Health Commentary


So, not surprisingly, companies compete by making better products. In other words, competition during this stage is basically driven by performance. As engineers design each successive generation of product, they strive to fit the pieces together in ever more efficient ways to wring the most performance possible out of the technology available. Typically, major subsystems need to be interdependently designed--and, as a result, a competitor needs to make all the product's critical subsystems. During this phase, the competitive advantage of vertical integration is substantial, so manufacturers do almost everything themselves. This is the way it was in the earliest days of the PC industry, for example. The next stage of an industry's development begins when the performance of its products has overshot the needs of customers in the less-demanding tiers of the market. These customers won't pay premium prices for more performance, of course, but will pay extra for a product that is extraordinarily reliable, or one that has been customized to meet their specific needs--especially if they can get that ultra-reliable or customized product quickly and conveniently. Ease of use is another feature that customers typically reward with a premium. To compete on the dimensions of customization, quick delivery, and convenience, product architectures whose pieces are strongly technologically interdependent tend to give way to modular ones, in which the interfaces among subsystems are standardized. This modularization lets designers and assemblers respond quickly to changing customer requirements by mixing and matching components. It also lets them upgrade certain subsystems without redesigning everything. But perhaps the most important repercussion of modularization is that it usually spurs the establishment of a cadre of focused, independent companies that thrive by making only one component or subsystem of the product. Think Seagate Technology in hard-disk drives, or Delphi Delco in automotive electrical systems. One of us (Christensen) has studied how industries that are in transition between the two stages present peril for established firms--and opportunity for upstarts. Large firms can easily become blind to shifts in the types of performance that are valued. For an established company, with its well-defined competencies and business models, the obvious opportunities for innovation are those that focus on unsatisfied customers in the higher market tiers. After all, that is where the innovations that the company has structured itself to deliver are still being rewarded by premium prices. Inevitably, though, this high-tier, performance-hungry group of customers shrinks as performance gets better and better. At the same time, in lower market tiers there is a huge increase in customers who are willing to back off from the leading edge of performance in exchange for high reliability, customization, ease of use, or some combination of all three.

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