When the competition trots out some new shiny innovation, it's easy to run screaming from the room like your hair's on fire. However, we recommend a more calm and introspective reaction. Something that starts by sitting down and asking some tough questions. Will the disruption be a small speed bump requiring little or no response? Will it have the potential to completely change the structure of share and revenue capture in a market? What should we do?
- Reduce the noise
- Classify the innovation
- Judge the competitive proximity
- Choose the right level of response
Quickly determining whether to call "all hands on deck" or to choose a more measured response with regard to a competitor's perceived innovation helps mitigate risk. This article will provide you with a simple framework for initially determining the appropriate magnitude of response to a disruption, real or perceived, in your business.
1. REDUCE THE NOISE
The key to choosing the right response is reducing all the noise and clutter. Marketers are bombarded with contradictory theories from analysts, pundits, bloggers and even employees, who opine, loudly, about what to do when something changes in a market. Many will proclaim your product's death. Others will pan an innovation as a fad and insist you should stay the course. It's noisy, and most incumbents habitually follow one of three courses: they boil the ocean for a definitive answer as to how to respond, they indiscriminately increase promotions or incentives to keep customers from defecting, or they demonstrate a blithe disregard for the change and proceed with business as usual.
Instead of habitually following one of these paths, there is a straightforward, effective way to reduce all the clamoring. Start by assessing the situation along two basic factors: the degree of innovation or change, and the competitive proximity of the disruption to your product or service. One axis spans a continuum from a radical degree of innovation to an incremental one. The other axis establishes whether the innovation is directly competing with an existing product or service or being introduced in an ancillary market.  Almost all innovations can be categorized using these two factors.
2. CLASSIFY THE INNOVATION
The first question is "What makes an innovation radical versus incremental?" To be radical, the innovation in question must be very different, in some aspect, from what exists. Here are some good questions that, when answered in the affirmative, move the innovation further toward the radical end of the scale.
- Does the technology it employs render current technologies obsolete?
- Does the innovation enable an unmatchable pricing advantage?
- Is there knowledge applied that makes existing offerings seem less competent?
- Does the business model (how the competitor makes money) change existing market "rules?"
Conversely, innovation is incremental when it simply builds on what exists, be it technology, knowledge or process. How far to move an innovation toward the incremental side of the scale depends on the extent that existing offerings can still compete by adjusting some other element of the existing business model. For example, can the addition of a minor technology feature by a new entrant be countered by delivering additional value (pricing, bundling, co-promotion, etc.)? The less it takes to buffer the competitor's action, the further to the left the change should be placed.
3. JUDGE THE COMPETITIVE PROXIMITY
On the surface the DIRECT ‹—› ANCILLARY scale may seem obvious and overly simplistic, but it's not as clear-cut as it may seem at first glance. In assessing what should be considered a direct competitor, it important not to classify by thinking historically. Competitors are not necessarily going to follow the same patterns or rules in the future as they have in the past. Instead, think about the trajectory of the current market, social or cultural trends and the potential competitive scenarios that might exist. Classify any existing or new competitors by considering these future scenarios, not by looking in the rear-view mirror. It may sound obvious, but it continues to be one of the biggest mistakes business analysts make when assessing a market.
Consider the following questions when classifying a new market entrant as ancillary or direct:
- Could this offering actually replace your product or service as is?
- Could it eventually replace yours by adding capability or features?
- Are larger social, psychological or behavioral trends naturally leading consumers toward that market and away from yours?
- Does the competitor describe a different way of looking at something (consumers, business models, technology, etc.) in your market that most incumbents discredit or discount?
The more questions that are answered "yes" increase the likelihood that you should move the entrant higher on the continuum as a direct and serious competitor in your market. Conversely, more "no" answers should move it lower down the scale.
One word of caution: This is the area where habitual thinking and gravitas can result in the misclassification of a competitor. Question all assumptions and then test your classification with others in your organization who are known "hole-pokers" and "nay-sayers." Their assessments will also help you know how to respond to many of the same questions when presenting your recommendation.
4. CHOOSE THE RIGHT LEVEL OF RESPONSE
Note that only one of these requires an urgent, immediate response and the organization should align resources toward addressing the innovation quickly. The others allow a "measure twice, cut once" approach that enables the marketer to design the most effective, thoughtful solution, avoiding the rework and chaos that results from being overly reactionary.
Example: Mobile phone manufacturers' response to the iPhone
It's overused as an example, but the iPhone is a powerful case in point on the impact of determining the correct level of response. In 2007, RIM, Microsoft, Motorola and Palm, allmarket leaders at the time, dismissed the iPhone. They did not consider any of the
product's specifications or features to be radical innovations and did not consider Apple a serious, direct competitor. Conversely, HTC and Samsung did think of the iPhone as a radical innovation as well as a direct competitor and responded by implementing dramatic new hardware designs and embracing the Android business model. We now see Apple, HTC and Samsung as market leaders and Microsoft, RIM and Palm with declining share.
Interestingly, while Apple was the initial entrant that upset the market, how did they respond when Google launched Android? Apple considered Google a radical innovation in terms of their business model, and a serious direct competitor. They reacted immediately and swiftly by assuring product parity while adding some new iOS features, but they also rallied employees to not let Google destroy them. Who is to say which will ultimately win the battle? Android has dominated lately, but Apple just recently gained more share while Android declined. Both companies are to be admired for their ability to quickly assess the needed response. It is competition at its best.
A counter argument to this proposed framework is that reacting to competitive activity is a loser's game. You can't respond and react to every competitive product's feature changes, large or small. If you do, it's a hamster wheel of reaction that sucks up resources and saps morale. And there is probably some truth to that, when thinking about small, incremental changes. But even in those cases, I'd argue you should be monitoring these changes and using the reaction framework above to assess the potential impact. You don't have to react to every change, but you should know about and understand them.
To that end, the most important implication resulting from using this type of assessment for competitive innovation, real or perceived, is that every brand marketer must incorporate the resulting monitoring and assessment into their planning process as they decide where to focus research and development, product investment and marketing spend. Doing so allows appropriate allocation of resources based of the speed and magnitude of a planned response. This impacts researchers too, as they must be cognizant of these threats and any needed response to ensure their insights are timely, accurate and useful. And finally, executives must be educated and informed about the response to innovation in order to set effective corporate policy in the time frame needed. The framework described above can provide a straightforward and concise means for explaining and justifying a particular course of action and the needed resources.
 The classification of innovation along a radical versus incremental spectrum is difficult to attribute to any one person, as it has been a staple tenet of market assessment for some time. Abernathy wrote about incremental versus radical innovation in the 1970s, while Porter talked about continuous and discontinuous technological changes in the 1980s. Many other authors, such as Nadler and Habino, have used other terms such as "breakthrough thinking" or "incremental innovation. While currently questioned as to its relevance in the fast-changing markets in which we compete today, it is still a robust way to initially assess the speed and depth of reaction to a new market entrant. Obviously, more in-depth analysis is needed to establish the strategy once the urgency of response is determined.