Performance Oversupply and Basis-of-Competition Shift
Predict when the rules of competition will change by tracking when technology exceeds needs
Performance oversupply occurs when the performance that technology provides exceeds the performance that the market demands. This seemingly benign condition is in fact one of the most powerful forces driving competitive dynamics, because it triggers a predictable shift in the basis of competition. When performance oversupply occurs along one dimension, customers stop paying a premium for further improvement in that dimension, and the basis of competition shifts to the next unsatisfied dimension.
Christensen identifies a consistent buying hierarchy that markets tend to follow as successive dimensions experience performance oversupply: functionality first, then reliability, then convenience, and finally price. When no available product satisfies the market's functionality requirements, functionality determines which product wins. Once multiple products offer adequate functionality, customers choose on reliability. When reliability is satisfied by multiple vendors, convenience becomes the differentiator. And when convenience too is commoditized, price is the only remaining basis of competition.
This framework explains both why disruptive technologies eventually conquer mainstream markets and why incumbents often fail to see it coming. Disruptive technologies initially underperform on the dominant dimension of functionality but often excel on reliability, convenience, and price. When performance oversupply in functionality shifts the basis of competition to these secondary dimensions, the disruptive technology's apparent weaknesses become its greatest strengths.
- Technologies can and often do progress faster than market demand, creating performance oversupply
- Performance oversupply triggers a shift in the basis of competition to the next unsatisfied dimension in the buying hierarchy
- The buying hierarchy typically progresses from functionality to reliability to convenience to price
- The attributes that make disruptive technologies unmarketable in mainstream markets often become their strongest selling points once performance oversupply changes the basis of competition
- Identify your current basis of competitionDetermine which performance dimension currently drives customer choice in your market. Is it functionality (customers cannot get enough performance), reliability (multiple products meet functional needs but differ in reliability), convenience, or price?Pro tipUse hedonic regression analysis to measure the 'shadow price' of each attribute: how much extra customers pay for incremental improvement. When the shadow price for an attribute approaches zero, you have performance oversupply on that dimension.
- Assess proximity to performance oversupplyCompare the rate of performance improvement your technology provides to the rate of performance improvement the market demands. If your technology improves faster than market demands increase, performance oversupply is approaching or has already arrived.WarningCompanies whose marketers create demand for new functionality through clever product positioning can defer performance oversupply but not prevent it indefinitely. Microsoft and Intel have been remarkably successful at creating demand for what their technologists supply, but the gap may eventually close.
- Anticipate the next basis of competitionUsing the buying hierarchy as a guide, determine what dimension of competition will emerge next. If functionality is currently oversupplied, expect competition to shift to reliability. If reliability is oversupplied, expect convenience to become paramount.Pro tipThis is the moment when disruptive technologies become dangerous. Their 'weaknesses' in the current basis of competition are often 'strengths' in the next basis.
- Position proactively for the shiftEither invest in the emerging dimension of competition before your competitors do, or take the disruptive approach by finding markets where the new basis of competition already applies.Pro tipHP's strategy of attacking its own laser printer position with lower-performance but more convenient and cheaper ink-jet printers is a textbook example of proactively managing a basis-of-competition shift
In the desktop PC market, when 5.25-inch drives oversupplied the capacity demanded, the basis of competition shifted to physical size, and 3.5-inch drives took over despite costing 20 percent more per megabyte. When size demands were met, competition shifted to reliability (MTBF), and then finally to price, with gross margins falling below 12 percent.
Complex accounting software packages had oversupplied the functionality needs of small businesses, which did not need most advanced features and found the software difficult to use. Intuit created Quickbooks by stripping out complexity, even eliminating double-entry bookkeeping, and focused on convenience and simplicity.
Christensen observed this pattern in the disk drive industry when 3.5-inch drives conquered the desktop PC market. By 1988, both 5.25-inch and 3.5-inch drives offered adequate capacity for desktop computers. Even though 3.5-inch drives cost 20 percent more per megabyte, PC makers switched to them in droves because the basis of competition had shifted from capacity to physical size. Desktop computer makers needed smaller drives to reduce the footprint of their machines. The pattern then repeated: once smallness was satisfied, the basis shifted to reliability (MTBF), then to price. He validated this pattern against the Windermere Associates buying hierarchy model and Geoffrey Moore's Crossing the Chasm framework.