Creating Differentiated Value When Using Open Source

by VanL

One of the most common questions for businesses is how to create differentiation when building on or using open source code. The answer is that these days, your business differentiators usually aren't your code. It is all the things around your code that usually lead people to buy your products.

The 80/20 rule

Almost everything in life can be analyzed in terms of the "Pareto principle," sometimes known as the 80/20 rule. When you consider everything that goes into the total value that your product or service delivers to the customer, most of it plays a supporting role: necessary, but not differentiating. For example, think about the seats in your car, or the dialer application on your phone. Those seats and dialer applications include supporting code. If they are not there, or are poorly implemented, they can and will reduce value. But supporting code doesn't drive sales. It doesn't increase your addressable market. By definition, it is not the reason to buy.

Most evaluations find that only 20%–or less–of your product value is differentiating. This differentiation is what drives the economic engine of your company. Perhaps it provides a significant cost/capability advantage, or provides the customer a compelling reason to buy your product. Although there are only a few of these differentiating elements, these are the items that drive revenue and growth.

The key is to identify what really drives your sales and customer experience, and then act accordingly. Differentiating aspects of the product should have protective strategies; supporting, commodity aspects of the product benefit from cooperative strategies (like open source).

Identifying Differentiators

So how can a company quickly identify which aspects of their products are differentiating and which are not?

The answer is to use your strengths. Your organization and its products have strengths and weaknesses, just as your people do. In the product context, strengths are differentiators - the reasons why your customers buy your products rather than those of your competitors. While strengths can change over time, frequently they are deep in the "DNA" of the company, a result of the unique culture and market perspective that made the company successful.

Companies do best when they understand their strengths, embrace what makes them different and focus most of their efforts on extending that advantage. Companies usually have one to three key strengths, a few other supporting pillars, and everything else is just maintained at an acceptable level.

Here are some common ways that companies differentiate:

Each company works to define the unique value of its products or services in the marketplace. They do best when they understand their strengths, embrace what makes them different and focus all their efforts on extending that advantage. Here is a list of some of the common ways that companies create differentiation:

  • Accessibility - Opening the door for a new class of customer. Companies with this strength succeed by moving their product or service into mainstream adoption by improving its price or usability. They often make incremental changes push purchasers over critical tipping points.

  • Associated Services - Personal help, professional results. Companies with this strength recognize that customers need strong partners to be successful. They look to provide guidance and support to ensure their customers can navigate confusing and difficult markets. Frequently paired with Expertise.

  • Branding - Defined value, clear expectations. Companies with this strength know how to create a clearly defined identity and set of expectations. They quickly and consistently convey their competitive advantages to the market.

  • Community - It’s bigger than any one of us. Companies that differentiate with community work to build value for others outside of their immediate product or service offerings and generate long-term goodwill. In turn, the community brings them new opportunities and offers intangible support for new initiatives. This strength can be particularly powerful when used in the context of open source.

  • Culture - A special place attracts and retains special people. Culture is closely tied with brand and reflects a commitment to creating an environment where certain values can thrive. Companies that differentiate on culture must ensure that the mores are clear and can communicate value to a variety of customers over time.

  • Delight - Neat! Companies with this strength focus on surprising customers with a uniquely positive experience. This requires forethought and the step-by-step anticipation of customer needs and expectations as well as the capacity to exceed those expectations.

  • Design - A crafted experience. This strength is about providing goods that integrate with and complement different lifestyles. While this may be related to Delight, it can stand on its own—think of Ikea.

  • Documentation & Explanation - Exposing the inner workings. Companies with this strength focus on making the mechanics of their product or service transparent, often to win over first-mover or high-end specialists. They often view customers as Design and Implementation partners.

  • Ease of Use / User Experience - It just works. Companies with this strength invest in understanding how people interact with their products. They take pride in the look and feel of their products and react to how customers feel after they’ve made a purchase. This strength is often paired with Delight and/or Design .

  • Expertise - People who know. Expertise is a skill and knowledge gap between a buyer and a seller of services. Companies with this strength know that customer trust comes from detailed knowledge and hard-won experience. They respect and promote people with a proven track record of success.

  • Implementation - We do it better. Even when a process or an end result is commoditized, there may be ways in which the user-visible process for reaching the result can differ. Companies with this strength focus on delivering on their implicit promise to customers and take pride in speed and efficiency of their execution. This strength is frequently paired with Specialization or one or more Single Points of Excellence .

  • Integration Making it all work together. Companies with this strength are like master chefs, combining diverse ingredients with novel processes to prepare something far more valuable than the sum of the constituent parts.

  • Integrity - Do what you say, every time. Companies with this strength make a point of visibly adhering to a code of conduct, even at the expense of short-term gains. Products with this strength have high SLAs and clear expectations about failure cases.

  • Legal Exclusion - Patents and Copyrights. Companies with this strength work the system to prevent others from encroaching on their territory. This can take many forms such as government-granted monopolies, anti-competitive legislation or patent protection. Companies with this strength invest in creating and cultivating ties with policy makers and thrive in markets that involve large capital commitments.

  • Lock-in - Creating walled gardens. Many companies try to create Lock-in by making it so that their products only interoperate with each other. This can be an effective strategy for market leaders, but it is unpopular with customers and may deteriorate over time. Frequently paired with Integration or Legal Exclusion.

  • Margin Tolerance - "Your margin is my opportunity." As much as every company loves fat margins, it is a competitive advantage to know how to be lean and to make do on less. They learn to survive on thrive with very little overhead. Think of these companies as the ones that go to the gym. When it comes time to fight, they are able to undercut the competition and maintain their position.

  • Openness - Commoditize your complements. This is the mirror image of Lock-in . When a company has strengths that don't depend on keeping source code secret, then Openness can actually be a moat. Other companies that rely on Lock-in to keep up profits may be at a disadvantage. Usually requires pairing with one or more other strengths from this list - but almost any one will do.

  • Operational Excellence - Doing it well. Companies with this strength promote efficiency and strive for quality in all they do. They view the process of getting something done as important as the final product.

  • Perception of Leadership The first, the best, for winners. Companies that cultivate a perception of leadership draw strength from the halo effect around their market position. They can convince customers that their new approach or feature set is the most relevant by virtue of the success they've enjoyed in other areas. Success begets success and can endow a patina of legitimacy to anything they do.

  • Play - An invitation to interact. Companies with this strength are adept at drawing customers into an environment that’s safe for experimentation and exploration. They succeed when they can convert that first experience into a long-term relationship.

  • Portability & Interoperability - Works well with others. Companies with this strength reduce the decision-making cost associated with their product or service. They invest in maintaining common functionality so that their customers do not have to and thrive in markets with a multitude of vendors each offering highly heterogeneous solutions.

  • Price - Money talks. Being the low-cost leader is a clear differentiator – just ask Walmart. This strength is frequently paired with Scale or Operational Excellence .

  • Scale - Bigger is better. Companies that find strength in their size can take advantage of economies of scale to deliver lower-cost goods. They can also exert market power to extract better pricing from vendors or put pressure on competitors. Scale may provide the greatest advantage to companies that use it to solve problems that smaller companies can only dream of.

  • Single Points of Excellence - *If you want X, no one else comes close. Companies with this strength build products that are defined by their capability in one or two specific areas. All other aspects of a product may meet minimally viable requirements, but these features or functions make this product the only choice when that specific capability is what you need.

  • Specialization - Mastery of a niche. Specialization is a cost gap between a buyer and seller of services. As companies focus on a particular niche, they can out-compete other companies that have less focus. It is frequently paired with Expertise but not necessarily (e.g., fast food is specialized, not expert).

  • Trust - You can count on it. Companies that deliver trust focus on the details of execution and build a strong commitment to customers. Whenever possible, they align their incentives to support customer outcomes to ensure that trust is systemic as well as implicit.

  • Value - More for your money. Companies with this strength focus on delivering the best product for the least cost. They understand that consumers care about getting a good value and constantly search for ways to improve their efficiency or increase their scale to reduce costs.

Find your non-code differentiators

You might want to think about some of the most successful companies you know. My guess is that it isn't too hard to see in these strengths the portraits of some of the most valuable companies in the world.

From an open source perspective, though, what should be apparent upon reading the list above is how few of these differentiators really depend on keeping source code proprietary. If you can identify what your customers truly value, then it opens the door for your leadership (and your OSPO) to make a difference by aligning your open source efforts with the things that your company does to create value.