WHEN TO COMPETE ON FEATURES

by Donald V. Potter

Many companies think first and foremost of competing on function. Often, functional leadership through unique features is not worth the investment: the function may appeal to too few buyers, or its uniqueness may not last long enough to cover the cost of its R&D.

Yet there are undoubtedly markets and conditions that make functional innovation worthwhile. How can a company know whether functional leadership is a good investment?

The key is to focus, not on the innovation itself, but on the nature of the market and the economics of competitors.

Uniqueness: How Likely and for How Long?

“An industry leader should have development costs below average for its industry.”

A feature triggers a purchase only if the feature is unique. Customers buy by moving through a hierarchy of needs: function, reliability, convenience, and then price. Although function is first, customers choose on that basis only if the feature is essential to them and offered by only one supplier. Once the feature is copied, the customer must purchase on some basis other than the feature.

What makes a feature hard to copy?

• Legal or regulatory barriers.
  Patents offer some protection. The requirement for regulatory (e.g., FDA) approval of competitors’ products can be even more powerful.

• Competitor’s economics.
  This can prevent or discourage them from following suit. Competitors who need to invest more than the innovator, or who believe they will not achieve good rates of return on the investment, may choose not to match the new feature.

• The need for external “verification.”
  Competitors’ “me too” products may not automatically be seen as equally valuable or reliable. Followers may need to spend time and money building up their brand image or gaining the certification of a credible third party, such as an industry association or regulatory board.

Leadership: At What Cost?

Companies should also consider their own costs to bring a product to market. These include the cost of research to create the feature and the cost to develop the market for the feature. In general, an industry leader should have total development costs, as a percentage of sales, below average for its industry.

Function Leadership: For What Benefit?

“It is usually less important to have been first than to be best.”

Finally, a company should think clearly about the benefits it expects to gain from functional leadership. These benefits might be:

• Dominant market share.
  In some market situations, the first entrant with an important new feature really does win big. For example, in immature high technology markets, where products change significantly every 12-18 months, the company whose new feature remains unique for even a few months can dominate that product generation. Or, in small, well defined markets, the early entrant may absorb most of the demand. Continued dominance is then assured.

• A portion of the share shift caused by market disruption.
  In mature markets, a player who already has a large share might introduce a feature that changes the market and shifts new demand disproportionately toward itself. As a function leader, he may realize that some competitors will follow but that others cannot. They will lose share, some of which the innovator can gain.

• A reputation as an innovator.
  Small players at the high end of the market are most likely to benefit from the cachet of being “always at the forefront”.

Might Number Two Be The Winner?

Investing in function leadership might be the right decision. Often, though, the rewards are as great for the fast follower. The second product to market may cost less to develop and offer improvements on the original. Customers may wait until their established supplier can offer the feature. And, the market may forget who was first. Does anyone today remember that Xerox pioneered much of the microcomputer technology, that Ampex developed VCRs or that ENIAC was the original mainframe computer? Once two or more suppliers offer a feature, it is usually less important to have been first than to be best.

Closing Thought

Feature innovations indirectly help companies who prosper in hostility. Feature innovations do not often create winners, but they do create losers. When some competitors refuse to copy successful feature innovations, they fail their customers. And failure of competition moves more share to winners than do the successes of the winners. But, what the heck, a win is a win!

(Note: This Perspective was written in the context of the economy in 1992. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items: Analyses: Analysis 3: Segmentation By Cost Driver Analysis 34: Reasons for Company Negative Volatility Analysis 40: Industry Growth by Product Price Point Analysis 46: Ease of Copy Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis. Most share shifting in the industry seems to be coming from volume gained within existing customer relationships rather than from new customers Some competitors proliferate products around the heart of the market The larger companies are squeezing out the smaller Product innovation has accelerated Competitors are aiming their marketing at narrower segments

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