In Praise of Dissimilarity

What do Intel and McAfee have in common? Ebay and Skype? Voice recognition and GPS? Louis Vuitton and Al Gore’s Climate Project? Or, more generally, when are two things (such as companies, products, resources) similar, and when are they not? More important, how do these similarities and dissimilarities matter? Executives must thoroughly understand these questions, or risk overlooking vast opportunities and grave threats.

Whether explicitly or implicitly, the traditional understanding of “similarity” by managers has been a taxonomic one. Simply put, the degree of similarity as traditionally measured depends on the extent to which two objects possess the same features. Personal computers, for instance, all have hard drives, processors and a video monitor. Taxonomic similarity underlies key frameworks of management such as strategic relatedness, the Standard Industry Classification (SIC) system, the definition of industry boundaries, including the forces within that industry, and the International Patent Classification (IPC). For example, the IPC category F02 (combustion engines) contains internal-combustion piston engines, gas-turbine plants, jet-propulsion plants and so on.

So, what do Intel and McAfee have in common? Well, not much, according to comments by “industry experts” when Intel, a manufacturer of computer chips, acquired McAfee, a security software manufacturer, in late August 2010. Intel produces hardware — chips, mostly — whereas McAfee produces anti-virus software. They are seemingly in two completely different (read, dissimilar) categories. The acquisition (which cost Intel $7.7 billion) was the biggest in Intel’s history. According to the Financial Times, the acquisition by Intel of such a dissimilar business puzzled many security industry executives. While experts hope that chips can be improved to make them able to withstand malicious attacks, that prospect is seen as being years away.

But while Intel and McAfee seem unrelated in a traditional, taxonomic sense, researchers in cognitive psychology have recently suggested that there is a second kind of similarity, called thematic similarity, and in that context the relationship between Intel and McAfee looks different. Importantly for us in management, thematically similar concepts tend to be taxonomically dissimilar. By appreciating thematic similarity, we can extend managerial cognition into areas that are taxonomically dissimilar, and therefore generally seen as irrelevant or outright counterproductive. There might be cases in which companies of minimal taxonomic similarity could combine to open up highly attractive opportunities — despite seeming to be strategically unattractive collaborators based on their existing resources, supplier networks and distribution systems.

Actually, Intel and McAfee are remarkably similar thematically. According to Intel, the acquisition of McAfee would boost its strategy in mobile wireless, where it is beginning to produce chips for smart phones. Beyond smart phones, security is becoming a key requirement as new devices, from tablet computers and handsets to televisions and refrigerators, connect to the Internet. The purchase is therefore set to turn Intel, the world’s largest chip-maker, into a leader in security, extending its reach into Internet-connected devices.

Kind(s) of Similar

The Intel/McAfee case illustrates that similarity is not just a matter of degree (how similar are two things), but also of kind (how are two things similar). Two things are thematically similar if they functionally interact in the same scenario or event. For example, an athletic shoe and an MP3 player are related through interacting in a workout theme, coffee and a computer interact in an office theme and a navigation system and a motor via an automobile theme. In each of these cases, the two things perform different roles.

By contrast, concepts belong in a taxonomic category, and hence are taxonomically similar to all other category members, by virtue of shared properties. Thus, taxonomic similarity is based on the properties of the objects themselves, and taxonomic categories cohere around shared internal properties. As a consequence, taxonomically related concepts tend to resemble one another. There is nothing wrong with taxonomic similarity. It has been and continues to be the basis of economies of scale and scope, and has been the fundamental organizing principle for the division of labor. Rather, the point is that managers might overlook important opportunities and threats stemming from a different kind of similarity.

How can managers look beyond taxonomic similarity to appreciate thematic similarity? Importantly, thematic similarity affects the perception not only of concepts that do interact and therefore are associated (such as car accidents and insurance), but also of concepts that could interact but are unassociated (e.g., insurance and soft drinks, as the latter are a major cause of obesity, affecting health insurance). The critical distinction between association and thematic integration becomes obvious by looking at hidden thematic similarities between concepts that are already associated, but not thematically integrated. To illustrate this distinction, consider an extreme case in which two products are so strongly associated that they are combined in one product but not thematically integrated. Many cell phones sport a camera function and a GPS function. However, the GPS and camera functions have not been integrated in most phones, despite sharing a thematic similarity: Many photos are about places, just as GPS is about places. Thematic integration links these two functions, allowing users to “geotag” the location at which a photo is taken. The first camera phone was launched in 2001 (the Sharp J-SH04). Yet, it took smart phone manufacturers a full six years (until Apple’s 2007 release of the iPhone) to thematically integrate the GPS and digital camera functions.

What This Means for Opportunity Search

When managers ignore the thematic similarity hidden behind taxonomic dissimilarity, they risk overlooking opportunity (as well as misdiagnosing threat). Thematic similarity opens up a new area of the dissimilarity space. While Google Maps and Yellow Pages are taxonomically similar services, another Google service, Google Voice Search, and GPS are clearly in taxonomically dissimilar categories. And yet there is a thematic similarity between the two in the context of using cell phones. If a consumer in New York City searches Google for “movie show times,” for instance, movie show times specifically in that consumer’s vicinity are retrieved. Thus, whereas at first sight GPS has little in common with Google Voice Search, their thematic similarity provides potential links that are hidden behind their taxonomic dissimilarity. This similarity led to Google Maps for mobile, launched in 2008.

The new area of thematic similarity holds particular promise for innovation and opportunity search. Focusing on areas of taxonomic dissimilarity can help managers identify novel products or services that result from the combination of strategic assets that are taxonomically dissimilar but thematically related. This distant (in taxonomic terms) yet close search for opportunities created by thematic similarity provides a pragmatic guide to how (in which domains) strategists can find new potential for competitive advantage. The behavioral theory of the business enterprise has long acknowledged managers’ dangerous tendency to search for opportunity in familiar taxonomic domains. Research literature advises managers to search in categories that are distant, rather than taxonomically close to their own. Methods such as brainstorming, which aim at identifying such distant domains, are often referred to in the general management literature. For example, in an attempt to move beyond mere product extension, companies often encourage their developers to think “outside the box” (meaning, in taxonomically dissimilar domains) and free their imaginations to envision products that respond in radically new ways to customer needs. However, where does “distant” start, and where does it stop? Thematic similarity puts a meaningful boundary around the “distant” space managers should scan to identify innovation opportunities. An example from the realm of sponsorship is Louis Vuitton’s donating 15% of its online sales to Al Gore’s The Climate Project. With so many organizations to choose from, why would a luxury brand partner with an environmental advocacy group? We submit that applying thematic similarity to opportunity search makes it clear that “distance” is also a matter of kind and that a search process in distant taxonomic terms can be close in thematic terms. While distant taxonomically, Louis Vuitton and The Climate Project share the thematic similarity “travel,” or even “frequent (air) travel,” and hence a concern for promoting awareness of climate change and what can be done to address it.

What This Means for Competitor Definition

Two criteria are traditionally used to distinguish competitors from noncompetitors: technological criteria (companies are competitors when they share similar technological attributes) and market-based criteria (companies are competitors when the products they make could substitute for each other). Regardless of which criterion is used, however, the fundamental problem resides in interpreting cues from the environment about the similarity of technologies and products. Whatever sophisticated analytical tools are used for determining which companies should appear on the competitive analysis radar screen, all these decisions ultimately rest upon categorizing companies on the basis of their similarities and differences — how similar two companies are.

By weighing thematic similarity alongside taxonomic similarity, managers are enabled to consider similarity as a matter not only of degree (how similar are two companies?), but also as a matter of kind (how are two companies similar?). This switch has direct implications for distinguishing competitors from noncompetitors. In particular, our analysis suggests an alternative and complementary frame for understanding the competitor definition issue.

A recent example is the question of whether Facebook in its first four years of existence (February 2004 to 2008) represented a competitive threat to Google. A taxonomic model would assign low similarity to the two companies. Technologically, the two used completely different platforms, applications, algorithms and business models. From a market-based perspective, Google was in the business of providing information about online sources and an e-mail service, not in the business of social networking. Facebook’s share of Internet activity, however, increased steadily during this time. As early as 2007, 18% of U.S. Internet users visited Facebook at least once a month, and the average user spent three and a half hours per month on the site. By mid-March 2010, for an entire week running, more people worldwide were using Facebook than Google. Google only openly acknowledged the threat posed by Facebook on November 1, 2007, when it launched Open Social, Google’s own social networking platform. In other words, Facebook remained a noncompetitor for Google for more than three years and six months after Facebook’s launch. In fact, Google managers actively dismissed Facebook precisely because it did not fit Google’s taxonomy of activities. Google CEO Eric Schmidt said, “We have address books, and the sum of our address books is the social graph.” And it was not until February 9, 2010, that Google acknowledged the thematic similarity between social networks and e-mail by making a determined foray into exploiting the integration of social networking and e-mail by launching Buzz, a networking service that was closely integrated with its e-mail offering, Gmail.

In essence, rather than being purely based on taxonomic criteria for determining similarity, drawing the boundary between competitor and noncompetitor also requires apprehending thematic similarities. Thematic thinking therefore provides a finer comb for finding potential competitors even among taxonomically dissimilar companies that would normally pass as noncompetitors. Likewise, thematic thinking can help uncover vast business opportunities that conventional thinking based on taxonomic categories would deem unrelated and therefore undesirable. And this is why Intel and McAfee are not that dissimilar after all.