“Best in Class” is a Sucker Bet

As my colleagues and I developed our model for Return on Innovation, we saw three sources of attractive returns.  They are:

1. Differentiation leading to sustainable competitive advantage.  The return comes from customers preferring your offer over the competitor’s (more revenues) and paying a premium for it (higher margins).

2. Neutralization of a competitor’s current competitive advantage.  The return comes from being able to compete in more sales opportunities than you previously could (leading to incrementally more revenues, but not better margins).

3. Productivity leading to better overall profit margins.  The return does not come from any change in competitive advantage but rather from your ability to accomplish the same outcomes with fewer resources.

Note the difference between the first two goals, neither of which correlates to best in class.  Differentiation requires you to be unique in class or “beyond the class.”  Unless you escape from the norms of the category, you cannot gain sufficient bargaining power to drive increased sales and higher margins. 

By contrast, neutralization requires only that you make it “into the class,” that is, meet the minimum market standards for an acceptable performance.  Once you have, you can check this item off your list, and your competitor has lost the leverage it once held.

Best in class falls between these two goals.  It is not sufficiently differentiated to be unique, and thus it does not create bargaining power.  But it goes well beyond the minimum acceptable standard, which means you have spent a bunch of resources beyond what you had to and achieved no economic return for so doing!

That’s why “best in class” is a sucker bet.

In essence, best-in-class projects should be classified as waste.  That is, they are competitive advantage projects that aim too low.  They do achieve some level of differentiation, but it is not enough to create the bargaining power with customers that leads to higher revenues and margins.  In effect they are a form of corporate entertainment whereby teams enjoy the moral authority of a lofty-sounding objective but in fact have no accountability for any measurable economic outcome. 

Darwin will not be fooled.

Comments

[Ganon Hall]

Great post. Would love to hear real examples of companies (or better yet products) that fall into these categories.

I've always thought of the iPod as "best in class": It wasn't the first MP3 player, not was it even the first hard disk MP3 player, but the UI and industrial design make it "best in class." Can a product be best in class and still meet one of the Return on Innovation criteria?

[Randy Cronk]

As I said in my blog post about this (http://tinyurl.com/fjuu6), I think too many high tech companies run away from their value-creating differences rather than promote them.

But "best in class" as waste? I think that's true if you are talking about marginal innovation, but not in the sense of superior execution.

[Geoff Moore]

TO Gannon: An example of three companies that fell into the best in class trap would be HP, Compaq and IBM in the PC business, each of whom devoted enormous resources seeking to become best in class, none of whom were able to create "beyond class" differentiation from the other two, all of whom lost out to Dell who simply played good enough in product innovation and trumped them all in process innovation.

[Geoff Moore]

to Randy: Let me suggest that "superior execution" gets rewarded as a productivity outcome, not as a differentiator. That is, it does not change the competitive dynamic by creating an unmatchable offer but rather by fielding a competitive "matchable" offer while using fewer resources. This means in effect the company either fields more offers than its competitors or earns better retruns on the same number of offers. What it does not ask the customer to do is pay a premium over other offers, which is what differentiation investments require if they are to be reimbursed.

[Saul Kaplan]

I agree that best in class is a losing game and to stretch the metaphor suggest the need for a “classroom without walls”. The very notion of competing within a walled classroom or within a traditionally defined competitive set does not reflect the reality and promise of our shiny new networked world. The best opportunities for creating sustainable value lie in the gray areas between organizations, functions, and sectors of our economy. The solutions to the real issues of our day, little things like healthcare, education, security, and quality of life will only be solved by “beyond the class” innovation and what I like to call collaborative innovation where private and public sector innovators can come together to explore and test better ways to deliver value.

[Lutz]

Michael Porter: Competitive Advantage

What's the news?

[Geoff Moore]

TO Saul.
“The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.”

[saul kaplan]

Geoff

Maybe a little fire and brimstone is exactly what the doctor ordered. Clearly there is a profound inertia of rest in the soul of most organizations when it comes to business model innovation. As we know, tweaks to today's business models abound but are not sustainable. Perhaps doing R&D for new business models on an ongoing basis is called for. We might stand a better chance for inertia of motion.