The Future Market for Second Mouse Companies

Jan. 6, 2012
Will Chinese companies begin to evolve and be more like their Western competitors?

Note: This article is part two of series. The first article was "We Aren't the Champions: Achieving Success as a Second Mouse."

In the first part to this article, we wrote about how a number of highly-successful Chinese companies have achieved their results not by emulating the Early Bird that catches the worm, but rather by emulating the Second Mouse that gets the cheese. The business models of these Chinese companies vary, but generally are some version of "offering products that are nearly as good as the global competitors at a much lower price."

A number of these Chinese companies have been agile enough to be first to borrow ideas and concepts and become the Second Mouse rather than Third or Fourth or One Hundredth Mouse, in order to dominate their home market in China, where fast follower innovations to reduce cost can easily win the day.

A few like Huawei have emerged as global giants by first offering a better value proposition to Chinese telecom customers, later to those in other developing countries, and finally to those in Europe, Japan and North America.

In our review of these Chinese Second Mouse companies, we concluded that they were not merely viable from an economic perspective, but were in fact prospering. Borrowing from the song made popular by Queen, we concluded that while these firms "Aren't the Champions" from the traditional perspective of leadership in design, technology and features, they could in fact be quite proud of their accomplishments as Second Mouse companies.

In this part of the article, we will examine whether future market evolution, rather than economic woes, might force them to abandon the Second Mouse business model and begin to evolve to be more like their western competitors.

"I've Had My Share of Sand Kicked in My Face" - Will different markets drive the Second Mouse toward different outcomes?

So, the next question is whether the market will permanently reward a company pursuing a Second Mouse business model, or if this model is just a way-station on the way to pursuit of a more familiar set of objectives toward cutting-edge product offerings. Our answer is complicated: some markets cry out for Second Mouse offerings, while others do not. In some market segments, the Second Mouse company will soon begin to get "sand kicked in its face" and need to reassess its fundamental business model, while Second Mouse companies continue to thrive in other market segments.

Market Segments withLimited Scope for Second Mouse Offerings
In the former category, we can think, for instance, of the global market for data center equipment.
Customers can be characterized as looking for offerings that add another "9" to the reliability of the product, rather than seeking out those that offer "almost as good reliability at a much lower price." There will always be a few customers with a few undemanding applications, but in general to compete in these markets, a company needs to deliver what matters to the customer and that is most assuredly not focused on price. Builders and operators of data centers, reflecting the critical performance standards of their customers, see their success in "more and better" rather than "OK and cheaper." That is not to say that if someone achieves a breakthrough of identical performance at a better price, it would not be embraced. But any performance differences will always be the focus.

Situations in which health or safety are at issue is also likely to fall into the category of rewarding high-end products and not aggressively embracing Second Mouse solutions. One would hope that commercial aircraft manufacturing would not end up being the province of those who take costs out of the system by cutting corners on safety (although there may be some carriers in some developing regions that could temporarily embrace such products.)

It also does not mean that no one will welcome a solution that is better at meeting real customer needs by taking costs out of the system by eliminating "bells and whistles" that are considered unnecessary by most participants, while leaving performance on critical factors such as safety unaffected.

More Natural Second Mouse Segments
Squarely in the category of "natural Second Mouse" market segments would be those where over time the major producers of a product have either lost sight of the market's needs or the market has changed while they have not.

Examples we have seen in our work include a supplier of cell phone components who does extensive testing to verify that the parts will function for the 10 years they are warranted to perform. This behavior is ingrained and a legacy of the time when cell phones were an expensive investment that had to function for many years. As even smart phones have become a fashion accessory and increasingly disposable, rapid achievement of new designs has replaced years of guaranteed function as the main factor the customers seek.

A Second Mouse supplier of components that can take both costs and complexity out of the system is helping his customer produce a perfectly acceptable product that better meets the need for speed and saves costs without any meaningful compromise.

The Second Mouse manufacturers of smart phones are also changing the model, touting their "almost the same at a cheaper price" performance. Their suppliers win, not by providing each customer with unique component designs, but by giving the customers components as close as possible to those that global leaders use.

Telecom infrastructure applications that are not as critical as data centers are a case in which Huawei has won globally with a highly creative Second Mouse business proposition. Positioning its switches as "nearly indistinguishable in performance at a fraction of the price" resulted in slow penetration in head-to-head bidding with the global market leaders for new projects or major infrastructure replacements.

But Huawei got creative in using its economic advantage by selling telecom operators on the idea of replacing older equipment that was still functioning satisfactorily with new Huawei equipment at a price point so low that the cost could be recouped in energy and maintenance savings alone. By changing the game, away from competing with the global leaders' new equipment and to competing with prior generations of their equipment, Huawei was able to demonstrate a clear advantage without having to be the recognized global leader in reliability and innovation.

Segments that are a Mixed Bag
Between the extremes is a broad mid-range where quality is important and customers are not focused with laser-like attention on saving pennies, but are happy to do so by making compromises that they see as less than critical. And criticality is often unique to each customer. Simply stated, segmentation creates opportunities for the Second Mouse companies. And the typical attributes of a Second Mouse company, namely the ability to operate at "China speed" and mastery of China Economics, make it quite possible for them to respond to discrete segments of the market.

Examples we have seen recently include several different kinds of testing equipment, where Early Bird companies focus on continually improving the products, with leading edge additions. Their work expands the range of tests that can be performed and allows the ultimate flexibility for user-defined tailoring of use. A Second Mouse competitor who designs a much simpler machine that does one thing impeccably well, more like an assembly line tool than a laboratory research device, will provide a better product at a significantly lower price for a large number of customers who do not value the flexibility.

A similar Second Mouse opportunity is in building control systems, where the global leaders design for experienced operators to have ultimate control in order to do extensive programming to save energy and achieve other important goals, while the less sophisticated customer wants something that is the ultimate in simplicity and does not require scarce technical resources to be used to run the system, even at the expense of not being able to tailor to the particular application.

This is one case in which the China market is quite different from the mature markets. Indeed, those buyers we spoke with in China had a vision of a control system that "we buy, put it in a room, and lock the door." Too many options offered to untrained users is worse than no options at all. So a long-term winning product for the China market may be the Second Mouse product, while the non-Second Mouse offering continues to win in more mature markets. But with experienced workers being expensive and increasingly scarce in mature markets, there may be an increasing number who would find such solutions to be attractive as well. At the same time, over time the China market may evolve toward becoming more demanding.

This example introduces the notion that the global marketplace can have different requirements from those in the China market. We have experienced the difference in markets for all kinds of building systems. For instance, global standards that building systems need to be designed for many decades of life are less relevant to those who anticipate even large buildings lasting a decade or so. So products that involve shortcuts related to service life (not safety) will not be seen as involving much of a compromise.

In addition, in the China market, service labor is still very cheap. In the U.S. and Europe, avoiding service calls is a key customer advantage. But in China, products from air conditioning systems to elevators that are not engineered (over-engineered?) to require few service calls are fully accepted. In fact, we often find that when the products require frequent service and when the service is extraordinarily quick and effective, the result is that the manufacturer gets higher marks than others whose products are more reliable.

So, once again in this instance, all generalizations are false. There are cases in which the Second Mouse model has limited applicability and there are cases in which it will have longer-term viability. And, these situations sometimes differ by geography. So, there will be some cases in which the Chinese companies will be challenged in markets beyond China, but will be very strong at home. In general, though, the threat is a significant one.

The Downside of "Early Bird" Product Improvement
A number of these case studies drawn from our consulting work share stories of suppliers whose engineers work to make products that are more complex, have more features, and allow more flexible operation over time. In other words, they strive to be the first and best with new capabilities.

In most cases, outstanding companies make these "improvements" based on requests for an additional capability or feature from a set of good customers. These customers are typically demanding and view the supplier as strategic. So, with a vision of the typical customer as being as demanding and knowledgeable as the ones who give feedback, as well as being sophisticated and able to talk to the engineers about features and capabilities, it is natural that over time products evolve in both complexity and expense. That evolution actually opens the door wide to Second Mouse offerings. It represents a challenge that we have only recently identified in the marketplace as being of critical importance.

But the Chinese Second Mouse companies seem to have developed the ability to learn what features are viewed as unnecessary by customers in their target market -- an important, and quite different, skill than that of the product development experts who query customers about how and where to raise the bar.

In the final part to this article, we will examine the competitive implications of Second Mouse companies for today's global market leaders from the west. We will look at two important questions from the perspective of the future competitive environment - whether leadership in technology, design, and features can allow western firms to retain their global leadership position, and whether the Second Mouse companies are likely to change their priorities to compete with western companies along those very dimensions.

George F. Brown, Jr. is CEO of Blue Canyon Partners, Inc., a strategy consulting firm, and is co-author with Atlee Valentine Pope of "CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs." David G. Hartman is Blue Canyon Partners' China Practice Director and has been an active participant in China's markets for over twenty years. He has previously served on the faculty of Harvard University and as executive director of the National Bureau of Economic Research.

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