Trade-offs between innovation and imitation

A flourishing commercial zone often has shops lined up selling identical items to their customers. Likewise, many convenience stores in a neighbourhood operate profitably whilst offering the same type of choices.

Similarly, a petrol station never seems to exist on its own especially near the entrance and exit points to a freeway. Also, in many of our cities, there are food streets full of vendors that thrive despite offering ‘identical’ menu choices. Interestingly, all these instances of outlets selling similar products is not coincidental, but an inevitable result of a dynamic exchange between the contestants. On the surface, it may appear illogical for a store to stack goods that are commonly available with other shops in its neighbourhood.

However, this behaviour of maintaining minimum product differentiation has been shown to be rational by Harvard Hotelling in one of his researches published in 1929. His investigations showed that as businesses are driven to maximise their market share, they tend to procure the same items which are driving the sales of their successful competitors. Over a period, this back and forth between trade rivals eventually leads to a state in which all the outlets settle on a similar set of offerings to their customers.

To gain better appreciation of the nature of interplay between competitors, we can hypothetically examine the journey of a few convenience stores operating in a busy neighbourhood. For simplicity, we can assume that all locations have equal access to customers and that a given item has the same price across all outlets. Therefore, in this situation, the principal way to attract maximum visitors is to offer the most relevant collection of goods. Hence, every shop engages in the process of trial and error to configure the optimum selection of products to maximise their sales.

At the onset, we can expect all the outlets to have different combination of items being sold at their stores. As visitors explore the shops, they are likely to crowd around the ones that stack the most pertinent choice of goods. Therefore, the struggling entities are likely to focus on reducing the difference between products sold at their premises versus the leading outlets. Hence, this continuous quest causes the trailing stores to transition through various configurations in their pursuit to attract the greatest number of customers.

However, at some stage during this process, one of the stores that is in the chase could stumble upon a combination of items that is more relevant than what others are offering. Hence, a new leader starts to emerge that begins to attract the maximum number of shoppers. As the impact of this change starts to take root, the new cohort of trailing stores begin to minimise their gaps with the latest top contender. Hence, this highlights the dynamic exchange between the rivals that carries on until most of them converge on a group of common offerings that best attracts the customers.

Therefore, this interplay within competitors results in a state of quiescence represented by those items that generally perform well across all shops. Although imitation is a rational response to competitive pressure, what is often overlooked is that doing it successfully also requires intelligence. This misunderstanding is perhaps due to the negative connotations attached with copying since our childhood days. However, it is not difficult to see that successful replication requires significant brainpower.

Take for instance an owner of a struggling store who observes that a leading shop in the vicinity offers about 25 products that are different to what they are selling. However, as the proprietor draws a plan to address this gap, the financial and space limitations could restrict the reduction target to only 5 items. So, the main question for the owner is which 5 items to select out of the 25 differences? It turns out that this is quite a complex problem to solve since there are roughly 53 thousand combinations that fit this criterion. Hence, a lot of thinking needs to be done since the wrong shortlisting of 5 items could be risky and may in fact have a detrimental effect on sales.

The key insight here is that every observed dissimilarity between a successful and struggling competitor cannot be deemed as a driver of success. Some differences could be merely cosmetic in nature and hence it is important to focus on the ones that are the genuine determinants. Although a trailing enterprise can quickly cover lost ground by dovetailing their key competitors, it is also important not to ignore the role of innovation. Broadly speaking, an organisation’s share of the market can help us choose which approach is more appropriate.

If a particular entity is leading the pack, there is relatively less to gain from imitating others and there are significantly more benefits to invest in innovation. This investment could be critical to ensure that a business continues to maintain its top positioning versus its key rivals. On the other hand, if the business is trailing others, the logical approach is to invest in smartly learning from others as opposed to engaging in expensive innovation projects. This strategy could help in gaining a quick share of the market, and as we discussed, is the principal reason why competitors converge to sell identical items. Therefore, the simplified rule of thumb could be stated as follows. If an organisation is leading, it should innovate, else it should imitate.

A typical business offering has many facets that perform at different levels in comparison to others. For example, a specific product may have features that stand out in relation to its competitors, whereas, it might have other attributes that might not fare as well. Hence, it is important for organisations to continuously benchmark their offerings with key rivals to devise future strategies. For example, they could adopt from leaders in those parts where they are trailing, whereas, invest in further innovation in those aspects where they are leading.

There is no doubt that innovation provides a business with what is known as the first-mover advantage. However, on the contrary, imitation provides what is known as the second-mover advantage which essentially relies upon avoiding the pitfalls that besets a pioneer. In essence, both approaches have their unique merits but it’s important for organisations to understand the trade-offs and adopt the one that best suits its specific situation.