Surviving Competitive Attrition

There seems to be a repeating cycle in the life of successful breakthrough products. These are: Phase One: The introduction of the breakthrough product followed by a "headstart" growth period with little industry rivalry/competition (e.g., the iPhone or Apple Watch).

Phase Two: As competitors catch up with the technology contained in the breakthrough product, and try to participate in the growing market created by the breakthrough product, industry rivalry increases. Industry growth is sufficient to sustain competitors even if their products lack sustained differentiation or a low cost competitive advantage (e.g., Samsung smartphones). See Concepts page and discussion of Michael Porter.

Phase Three: As industry growth slows competitors with sustained differentiation try and grow sales by moving downmarket (through market segmentation), while companies with a low cost competitive advantage try and grow sales by moving upmarket. Companies without sustained differentiation or a low cost competitive advantage are eventually forced out of the market (e.g., Samsung). As competitors drop out rivalry decreases.

When a company introduces a new product it must make sure the product has either: (1) some element of sustained differentiation (like Apple's iOS and the Apple ecosystem); or (2) is produced through a low cost, trade-off based approach that's difficult for competitors to match. See post titled "Acquisitions, Rivalry, and Strategic Trade-Offs."

Without sustained differentation or a low cost advantage, a competitor will get squeezed out of the market during phase three. This happened to Samsung and Sony in the PC business and is currently happening to Samsung in the smartphone business. With smartphones, Samsung probably made a mistake trying to compete in the mid to high end market with an undifferentiated Android product instead of making a strong, early commitment to a low cost approach. During phase two this strategy works (when the industry is rapidly growing), but it stops working during phase three.

One downside of pursuing a low cost advantage is that many low cost approaches seem to get matched by at least a few hyper-efficient competitors. Dell originally had a low cost advantage in PC's, but this advantage has been largely matched by Lenovo, HP, Asus, and Acer, leaving these companies stuck in a price-driven modular battle that makes it difficult for them to invest in meaningful product innovation (which makes them vulnerable to technological breakthroughs by integrated companies like Apple). See posts titled "Business Models That Facilitate the Creation of New Products" and "How Outsourcing Can Destroy a Company."

Michael Porter notes that operational effectiveness ("OE") is typically matched over time, and does not constitute a unique long term strategy. For this reason, any company pursuing a low cost strategy should focus on trade-off based activities that competitors can't or won't match (regardless of OE improvements these competitors eventually make). See Concepts page and discussion of Michael Porter; post titled "Acquisitions, Rivalry, and Strategic Trade-Offs."

The author owns stock shares of Apple.