value insights

Performance Oversupply and Competition Evolution- Valutrics

In several industries, technologists were able to provide rates of performance improvement that have exceeded the rates of performance improvement that the market has needed or was able to absorb.
Historically, when this performance oversupply occurs, it creates an opportunity for a disruptive technology to emerge and subsequently to invade established markets.

As it creates this threat or opportunity for a disruptive technology, performance oversupply also triggers a fundamental change in the basis of competition in the product’s market: The rank-ordering of the criteria by which customers choose one product or service over  another will change, signaling a transition from one phase (variously defined by management theorists) to the next of the product life cycle. In other words, the intersecting trajectories of performance supplied and performance demanded are fundamental triggers behind the phases in the product life cycle. Because of this, trajectory maps usefully characterize how an industry’s competitive dynamics and its basis of competition are likely to change over time.

The marketing literature provides numerous descriptions of the product life cycle and of the ways in which the characteristics of products within given categories evolve over time.

Consider, for example, the product evolution model, called the buying hierarchy by its creators, Windermere Associates of San Francisco, California, which describes as typical the following four phases: functionality, reliability, convenience, and price. Initially, when no available product satisfies the functionality requirements the market, the basis of competition, or the criteria by which product choice is made, tends to be product functionality. (Sometimes, as in disk drives, a market may cycle through several different functionality dimensions.) Once two or more products credibly satisfy the market’s demand for functionality, however, customers can no longer base their choice of products on functionality, but tend to choose a product and vendor based on reliability. As long as market demand for reliability exceeds what vendors are able to provide, customers choose products on this basis—and the most reliable vendors of the most reliable products earn a premium for it.

But when two or more vendors improve to the point that they more than satisfy the reliability demanded by the market, the basis of competition shifts to convenience. Customers will prefer those products that are the most convenient to use and those vendors that are most convenient to deal with.
Again, as long as the market demand for convenience exceeds what vendors are able to provide, customers choose products on this basis and reward vendors with premium prices for the convenience they offer. Finally, when multiple vendors offer a package of convenient products and services that fully satisfies market demand, the basis of competition shifts to price. The factor driving the transition from one phase of the buying hierarchy to the next is performance oversupply.
Another useful conception of industry evolution, formulated by Geoffrey Moore in his book Crossing the Chasm,  has a similar underlying logic, but articulates the stages in terms of the user rather than the product. Moore suggests that products are initially used by innovators and early adopters in an industry—customers who base their choice solely on the product’s functionality. During this phase the top-performing products command significant price premiums. Moore observes that markets then expand dramatically after the demand for functionality in the mainstream market has been met, and vendors begin to address the need for reliability among what he terms early majority customers. A third wave of growth occurs when product and vendor reliability issues have been resolved, and the basis of innovation and competition shifts to convenience, thus pulling in the late majority customers.
Underlying Moore’s model is the notion that technology can improve to the point that market demand for a given dimension of performance can be satiated.
This evolving pattern in the basis of competition—from functionality, to reliability and convenience, and finally to price—has been seen in many of the markets so far discussed. In fact, a key characteristic of a disruptive technology is that it heralds a change in the basis of competition.

Two additional important characteristics of disruptive technologies consistently affect product life cycles and competitive dynamics: First, the attributes that make disruptive products worthless in mainstream markets typically become their strongest selling points in emerging markets; and second, disruptive products tend to be simpler, cheaper, and more reliable and convenient than established products. Managers must understand these characteristics to effectively chart their own strategies for designing, building, and selling disruptive products. Even though the specific market applications for disruptive technologies cannot be known in advance, managers can bet on these two regularities.

The relation between disruptive technologies and the basis of competition in an industry is complex. In the interplay among performance oversupply, the product life cycle, and the emergence of disruptive technologies, it is often the very attributes that render disruptive technologies useless in mainstream markets that constitute their value in new markets.

It is critical that managers confronting disruptive technology observe this principle. If history is any guide, companies that keep disruptive technologies bottled up in their labs, working to improve them until they suit mainstream markets, will not be nearly as successful as firms that find markets that embrace the attributes of disruptive technologies as they initially stand. These latter firms, by creating a commercial base and then moving upmarket, will ultimately address the mainstream market much more effectively than will firms that have framed disruptive technology as a laboratory, rather than a marketing, challenge.

When performance oversupply has occurred and a disruptive technology attacks the underbelly of a mainstream market, the disruptive technology often succeeds both because it satisfies the market’s need for functionality, in terms of the buying hierarchy, and because it is simpler, cheaper, and more reliable and convenient than mainstream products.  Because established companies are so prone to push for high-performance, high-profit products and markets, they find it very difficult not to overload their first disruptive products with features and functionality.



The figure  summarizes the model of performance oversupply, depicting a multi-tiered market in which the trajectory of performance improvement demanded by the market is shallower than the trajectory of improvement supplied by technologists. Hence, each tier of the market progresses through an evolutionary cycle marked by a shifting basis for product choice. Although other terms for product life cycles would yield similar results, this diagram uses the buying hierarchy devised by Windermere, in which competition centers first on functionality, followed by reliability, convenience, and, finally, price. In each of the cases, the products heralding shifts in the basis of competition and progression to the next product life cycle phase were disruptive technologies.

The figure shows the strategic alternatives available to companies facing performance oversupply and the consequent likelihood that disruptive approaches will change the nature of competition in their industry. The first general option, labeled strategy 1 and the one most commonly pursued in the industries explored in this book, is to ascend the trajectory of sustaining technologies into ever-higher tiers of the market, ultimately abandoning lower-tier customers when simpler, more convenient, or less costly disruptive approaches emerge.

A second alternative, labeled strategy 2, is to march in lock-step with the needs of customers in a given tier of the market, catching successive waves of change in the basis of competition. Historically, this appears to have been difficult to do. In  the personal computer industry, for example, as the functionality of desktop machines came to satiate the demands of the lower tiers of the market, new entrants may  enter with value propositions centered on convenience of purchase and use. In the face of this, other companies may respond by actively pursuing this second approach, aggressively fighting any upmarket drift by producing a line of computers with low prices and modest functionality targeted to the needs of the lower tiers of the market.

The third strategic option for dealing with these dynamics is to use marketing initiatives to steepen the slopes of the market trajectories so that customers demand the performance improvements that the technologists provide. Since a necessary condition for the playing out of these dynamics is that the slope of the technology trajectory be steeper than the market’s trajectory, when the two slopes are parallel, performance oversupply—and the progression from one stage of the product life cycle to the next—does not occur or is at least postponed.

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