The innovator’s paradox: differentiated products = less risky products?

3 08 2010

Chris van der Hoven wrote:              

In product and service portfolio management, a “balanced” portfolio includes value prospects that are risky (these may be very different from what we know and do currently), and those that are less risky (these are incremental – in our comfort zone). The “balance” is achieved by… limiting our exposure to too many risky prospects, but having enough risk to ensure a reasonable return.

This raises the question about the role of highly differentiated propects in the portfolio.  To be highly differentiated, they can’t be “me too” or simple derivatives of existing processes and products. They need to be different – new – not we’ve done before maybe…? So, does that mean they are very risky?If yes, then do we need to limit the exposure to highly differentiated products and services in our portfolio?

Well, that’s the innovator’s paradox! In a study of service ‘superiority’ Cooper and deBrentani found that differentiated products achieved more than 3x the success of ‘me too’ pruducts! If that’s the case, are more highly differentiated products LESS risky?

If you have a deliberate strategy on differentiation in your portfolio management, or just generally have a view on this, let us know.

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4 responses

3 08 2010
Mark Fisher

A possible twist on this is the definition of a “differentiated service/product”. Two dimensions for my software company:

a) Bespoke software development projects for a leading Oil and Petro Chemicals along side bespoke software development for an NHS Trust satisfaction survey or a fleet telematics company or a light aircraft in flight navigation aid or an Enterprise Project Management tool or…

b) Project revenue based on fixed fees or day rates versus projects based on pay per click internet services.

We don’t consider any of the projects in a) to be ‘differentiated’. We’re simply applying the same skills to different business challenges, sometimes in an innovative way. We do however consider the options in b) as ‘differentiated’, but the selection is probably not based on any innovation or a desire to be different; it’s what’s best for the project (or customer!).

3 08 2010
cranovation

Chris wrote:

Hi Mark – I guess what you have is a “diverse” portfolio of products? One measure of whether these products and services are also “differentiated” might be the extent to which they compete ‘head-on’ with alternative offerings in the market, and also the extent to which you can premium price them?

6 08 2010
Mark Fisher

Or maybe our service/product is not diverse, but our customers are. And maybe it’s the fact that our offering does add real value for this diversity of customers that makes it valuable.

Not sure where this leaves the “differentiated product” and “balanced portfolio” ideas for us?

6 08 2010
cranovation

Chris wrote:

Hello again Mark – If you are comparing products (or customers) in your portfolio – with each other – then high variability suggests ‘diversity’ and is a way of managing risk. The value to the customer is not linked to how ‘diverse’ your product portfolio is – at least not as obviously as the way in which your product is superior and unique (differentiated). So, maybe somehow – possibly through your marketing – the customer does look across the range of products you offer – but when selecting a purchase, surely they compare your company’s product against other company’s products? Assuming you are competing head on, they compare a combination of product attributes offered by each possible vendor, take a view on how that helps them remove a constraint or get a particular job done, and make a choice.

I think portfolio ‘diversity’ is a consideration from the inside looking out. Valuable to the portfolio (you) because it is a way of hedging your bets. By contrast, ‘differentiation’ is a consideration from the outside looking in – valuable to the customer because they can select a product that is superior and unique (as compared to other vendors).

Getting back to the original point then, generally developing products that require a high degree of both product and process change (internally) has traditionally been considered to be risky. Basically, incremental developments are assumed to be safer. My contention – based on the Cooper and deBrentani study – is however, that it might in fact be ‘safer’ to have more ‘differentiated’ products in the pipeline (portfolio) given their view that significantly more of these succeed overall. So, these are valuable to the customer, AND valuable to the portfolio – because they may in fact reduce the portfolio risk.

Your company has a very focused portfolio of highly bespoke products that I suspect are co-developed, or at least developed in close cooperation with your clients. The benefit of a diverse portfolio would work for you for this reason. The issue of how differentiation benefits you may only be relevant with a much larger portfolio of products that are more commoditised over time. I suspect in your type of business, it would be your customer acquisition and retention process that you’d differentiate?

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