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Mitigating competition to
capture the value of innovation
The primary goal of product market strategy is to create an offering that meets the needs of a specific customer better than other options. Doing so successfully will allow you to begin winning customers for your new product (or service).
However, one of the fundamental realties of a market economy is that, whenever any new product comes to market and begins to generate sales and profits, competitors will move quickly to offer competing products in an effort to capture some of the value being created.
Specifically, for a given offering, competitors will do their best to match or beat the benefits your product delivers and/or the price you charge for that product. In doing so, competitors will begin to win customers that would have bought your products, and as a result capture some of the value created by your innovation. Left unchecked, this typically very quickly leads to an intensely competitive, commodity market characterized by similar products being offered at similar prices. In such a market, profits are reduced to a minimum, and the innovator ends up capturing little value in return for their ideas, investment and risk.
Given this reality, an important component of your overall product market strategy must be: how to mitigate competitive alternatives to your offering, at least for a while, in order to increase the value you capture from your innovation?
Fundamentally, there are two ways you can mitigate competitive offerings and continue to win customers and realize value from your new product offering:
- Limit competitors’ ability to offer a similar product and/or price.
- Encourage customer preference for your product other than through features or price.
Limiting competitors’ ability to offer similar product features and pricing
While certain kinds of anti-competitive activity are illegal in the United States and many other countries, successful companies pursue a number of legal tactics to limit competitive alternatives. These fall into two main categories: tactics to limit a competitor’s ability to design a very similar product, and tactics to limit a competitor’s ability to produce similar products at a competitive cost.
Tactics to limit competitor’s ability to design a similar product
One of the key components to success is creating barriers to market entry by limiting imitation of the new product. This is accomplished by keeping the information about the new product secret from potential competitors, by creating a legal barrier, or through developing unique product design skills.
- Secrecy. Secrecy can be a vital tool used in keeping information away from competitors and can be simple to implement. This is most effective when the following conditions are met:
- Limited sources have access to the information relating to the product – the fewer people who have access the less likely competitors will be able to obtain the information.
- The product is complex – the more difficult the product the harder it is to duplicate.
- The procedures involved in creating the product are poorly understood – the fewer people who understand your product the less likely it will be imitated.
- Tacit knowledge is involved– knowledge that is “implied” vs. “documented” makes it more difficult to duplicate the product.
- Legal barriers. There are a range of legal barriers to imitation, such as copyrights, trademarks, and patents. The most effective legal barrier in deterring imitation of a new product is a patent, especially in the early development of new technology-based industries. It protects a company from duplication while allowing the company to establish the process needed to produce and distribute the new product.
A patent is the exclusive right granted by a government to an inventor to manufacture, use, or sell an invention for typically a period of twenty years in return for disclosure about how the new product works.
A product must meet three criteria to be deemed patentable. It must be (1) useful, (2) a novelty, and (3)”non-obvious” (to an expert in the field).
There are also several limitations that should be considered when deciding if a patent is the direction your company should pursue. The most significant are (1) high legal cost, (2) limited effectiveness in some industries (for example, patents are highly effective in the pharmaceutical industry and not quite as effective in highly progressive industries, such as computers and aircraft), and (3) “inventing around” (competitors are capable of developing their own product which does not interfere with the patent but still manages to capture the potential returns of the original product).
- Unique product design skills. Another approach to limit a competitor’s ability to duplicate a product is to possess unique design or engineering skills within your company. While this is powerful if it can be achieved, generally it is not wise to rely on having unique skills. Few companies truly have unique skills that cannot be duplicated or learned by others.
Tactics to limit a competitor’s ability to produce at a competitive cost
The second broad approach to limiting a competitor’s ability to offer similar products at similar prices is to mitigate their ability to produce at an efficient cost. These tactics include leveraging the learning curve, gaining control of resources, and leveraging existing manufacturing capacity.
- Learning curve. The learning curve concept is the idea that the more experience a company has in producing a product, the better a company becomes with respect to its productivity. The learning curve is based on cumulative experience, which normally is most effective when a company is an early competitor in the industry and has gained extensive proprietary experience.
- Unique access to resources / inputs. Another strategy used to capture returns of a newly introduced product is by obtaining control over the resources you need to produce the product. The first step in this strategy is to identify the main resource for producing your product and then produce a “bottleneck” in the production process by obtaining control over this resource and making it essential and rare. This strategy is not useful if your main resource can be easily substituted.
- Existing manufacturing assets. A final strategy that is sometimes used by companies is gaining control of complementary assets such as service capability, customer and/or supplier relationships and complementary products. If a company can gain control of these assets then the likelihood of benefiting from the new product is high.
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