More Details On The 8 Productive Tensions Of Innovation - 2. Differentiate Or Borrow

Q - Is it better to differentiate your offerings or borrow ideas from competitors?

Differentiation is seeking uniqueness to distinguish oneself from a competitor; borrowing refers to knowingly using or imitating another organisation's ideas, concept, etc. The latter involves determining what to copy and from whom.

It looks at the tension that organisations face between competitive differentiation and borrowing.

Often new markets play by different rules, ie sources of competition are constantly changing, customers can be unknown, etc. Thus strategies, ie where to play and how to win, developed in traditional markets are not necessarily applicable in emerging industries and products.

For example, conventional strategic frameworks like Porter's 5 forces (existing rivals, the bargaining power suppliers and customers, alternative offerings and new entrants) are less effective in uncertain, unpredictable, volatile markets. (for more details see elsewhere the Knowledge Base)

These emerging markets are usually around technology, such as cloud services, warehouse robotics, smart phones, Internet of Things, AI, digitalisation, augmented reality, autonomous vehicles, plant-based meat substitutes, fintech, environmentally friendly fuels, etc. The new start-ups are challenging the large established organisations in all industries, like banking, ITC, etc. Their established business models are under threat (for more details see elsewhere the Knowledge Base).

The winning strategy aims to deliver better value than competitors, do it more effectively and efficiently, and ideally at a lower cost. You need to out-manoeuvre your competitors.
Borrowing appears to contradict the rationale for differentiation, ie differentiation is needed to avoid a negative spiral of competing only on cost. However, you need to treat other companies in the same industry as peers rather than competitors, ie
"...treating peers as a treasure trove of ideas and resources from which an organisation draw..."
Christopher Bingham et al, 2022a

Borrowing can enable an organisation to develop working prototypes of its products and/or services quickly and cheaply. Borrowing will save you using your resources (time, money, labour, etc) plus minimising 'trial and error' mistakes; it encourages developing and testing prototypes rather than chasing the perfect solution.
Research has shown there are some implicit rules and shared specific behaviours.

a) still need to have answers for questions like

- Who is the customer?

- What does the customer value?

- How will you deliver that value at an appropriate cost?

An example is PayPal. Its competitors develop close links with banks as a basis to keep fraud ramifications manageable; this restricted their customer base. In contrast PayPal learnt that customers were more interested in ease of use than tight anti-fraud control. Thus
"...they committed to an open, stand-alone, web-based model available to all..."
Christopher Bingham et al, 2022a

 b) 'Parallel Play' (this term comes from observing 3 & 4 year olds playing, ie they play near one another but not together; they observe what other children are doing while working on their own projects, like creating a costume from old clothes, building a structure, etc; each child learns more than if playing alone; they imitate, borrow, etc from each other
"...Though aware of other children's efforts, they focus primarily on their own activities and on figuring out what works as a progress toward whatever goal they had in mind..."
Christopher Bingham et al, 2022a

Similarly this happens in a dynamic environment, where you are continually observing what is happening (including what other people are doing) and testing out your ideas; this includes borrowing others' ideas; it involves relentless experimentation (including watch and wait and constantly refining your approach) to identify what is best value. There are 3 types of parallel play

    i) initially forget about differentiation and borrow ideas instead

Some examples

        - ride-sharing industry (Sidecar reduced the complexity in its multi-passenger, multi-stop model by substituting one passenger, one-stop rides; the drivers would use their own cars including a system that featured electronic payments, GPS navigation, a rating system for drivers, etc. Soon other players in the same industry, like Zimride (later Lyft), Uber, etc, followed.)

NB These companies regarded themselves as competitors to taxis, not with each other. Similarily, for fintech organisations, they viewed the established investment and wealth management firms as their true competitors, not each other, ie
"...play the course, not the players..."
Christopher Bingham et al, 2022a

         - search engines industry (Google borrowed an idea from rival search engine (GOTo.com) to generate revenue by allowing advertisers to pay for prominent placement search results and charging them only when users click on their ads; Google's AdWord was based on GOTo.com's approach, ie allowing advertisers to buy small text ads and to pay only on clicks, not for views.)

        - photo sharing (initially an app called 'Burbn' allowed users to connect, arrange a meeting and post photos of their meetings; as this proved too complicated, they investigated what users really wanted; it was changed to photo sharing, ie posting a good photo with 3 clicks and everything else was removed; it was renamed Instagram; also, they borrowed and installed the stories features from Snapchat)

    ii) focus on 'established substitutes' to help create a realistic value proposition (even though the established substitutes may have only a few users, they are already providing value to customers)

    iii) be non-consensus, ie have a unique insight that defies conventional wisdom rather than just trying to be better than competitors; don't try to fit into somebody else's landscape or category.

c) Test relentlessly and then commit (developing innovation through experimentation and testing; don't launch without a lot of testing; use the learnings to select the most beneficial product and/or service, and then allocate sources to its development)

The above goes against conventional wisdom, ie

"...in uncertain markets, cost of commitment and ensuring the loss of flexibility cannot be justified..."
Christopher Bingham et al, 2022a

However, recent research suggests
"... commitment to be key to success - provided that firms tested alternative business model templates first. Less successful enterprises either committed without testing (often missing out on more lucrative opportunities) or flitted among several templates, hedging their bets without making a choice..."
Christopher Bingham et al, 2022a

d) Pause, watch and refine (after committing to a general approach, it is best to pause and observe before continuing. This is different to the conventional approach of once committed, move quickly, ie 'fail fast'.

You need to commit to a single approach for creating and capturing value by postponing the optimising of it.

Dropbox is a good example. Initially they offered 
"...enormous value by giving customers instant access to their files from any computer through a simple drag and drop interface; early on, it committed to an easy-to-use product and a freemium model for capturing some of that value..."
Christopher Bingham et al, 2022a

They stopped short of tailoring its products any further. This allowed them to accommodate additional uses like sharing files and collaboration. By 2018, it had around 30% of its 11 million paying users on a Dropbox business team plan.

As it is impossible to anticipate all potential customers
"...an incomplete, partially elaborated business model increases the likelihood that innovators will be able to accommodate useful new information that they would not have anticipated......that fewer constraints we impose, the better, because there's more room for a emergent behaviour, more room to discover..."
Christopher Bingham et al, 2022a

NB Users' preferences shift as they engage with innovations in unexpected ways. For example, ultrasound pioneer SonoSite created a website where health professionals could share how they use ultrasonic stethoscopes; from this SonoSite learnt about additional uses of its stethoscope, like medical missionaries diagnosing heart defects in children, nurses locating a vein for inserting a needle, etc. Thus, SonoSite modified its business model appropriately.

Don't become trapped by your original business model.

Learn to take a break and observe, especially your customers, to allow yourself to produce unanticipated insights around your business model.

In summary, commit to a business model template quickly but implement it slowly so that can gather instructive insights along the way.

The diagram - differentiation v. borrowing ( How do you know points of differentiation will be most important to would-be customers?)

(source: Christopher Bingham et al, 2022)

"...in preference to differentiating a new market business right away, leadership first engages in 'parallel play'., taking time to observe what others in the arena are doing, borrowing ideas, and testing them, before fully committing to a business model. Then, again, pause, watch, and wait. As the market settles and relationships between actions and outcomes crystallise, update and refine your model..."
Christopher Bingham et al, 2022a

Summary

Parallel play

At the beginning, start-ups have many unknowns where discovery and surprises are frequent. As start-ups become successful, they need to start to follow the traditional laws of strategy and focus on competition plus the need to differentiate.