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Copycatting: Is it Creative or Cheating?

December 27, 2012


“True entrepreneurs are supposed to shun imitation and try to be authentic and original,” writes entrepreneur Luke Johnson. “I’m not convinced this strategy generally makes commercial sense. Indeed, the merits of being a copycat are underrated.” [“A copycat is not second best in business,” Financial Times, 27 November 2012] His Financial Times‘ colleague, Lucy Kellaway, agrees. She writes, “There is nothing to be ashamed of in this. It is good to copy – we would have died out as a race if we didn’t do it. Copying gives me access to an infinitely richer and more varied menu of ideas than if I had to limit myself to my own meagre store.” [“Copying, the mother of the best inventions,” Financial Times, 6 November 2011] Not everyone is so sanguine about the benefits of copycatting. Bianca Bosker, for example, reported that Reid Hoffman, co-founder of LinkedIn, and Steve Case, co-founder of AOL, argue that “the proliferation of copycat companies” has “become the scourge of the startup scene.” These copycat companies are generally referred to as “clones.” Bosker continued:

“New web companies are being cloned earlier in their lifecycle and more quickly than ever before. … They noted that startups often duplicate a site’s design, terms of service, text and code to produce a replica that is virtually indistinguishable from the original. Such practices are ‘unconscionable’ and ‘unethical,’ Hoffman said.”

Johnson, on the other hand, argues, “Every business idea is derived from something that preceded it – what lawyers call prior art.” He continues:

“The level of replication in any so-called new product or service is simply a matter of degree. Unless you specifically infringe a patent, design, trademark or copyright, or are very blatantly passing off your goods as if they were a rival’s, you can profitably rip off an idea. As ever, it is execution that matters, not the idea.”

Hjalmar Winbladh, founder and CEO of Wrapp, complained to Bosker that cloners aren’t promoting innovation they are killing it by attacking the young. “What is worrying from an innovation and entrepreneurship point of view is cloners seem to be going after younger and younger companies and also have been able to attract a huge amount of capital,” Winbladh said. “They have more resources and can steal the technology, text, everything from a small startup and deploy that on a massive scale before the small innovator has the muscles to fight back.” Johnson doesn’t disagree on that point. He writes, “It can be much quicker, cheaper and lower-risk to mimic than to start something from scratch.” Johnson continues:

“The digital marketplace is swamped by clones. Among the most successful in the field are Alexander, Oliver and Marc Samwer, three brothers in Germany who have built copies of eBay, Zappos, Groupon and Airbnb across various European countries before the Americans arrived. Their form of ruthless innovation has been exceedingly effective: they are reckoned to be billionaires. The brothers run a clone ‘factory’ called Rocket which incubates dozens of internet start-ups – many of which take their business plans from Silicon Valley. They have learnt to scale rapidly, and tailor online companies to European tastes and cultures – which is why they have done so well.”

Johnson appears to be perfectly at ease with such clone factories. Bosker calls the Samwer’s brothers activities “notorious.” She continues:

“The people behind these simulacra startups frequently hope to gain share in a local market, then sell their company to the firm whose concept they cribbed. This strategy has paid off in the past: Groupon purchased its German clone Citydeal, a brainchild of the Samwer brothers, in 2010. Copycats may also resort to ‘blackmail’ tactics, noted Winbladh, who said that the individuals who cloned his company offered to shut down their site in exchange for equity in his startup. Winbladh refused their offer. Neil Blumnethal, co-founder of Warby Parker, an e-commerce site for eyewear, called on [venture capitalists] to unite in stonewalling creators of rip-off websites and withholding funding from companies that replicate other founders’ creations.”

Ndubuisi Ekekwe, like Johnson, understands why cloners have arisen. “Nothing breeds copycats like a successful business venture,” he writes. “When a new business idea is incubated and executed successfully, cloners naturally emerge and imitate. … Copying others is a reality of doing business.” [“When You Can’t Innovate, Copy,” Harvard Business Review Blog Network, 24 May 2012] Although admitting that imitation is a form of flattery, Ekekwe doesn’t believe that such efforts are innovative. “While innovation funds are common,” he writes, “it’s rare to read of imitation funds.” He continues:

“Innovation has become a buzzword that connotes respect and profitability. It is seen as the fulcrum that will propel a business to success. So, firms are encouraged to invest in R&D to outflank competitors with potentially better products that could win markets and generate better margins. The push to the top of the innovation index means that some companies will try to avoid what others have done — even when others are yielding better results. Personally, that has always been my way of looking at business — innovate or perish. And I have also supported the notion that innovation is central to economic prosperity.”

Nevertheless, Ekekwe has to admit, “The Samwer brothers have certainly shown that in the absence of innovation, copying and funding already-tested business models can work.” Johnson agrees. He writes:

“I would generally prefer to back a replica of a highly profitable and thoroughly tested business – but in a new territory – than invest in a genuinely pioneering idea. The latter sounds much more exciting, but it probably won’t work: the former has a much better chance of making it. Creativity is often exaggerated as a vital skill that every entrepreneur should possess. In fact, a sense of opportunism and an ability to carry out tasks effectively are at least as important. Advances progress incrementally, not by giant leaps. And both types of venture help create jobs and wealth.”

An academic who seems to have influenced Johnson’s thinking is Oded Shenkar, a professor at Ohio State University’s Fisher College of Business. Shenkar is author of a book entitled Copycats: How Smart Companies Use Imitation to Gain a Competitive Edge. Johnson notes that Shenkar “argues that just copying a market leader in every respect isn’t clever: instead, do what they do only better, cheaper and with a different spin. And get a move on – the originator is unlikely to simply sit back and watch you steal their market.” In the abstract to an article with the same title, it states:

“In the business world, imitation gets a bad rap. We see imitating firms as ‘me too’ players, forced to play catchup because they have nothing original to offer. In Copycats, Oded Shenkar challenges this viewpoint. He reveals how imitation is as critical to prosperity as innovation and how savvy imitators generate huge profits. They save not only on R&D costs but also on marketing and advertising investments made by first movers, and avoid costly errors by observing and learning from others’ trials.”

Copycatting may make imitators “savvy” but it doesn’t make them innovative. Johnson doesn’t care. He writes:

“It can make sense to let a pioneer go first and then follow as a fast second before they have established a monopoly. Quite often the imitator’s technology can be more refined and entirely legal. A first mover advantage is all very well, but copycats can learn from a first mover’s mistakes and capitalise on the fact that consumers like choice. They benefit from the fact that a market is known to exist for their product – although they clearly face entrenched competition.”

The most profound thing that Johnson notes is that the first mover advantage may not really be an advantage at all. Barney Jopson writes:

“Being ‘first to market’ is not the sure-fire path to dominance it is cracked up to be. In 2001 the idea of first-mover advantage was challenged by the academics Peter Golder and Gerard Tellis, whose research into the history of 66 industries found that companies get limited rewards from being pioneers. In fact, it is later entrants that tend to succeed. [“The first-mover advantage myth,” Financial Times, 5 March 2012]

Jopson agrees with Johnson that “so-called ‘fast followers’ have the advantage of being able to use pioneers’ experiences to learn about consumer tastes, new designs and manufacturing techniques, and the potential size of a market. They can also learn from their mistakes.” He continues:

“Eric Schwartz, general manager of laundry care at Henkel in the US, echoes this view. ‘The first mover sometimes overcomplicates in the beginning,’ he says. ‘At the end of the day it’s not about how intricate you make a new offering. It’s about how close to what the consumer wants your offering is.’ But the myth of first-mover advantage remains firmly embedded in business. One reason is that first movers that fall by the wayside get forgotten. Another is the law, which gives first movers the right to register new patents and brands.”

Johnson gives a literary shrug of the shoulders and concludes, “That’s capitalism, I guess.” In the end, the only strategies that may work to dissuade cloners are those recommended by Ekekwe. He writes:

“To mitigate the investing risks associated with eroding market opportunities due to copycats, investors always look for companies with strong competitive resilience or those that are operating in markets with a high barrier to entry.”

While true innovators are rightfully discouraged by copycatters, their indomitable will to create probably won’t suffer even after being ripped off. In the end, the business world will always have both innovators and imitators.

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