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Daily RC Article 96

Strategic Borrowing: Accelerating Innovation in Emerging Markets

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Young children learn individually, but because they observe one another, any group of them is performing a kind of collective experiment, enabling each one to learn more than he or she could alone. Indeed, pre-schoolers often imitate one another. Rarely do they bother trying to outdo one another. Borrowing is also typical of successful new-market innovators. Astute borrowing can make the difference between a winner and an also-ran…

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The practice of borrowing runs directly counter to the conventional strategic imperative of differentiation––which traditional strategists argue is essential to avoiding the negative spiral of competing only on cost. But trying to differentiate early on in a new market can lead a company down a blind alley. A more effective approach, we argue, is to treat other companies in the space as peers rather than competitors. When we interviewed executives in a nascent fintech category, we discovered one firm that was so focused on distinguishing itself that it spent millions developing a slick user interface and proprietary algorithms…, nearly going broke in the process. Meanwhile, a successful rival pursued a different approach: It reproduced a peer’s user interface and opted for a financial-analytics provider that other fintech companies had hired to gain access to shared brokerage data. Borrowing enabled the company to develop a working prototype of its product quickly and cheaply.

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To be sure, borrowing is unlikely to produce an optimal business model... It won’t identify the product that all customers value over existing solutions or the best mechanism to profitably deliver it. But it typically lowers the amount of money and time needed to design a good-enough-for-now offering, by treating peers as a treasure trove of ideas and resources from which a company can draw. Firms can then spend more on other aspects of the business model and on testing assumptions. Borrowing also helps entrepreneurs resist the temptation to strive for an optimal solution right away––an unrealistic and unnecessary aim in a brand-new market. At this very early stage, quickly assembling a rough prototype for hands-on learning is nearly always a more useful aim than pursuing a perfect solution is.

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Of course, entrepreneurs could always borrow faulty ideas. But because they focus on how to profitably deliver value to customers, they’re likely to be reasonably astute judges of whether a given idea is good.

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This is not to say that new-market entrepreneurs don’t or shouldn’t differentiate. But initially, we argue, their primary competitive focus should almost always be on an existing substitute … not on their new-market rivals. The successful fintech companies we studied saw their true competition as established investment and wealth-management firms. In their messages to prospective customers and investors, they all presented themselves as superior to traditional sources of financial guidance. They mostly ignored their fintech peers (preferring to “play the course, not the players,” as one company founder memorably expressed it).

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A focus on established substitutes helps entrepreneurs create a realistic value proposition. Peers at this stage are likely to have few users, but established substitutes are already providing value to customers. As one fintech founder noted, viewing established substitutes as the true rivals prevented his team from “worrying about the wrong things.” To be sure, this focus can be hard to achieve in practice, as many venture capitalists demand benchmarks against other start-ups, but enlightened investors and founders find other ways to measure progress.

#BBD0E0 ?
The article highlights the value of borrowing ideas in new markets, emphasizing how learning from peers and established substitutes can expedite innovation. It challenges the conventional differentiation strategy by advocating for a more collaborative and borrowing-oriented approach, especially in nascent industries like fintech. Borrowing ideas allows for quicker prototyping and learning, focusing on delivering immediate value rather than aiming for a perfect solution. It suggests that early-stage entrepreneurs should view established substitutes, not their direct competitors, as their primary focus for creating a realistic value proposition.
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