such that the consumer/customer will be open to a new and different approach. It’s important to note this should not be expressed as the “challenges” unique to a brand or company, but rather a fundamental problem to the entire category itself that consumers have typically and unnecessarily accepted as a given.

  1. (Area 2) Future Category Reimagined & Without Compromise: Does the company cast a compelling future—free of these fundamental problems, compromises, and trade-offs inherent to the category? Are they able to explain what the category looks like in its true glory where the customer/consumer is transformed, partners are proud participants, and the company generates an abundance and surplus of benefits: rational, emotional, aspirational, as well as financial?

  1. (Area 3) Radically Different Offer + Business Model: How does this new category get delivered to the customer, both through a breakthrough product/service/offer, but also through a breakthrough business model? How does product innovation and business model innovation come together in a way where 1 + 1 = 11?

  1. (Area 4) Data Flywheel: Does the company generate data about customer/consumer demand/preferences (be it intentional or as a side effect) that creates a unique opportunity and advantage to anticipate the future of consumer demand and any category shifts? Does this Data Flywheel provide insight into not only how to improve company offerings, but predict where demand for this new category will unfold next?

  1. (Area 5) Depth & Degree of Customer Outcomes: Does the company generate satisfied/ecstatic customers/consumers? Are they so happy and satisfied they gladly evangelize the product/service to others? Or, even better, do customers want to tell their own stories of radical transformational outcomes—where the customer’s life is truly different after engaging with the company?

Using The Category Creation Scorecard, companies on the Fortune 100 Fastest Growing list fell into three (3) groups.

  • 60% of companies on the list scored 0 to 2, and were much more focused on “beating the competition” than innovating or creating something entirely new. These “compete to win” companies fight for existing market share.

  • 20% of the companies scored 3 to 5, and were more focused on “being the best” within an existing category—not “being the leader” of a new category. 

  • The final 20% of the companies scored 6 to 10, and were companies clearly trying to design/create a new and meaningfully different category.

What was striking to discover, however, was the three-year stock price growth for each of these three types of companies. 

“Be The Winner” companies (0 to 2) saw 21 percent growth. “Be The Best” companies (3 to 5) saw 31 percent growth. 

Meanwhile, “Be Different” companies (6 to 10) saw 49 percent growth. Revenue growth was roughly the same across all three buckets of companies, meaning category creators weren’t growing faster per se—but each dollar of revenue generated for category creators was far more valuable.

This is a powerful indication that investors pay for category potential. They understand the company who designs the category is best positioned to dominate it. 

After all, it’s the promise of future growth that makes a company valuable, not past performance. 

NET-NET, COMPANIES TEND TO CLUSTER INTO 3 BUCKETS

  • “Be The Winner”

  • “Be The Best”

  • “Be Different”

Once you understand the qualities of these three types of companies, you will see them everywhere. Their marketing will ring loud and true—because they announce themselves to the world exactly as they are.

“Be The Winner”: Scores 0-2

Xerox. Delta Airlines. Ford. Verizon. 

These are companies that believe strategy = competition. 

These Market Share Maniacs have no goal other than to beat their competitors and be the #1 market share leader, believing things like “brand equity” will be the reason why customers pick their products off the shelf.

They play a comparison game.

Financials aside, you can usually tell which companies are playing the “Be The Winner” game because they use words like most-trusted, longest-standing, customer-favorite, award-winning, etc. Whether “Be The Winner” companies realize it or not, these words signal to customers the unchanged nature of their category—and hope, using status, to convince them not to switch to a next-best alternative/competitor. 

As a consequence, their scorecard looks as follows:

  • Category POV/Problem = 0. They don’t see anything wrong with the category and would rather not change.

  • Future category reimagined = 0. Again, nothing to change, so no reason to educate customers on a different future.

  • Radically different offer and business model = 0-2. This is likely the only place these companies score. They tend to have a great product, maybe a great business model, or even both. But they have no ambitions beyond this particular area.

  • Data Flywheel = 0. No need to anticipate future category and/or customer behavior shifts because the overwhelming belief is “the world tomorrow will be the same as it is today.”

  • Depth & Degree of customer outcomes = 0. Again, the customer is not what they care about. They care about maximizing returns for investors based on their position in the category today.

“Be The Best”: Scores 3-5

In 1997, TIME Magazine named Andy Grove, the CEO of Intel at the time, TIME’s Man of the Year. When Andy Grove passed away in 2016, TIME Magazine said, “He is remembered as a pioneer of the digital age, a savior of Intel and a champion of the semiconductor revolution.” 

Andy Grove made Intel so dominant, the company faced anti-trust lawsuits. That’s how you know you’re dominating your category! From 1990 all the way through 2009, lawsuits rained from the sky from the US District Court of Northern Texas to the United States’ FTC to Japan’s Fair Trade Commission, and the European equivalent. 

Intel and Microsoft were known as the ‘Wintel’ cartel. 

Fast forward to 2021, and Intel just replaced its CEO with its 3rd CEO in 3 years. Intel trades at a 3x market cap to sales multiple, while Nvidia trades at 25x. Apple just announced it was switching to its own M1 chips. Tesla makes its own chips for its self-driving software. 

Intel isn’t Andy Grove’s Intel anymore.

So, what happened? 

Category neglect was a big part of the problem, which is a topic we will get into in a future newsletter (e.g., How Category Kings and Queens lose their way). And perhaps category neglect was the reason why Intel whiffed on mobile, the cloud and gaming. Perhaps Intel never really built their Category Creation Flywheel. Perhaps Intel neglected to innovate its business model and data flywheel in the same way they innovated their products. 

Perhaps having the best products is not enough.

“Be The Best” companies want to be seen in the market as having the best product or the best technology. They are innovation and R&D focused, but almost exclusively through the lens of having the best tech/R&D/product for the sake of being able to win the “Be The Best” debate out in the market. 

You can spot these companies from a mile away because they literally say, “The best, fastest, cheapest, smartest…” before describing what they do or how they do it. 

The difference between “Be The Best” and “Be The Winner” companies is “Be The Winner” businesses are myopically focused on market share ownership, whereas “Be The Best” businesses care more about dominating one specific area or niche within the total market, usually centered around a specific use case, tool, or feature. 

For example, in the CRM market, a “Be The Best” company would aim to be “The smartest, most intuitive” CRM app, or “The cheapest, most accessible” CRM platform—and make product and marketing decisions around maintaining and defending their position.

Silicon Valley dogma says, “The best product always wins.” 

Sure, but for how long?

While these types of companies may achieve success in the short term, they only maintain their leadership position as long as they remain “The Best” in an unchanged category—meaning their winning position is dependent upon someone else not designing a different future. And at some point, a competitor (often a startup) will release a new, better, faster, cheaper carbadingulator. 

We call these “Be The Best” companies Incremental Improvers because their scorecard looks like this:

  • Category POV/Problem = 1. These companies articulate the category problem as having outdated technology/products, but they don’t think about it from a customer/consumer standpoint.

  • Future category reimagined = 1. Their vision of the future is myopically about a “better mousetrap” in an existing category opposed to creating a different category of product altogether.

  • Radically different offer and business model = 1-2. Similar to “Be The Winner” companies, “Be The Best” companies tend to score well here. Primarily because both “Be The Winner” and “Be The Best” are focused on beating the competition to squeeze as many rewards as possible out of an already established category.

  • Data Flywheel = 0-1. They may have a Data Flywheel, but almost always as a means of improving the technology—not seeing where the category as a whole is headed.

  • Depth & Degree of customer outcomes = 0. Again, the customer is not what they about. They care about maximizing returns for investors based on their position in the category today.

“Be Different”: Scores 6-10 

Tesla. Amazon. Netflix. Apple. Spotify. Airbnb. Picasso.

These are the true category designers—the companies that end up writing or rewriting the rules of the game and driving all the “Be The Winner” and “Be The Best” companies either out of business or out of relevance. 

The biggest difference between these types of companies and everyone else is the fact they are in the business of creating new things, not competing over old things. For example, Airbnb didn’t “disrupt” hotels (which would imply their #1 goal was to “take away” opportunity from Hilton or Marriott). Instead, Airbnb created home-sharing, meaning their #1 goal and mission was to “create” opportunity—and provide a different solution to a new and different problem.

“Be Different” companies care deeply about the category POV/problem and are committed to creating a different future. 

For example, on a recent podcast with Christopher, Gloria Hwang, founder of Thousand Helmets went so far as to say they are not competing with other helmet makers. They want to increase the number of people who wear helmets.

This might sound like a small, even trivial difference. But it’s not. If you think about how “much better” your product is, or where you rank compared to your competition, that becomes your point of reference. But if you think about getting more people to wear helmets, you’re solving a different problem—and playing a completely different game.

“Be Different” companies care so deeply about scorecard areas 3, 4, and 5—areas “Be The Winner” and “Be The Best” companies rarely prioritize.

As a result, their scorecards look like this:

  • Category POV/Problem = 1-2. These companies tend to have a fairly clear view of the category problem, though some articulate it better than others.

  • Future category reimagined = 1-2. In general, they also tend to signal/talk about the future reimagined, but not all “Be Different” companies fully articulate this in a meaningful capacity.

  • Radically different offer and business model = 1-2. Similar to “Be The Winner” and “Be The Best,” “Be Different” companies also tend to score well here.

  • Data Flywheel = 1-2. Sometimes companies don’t have this, but the great ones do—and see data as the key to anticipating where the category (and customer behavior) is headed in the future.

  • Depth & Degree of customer outcomes = 1-2. These companies tend to be radically generous, and generate an incredible amount of abundance not just for their customers, but for the company, employees, investors, suppliers, and the surrounding community and broader society as well.

NEW CATEGORIES CREATE NEW SUBCATEGORIES

The reason “Be Different” companies are so valuable is because of their ability to accurately predict and design the future. 

Once one new category is identified, and a Data Flywheel is leveraged to anticipate customer behavior, you can start hypothesizing about the next new category, and subsequent subcategories that can be created, and so on.

For example, five to eight years ago a new category emerged called “Electronic Bikes” (otherwise known as e-bikes). 

Before “Electronic Bikes,” there were dozens of bicycle subcategories that already existed: mountain bikes, racing bikes, BMX bikes, touring bikes, etc. If you were a “Be The Winner” company focused on market share like Schwinn (“Making Adult & Kids’ Bikes For More Than 100 Years”), you believed all the bicycle categories had been created and your job was to maintain your leadership position. 

And if you were a “Be The Best” company like Cannondale, you were focused on creating the best possible product in an existing, proven category (“SystemSix: The fastest road bike in the world. Period.”). 

It wasn’t until a “Be Different” company came along that the new category was created: Electronic Bikes. 

E-bikes were not an already established category, nor was it an incremental improvement upon an existing category/product. 

It required a fundamental POV shift in what a bicycle could be, how it could move, who it was for, and so on—moving customers out of the mindset that bikes had to be manually operated and pedaled, and into a new and different future where bikes were operated using electricity.

Once this new category was created, a whole new range of subcategories were unlocked: mountain e-bikes, road e-bikes, cruiser e-bikes, and so on. But then, guess what? Once you started riding one of these new e-bikes, suddenly all your regular mountain biking gear didn’t look right. 

So then even more subcategories appeared: e-bike helmets, e-bike shoes, e-bike water bottle holders. And in each of these cases, none of the companies that capitalized were incumbents. These new categories and new subcategories ended up being owned by new vendors with POVs aligned with this different future. The e-bike companies were new. The e-bike helmet companies were new. The e-bike fix-it shops were new.

If you were a “Be The Winner” or “Be The Best” company, you couldn’t see these new categories until it was too late. You ignored them. They seemed ridiculous. Inconsequential. Unimportant. And that’s because, on a very fundamental level, you didn’t want to see them. They threatened your world view, and the success of your business was dependent upon the world staying the same—and not changing.

Incumbents don’t usually adopt new categories until, a decade later, the new category becomes the dominant category. Today, e-bikes are now the fastest-growing bicycle category in the world—and the entire industry has been turned upside-down.

This is what makes The Category Design Scorecard so powerful.

It objectively tells you what type of company you are:

  • “Be The Winner”

  • “Be The Best”

  • “Be Different”

And, as a result, gives you a good sense of how relevant you will be 10 years from now.

Arrrrr,

Category Pirates