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Hey, We Got New Features

We have written several times about the Customer Buying Hierarchy. See some examples HERE, HERE and HERE. This Hierarchy holds that customers buy Function, Reliability, Convenience and Price, and in that order. Most people assume that new Functions or Features drive a great deal of market share change. In most industries, this is not the case. In a Hostile industry, it is not the case at all. I recently read of two industries who stress Function innovation today. One will succeed with this kind of innovation. The other will have, at best, fleeting success with it. Function innovations work best, and are sometimes critical to the success of a company, in high-growth and stable high-profit industries. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) They are much less helpful in a very tough Hostile industry.

The TV broadcasting industry is stable and highly profitable. It has become somewhat more competitive over the last few years, as cheaper satellite broadcasters take share from the dominant cable TV firms. Innovation has kept prices high and stable. This industry caught a break a few years ago when high-definition television made its debut and caused sales of new televisions to soar. These soaring television sales pulled with them new high-definition channels and premium services offered by the television broadcasters. These were Function innovations. An industry leader had to offer them in order to stay competitive in the market.

Now the industry may have caught a break with another new technology, 3-D. Broadcasters, content providers and television manufacturers are all betting that 3-D will be the next big Function innovation in television. So far, DirectTV has taken the lead in offering 3-D content. This, again, is a Function innovation which should appeal to customers in a fast-growing market.

The hotel industry is Hostile today. The recession has taken the air out of the sales of hotel companies. In response to the fall-off in demand, the leading hotel companies are searching around for their next “new thing” to attract customers away from one another. Obviously, there is less demand to go around, so the only hope a company has to improve its revenues is to take customers from another competitor. Now the industry leading competitors are trying a Function innovation to take market share. This Function innovation is in bathrooms. Many hotels are investing in bathroom upgrades, including better hairdryers, new packaging of soaps and shampoos, larger and thicker towels and bathroom throw rugs, among other innovations.

These Function innovations in a Hostile marketplace will move very little market share. The reason is that virtually all competitors will copy the Function innovations as soon as it is clear that they appeal to customers. We have seen Function innovations fail before. Remember the more comfortable beds? How about the flat screen high-definition televisions? Or what about the new paint and decorations? Wifi in every room? All of these innovations had a very short period of uniqueness. Once hotel competitors saw they helped the top and bottom line, everyone copied them. Now they are all taken for granted.

Sometimes an industry turns Hostile when Function innovations can no longer produce lasting market share benefits. Then customers have to make their buying decision on Reliability, Convenience or Price. Reliability and Convenience are much more costly benefits on which to stake a company’s reputation with customers, so relatively few companies really invest to achieve superb Reliability and Convenience. That is why these benefits usually mark the industry winners in very tough markets. (See the Perspective, “Reliabiilty: The Hard Road to Sustainable Advantage” on StrategyStreet.com.)

Posted 5/17/10