When I was young and naive and read business books … [that could be a new series … mmh ,, !o.O! ,, ] … they told me things.
Differentiated products, I had this clear picture:
- Excel Tables with features on the Y Axis, Products on the X axis, and discrete finite numbers of choices for all combinations. Too abstract? Or tables with feature comparisons.
- As economist, I thought mapping those feature combinations to value was a thing.
- As a market researcher, I thought conjoint and price identification was a thing.
- Talking to sales people, I thought this thing was a procurement game. Find out how the market evaluates the product, and run 80/20 on being (a) differentiated enough to be on a product list of the procurement, (b) be pronouncedly enough differentiated on key elements to make it into the list of products to be screened, (c) have supporting documents and a value proposition around your strength at at hand, etc.
Things became more different when being on the buyside. You were looking at how organizations really were taking “nieches” or specific spots on the big competitive landscape canvas and fought for small market shares, eventually building IP or value propositions interested for bigger folks that would buy them. The strong executers, and big fund raisers eventually trying to consolidate and capture market share on their own and going IPO or bigger exit.
But now, being in a company that produces products and being asked how we differentiate and getting opinions from inside and outside, you get yet another different picture.
Product differentiation has several interesting dynamics. Let’s look at them.
Tension 1: Vision vs. Market
In any company, you will see vision vs. market as a key aspect. Nobody just builds for the market or he typically gets disrupted or boring at some point. Being visionary can meet you underperform the market with a bad vision or outperform with a good vision. But also visions get outdated, so easy to make errors there. Both directions are usually sticky. Everything you do in a company will attract certain people, that believe in the story – vision or market adoption – and this creates sticky monocultures. Hard to switch all the time. So always risk here.
But often times outdates visions, incomplete visions, or weird realizations of market focus can create differentiations and strategic directions that make weird products. Very hard to hit the right note on all dimensions.
Tension 2: Research vs. Development
Yeah, it isn’t always R&D. It also is R vs. D. Because even if you are market focus, you might at some point simply realize that the entire architecture and design of your product can’t do that new 5% extra, because your foundations aren’t there and you would need to rewrite 60% of it all to get there. You delay the decisions. The 60% at 50 million costs has become 80% that now cost 2 billion. Classical “legacy” problem in companies with very widespread products that had their days of success. 5 generations after the initial product, 40% of the core of the entire product portfolio is legacy and rewriting it kills the margins and value of the entire company.
But even without legacy, you might have to use certain technologies to get the extra 5% and you just might not have the research talent in the organization to get this done. If you had focused on more research talent and fostering research in general, you would have lost a lot of execution on the way. But maybe those 5% extra were the differentiatior that adds the customers 40% more value where even adding 20% of extra value isn’t enough and where all your competitors due to legacy would never cross the 20%. Yes, in this case choosing execution killed your shot to take the entire market. And now you are a nieche in a nieche with 3% market share in a tiny market.
Tension 3: Competitor Intelligence or Competitor Idiocracy
The first naive view on differentiated feature support among competitors is that people chose to rationally differentiate by focusing on different features. That often is accurate.
But now you add that some companies just are not able to produce certain features, which is why you have an over exposure of other types of features.
Both is only relevant when thinking about the third aspect. Those companies might have had the chance and opportunity and ability to build out other features, but they learned from the market that the ones they build are having better cash returns. More cash flow means more ability to re-invest. More growth. More M&A. More market dominance. Better margins. Etc.
But then also, it could just refect a blind vision and it could be a random and unssucessful choice.
And last but not least, depending on how good others are on these things, competitve pressure, talent access and the lower performance on the above can also just lead to unsound decisions and lack of cash to actually improve the system and build key new features in due time.
How to do proper competitor research
First of all, you need to understand the domain and the difficulty of things. Only then you know if certain things that might be very high value are not done because of reasons or because it was too hard to do.
The visionary understanding must be there. A very deep of technical possibilities, demand and willingness to pay for things, a conceptually wide and deep understanding of the domain. As to understand and evaluate visionary benefits and fallacies of competitors and build out a competitive vision.
List goes on. Important is that you need internal champions from different domains in your organization to get the whole picture of understanding competition. Reports from those champions are crucial. And the effort put into this extra work depends on how important you think this exercise is. Being differentiated, highly focused on having and executing on superior vision and developing to market as to maximize cash flows for faster growth.
So overall, lots of things to consider. Nothing is wrong. Not the procurement view. Not the simple excel table. Not the conjoint view. Not the visionary arguments. Etc. etc. Etc. it is just really lots of work, lots of effort and energy for a company. It must be orchestrated well. But it is an art. Not a science. Even here, product management can be a make or break or kill or bill element of the organizational strategy. If you have good product managers. If they suck. You suck.