The Substitutes Threat

Try to picture this scenario. A traffic technology company invests in a technology, where intelligent sensors embedded under a layer of asphalt, are proven to successfully control the flow of traffic at stop lights. Therefore, this technology starts to be implemented across the globe. However, soon after the successful introduction, traffic logistics experts realise that while these sensors clearly work, improved camera technologies are likely to yield better results and prove to be a much better solution.

As a result, a promising Research and Development (R&D) investment evaporates unexpectedly.

This example demonstrates that an important aspect of the process of bringing innovations to market therefore is not only the analysis of present competitors, but also even more important a survey into potential (new) competitors.

The competitor analysis should, therefore, contain three steps, namely analysing:

  1. The innovation in comparison with present technologies/solutions
  2. The whole proposition relative to that of direct competitors
  3. Emerging technologies that could become a future threat.

Step one is relatively easy: What are the reasons why the new technology is better, less expensive, offers more advantages in comparison with present technology? These arguments are rather easy to substantiate.

Step two is slightly more difficult than step one. This step involves further comparing the new technology with its direct competitors as well as its positioning relative to these competitors. It is, after all, not easy to collect all relevant information regarding your direct competitors, especially, when it comes to their most recent innovations not yet made public.

Step three is by far the most difficult of the three steps. This step includes analysing and/or predicting any potential competition, which can, literally, come from anywhere. This phenomenon is known as the ‘substitute’ technologies/solutions.

In my personal experience, in most cases, little or no attention is paid to the potential threats that these substitutes can pose.

For example: Many years of research have been invested in the development of self-healing concrete. Concrete constructions often experience problems with concrete decay, which is the result of cracks on the pull side. It would be fantastic if these cracks could repair themselves!

At the moment, though, composite materials that can replace the use of concrete in the construction of infrastructure constructions (the substitute) are being developed at high speeds. Thus the crucial question is: to what extent will the increasing use of composite materials become a (real) threat to self-healing concrete?

The example above is easy to understand. Both technologies, composite materials, and self-healing concrete, have long development processes which make future analyses and scenario planning relatively simple to do. When it comes to other innovations which have a large software component, though, things can become rather complicated due to their relatively short development times.

The main reasons why thinking of (future) threats from substitutes rarely occur are:

  1. Bias and denial
  2. Lack of imagination and lack of knowledge.

Bias and denial are obvious reasons. Lots of time, money, passion, and perseverance have been put into a (very) long development process. Suddenly, it seems that a completely ‘strange’ technology might be a real threat. Rationalisations are given: “…….That will not happen of course. Our technology is superior, because of …….”.

Furthermore, reputations, careers, and large sums of money are at stake, none of which can simply be written off.

Lack of imagination and lack of knowledge as reasons also make sense. As a developer, you are extremely knowledgeable about a very specific technology, but, almost invariably, you’ll lack sufficient knowledge of completely different technologies and their development paths. Civil engineers learn how to use concrete; chemical engineers learn how to develop composites. In the case above, the developers of self-healing concrete know almost everything there is to know about concrete, but next to nothing about composite materials. Developers of self-healing concrete cannot be expected to thoroughly analyse possible threats that the development of composite materials might pose.

As technological developments continue to accelerate, thinking about potentially serious threats that substitutes could pose becomes ever more important.  I, therefore, recommend the use of independent external advisors in any case. These advisors have the advantage of not being emotionally invested in the innovation.

It’s relatively easy for start-ups to entice independent external advisors to commit to their companies.  The, usually, simple structure of start-ups makes this quite easy to accomplish and, in general, highly qualified advisors enjoy helping start-ups.  It’s important that start-ups involve these advisors early on in their development.

Large(r) companies, with their own research and innovation centres, find it harder to use external advisors to assist with technology competition analyses.  It is unusual, and uncomfortable, for large(r) companies to involve external advisors who look over shoulders and co-assess innovations. (“We are a large company.  Trust us, we’ve got all the knowledge required in-house…”). In particular, large(r) companies that claim that they have “all the knowledge required in-house” usually have trouble thinking and looking beyond their particular confines. I, therefore, strongly advocate that those within these companies who are responsible for the development of innovations surround themselves at an early stage with outside advisors who can be of essential help in analysing, from a broader perspective, the competition.

In case you’re “too late” and the substitute is already operating in the market, as the old adage goes “If you can’t beat them, join them."  Don't hesitate in these cases to find, as soon as possible, ways to cooperate, in creative ways, with your – substitute- competitor.  Such a move could result in the possibility of offering two different solutions to your (potential) clients, and, thus, positively influence both profitability and market share.  Also, parties cooperating with adjoining technologies may be able to significantly increase the probability of their investments being recoupable/recovered.

Summary

In the early stages of innovation, development is very alert to the possibility of the development of substitute technologies/solutions that might jeopardise the future of your business.

You should ask outside advisors that can make rational decisions to co-assess the possible threat of substitutes, and be prepared to cooperate with competitors if your situation so requires.

Share this article on your TLN® Profile
Share this article