To Boost Innovation, Enlarge Your Competitive Space

You can learn a lot from distant competitors that your closest rivals overlook
To Boost Innovation, Enlarge Your Competitive Space

The essentials

  • By monitoring peripheral competitors or competitors that do not monitor each other, firms gain the raw material for their own innovations while minimizing the chance of retaliation or a technological arms race.
  • “Distant” competitors may be non-direct rivals catering to a different market; “dark horses” that fly under the radar; or “disconnected” rivals that don’t pay attention to each other.
  • A study found that firms introduce more new products when they focus on different-market and peripheral competitors.

There is an old saying that only a fool learns from his own mistakes, while the wise learn from the mistakes of others.

The most agile organizations understand this well. These are the firms that closely monitor the innovative moves of competitors to find ways to develop or improve their own offerings and optimize R&D efforts.

But if competitive monitoring is such an important source of learning, why do so many firms go only half way? In effect, that’s what they do when they define their competitive space tightly and limit their intelligence gathering to direct competitors within the same geographic area, industry, or product category. Instead, why not study and adapt the initiatives of firms on their periphery that offer new insights without threat of retaliation?

That’s what puzzles Sruthi Thatchenkery of University College London. After all, she says, “monitoring distant competitors – especially competitors on the periphery or competitors that do not monitor each other – gives firms more raw materials for recombination and guides firms to search in less crowded areas, while also minimizing counterproductive racing.”

“Racing” happens when direct rivals innovate in lock step down one path, which actually ends up stifling innovation (the so-called “Red Queen effect”).

Who Is a Distant Competitor?

In her own research that looks at how competitive monitoring influences firm innovation, Thatchenkery defines “distant” competitor in three ways.

One is the non-direct rival that caters to a different customer base. In this case, there’s no zero-sum competition and less chance of a turf-protecting patent fight. And the payoff can be substantial. “Because the knowledge acquired from different-market competitors is unlikely to overlap with that of the focal firm,” she says, “integrating that knowledge into the focal firm’s innovation process is more challenging but also potentially more significant for innovation.”

Thatchenkery cites the example of a database software firm that introduces a product that more efficiently scans and retrieves information from large databases. A security software company monitoring that firm may adapt this technology in its own product offering.

The other type of distant rival is the “dark horse” — a peripheral competitor that, for whatever reason, flies under the radar. These are firms on the outer edge of competitor networks. Thatchenkery says peripheral competitors can increase product innovation because they are “a source of less frequently used and thus more unique knowledge.”

And the final type are “disconnected” competitors that don’t pay attention to each other and that are “bridged” by a third firm. In effect, this firm acts as a knowledge broker, recombining breakthroughs from the disconnected competitors into its own innovation.

Peripheral Benefits

Thatchenkery teamed up with Riitta Katila (Stanford University) to test their hunch that distant competitors help drive innovation. Their longitudinal study focused on the actions of 121 public firms in the enterprise infrastructure software industry in the U.S. between 1995 and 2012 — firms such as Computer Associates and Symantec that offer network management, cybersecurity, and application development services. The researchers also interviewed more than 25 industry experts and former and current executives.

Thatchenkery discussed their findings at a research conference on competitive dynamics at Smith School of Business.

In the study sample, she says, the average firm faced 36 direct competitors and monitored around six of them. Around half of the competitors that executives monitored were from outside their firms’ immediate markets. On average, 14% of the competitors were peripheral dark horses.

Their key finding is that firms do indeed introduce more new products when they focus on different-market and peripheral competitors. Managers of these firms view non-traditional competitors as a conduit to less-overlapping and less-frequently used knowledge.

“Effect sizes are substantial,” says Thatchenkery. “One standard deviation increase in attention to peripheral and disconnected competitors each yields one additional product per year, in a context where the average firm introduces two to three new products per year.”

Clearly, organizational leaders even within the same industry have divergent interpretations of their competitive environment. Those that are willing to identify their rivals more unconventionally can tap into a source of learning that their closest rivals overlook.

“Our analysis suggests that executives can enhance innovation by thinking about competitors in a less conventional manner,” says Thatchenkery. “The findings suggest that monitoring competition with a wider lens represents a new path to innovation that has not been much studied. Competition is thus not merely an obstacle to overcome but rather can be used to create strategic advantage.”

Alan Morantz

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