This week we continue unravelling the tactics that determine who becomes the dominant leader in the alluring winner-take-all markets. The logic of the digital economy makes these markets likely to increase in numbers and their impact will be huge. Understanding the power mechanisms that determine the outcome in these markets is no less than critical.
In part 1 on this theme we covered the first process, claiming a market, of the three that shape the boundaries of a new market in as favorable way as possible for the becoming market leader. The three mechanisms for claiming a market that Santos and Eisenhardt showed in their research was;
- adopting templates
- signal leadership
- disseminate stories
Their are several psychological explanations for why these mechanisms work so well. Individuals are attracted to the combination of novelty and familiar. Illusory exaggerations creates curiosity ad gets people attention. Finally vivid emotional stories with unusual situations and intriguing personal perspectives are often overvalued in relation to the facts they actually carry and their messages are more easily remembered.
Claiming the market is about establishing an identity in the mind of the relevant individuals relevant its about becoming the ”cognitive referent” for the new market. The focus of the next process is alliances, it is about specifying the market boundaries through different alliance tactics with already established companies. Santos & Eisenhardt call this part ”Demarcating a market”.
Demarcating a market
The purpose of controlling how the industry structure and constructed market is defined is to avoid or delay more powerful competitors entering the market. The way successful entrepreneurs in new markets do this is through three alliance mechanisms;
- revenue sharing agreements, for example distribution contracts, supplier or advertising contracts
- equity investments, allowing more powerful firms to invest in the venture and thereby reducing or delaying the incentive to compete directly
- antileader positioning, forming alliances with smaller competitors to compete against the anticipated threat from a dominant company in a proximate market.
In the Levande Böcker case, which I referred to in Part 1, we applied this process by making a joint venture with the largest children book publisher and starting a mail-order business with another major publisher. Both partnerships worked well in shaping the new market There is a natural tendency of large firms anyway to delay entry into nascent markets. The market might be too small to justify an early entry or the large firm might overvalue their relative strength and thinks it is safe to wait and see how the market develops. This tendency opens up opportunities for the agile new entrepreneur to take the initiative and offer established firms something significant and thereby preempting the threat and shaping the relations in the market.
Controlling a market
The last piece in the puzzle to new market dominance has to do with controlling as much as possible of the important resources in the market. The entrepreneurs seek to make the organizational boundaries overlap with the market boundaries in such a way that they occupy as much of the market as possible. The tactic to achieve this is through acquisitions. Santos & Eisenhardt point to three different mechanisms for controlling the market;
- elimination of competing models, destroying resources or blending them into the acquiring firm.
- increasing coverage, expanding presence into emerging areas the nascent markets
- blocking entry, removing possible stepping stones for established firms to get into the market.
Again referring to my experience of creating market dominance in the Levande Böcker case, we made a very important acquisition of the leading distributor in the market. If that company had been bought by one of the established firms our position would have been greatly weakened. The entrepreneurs of the acquired company was much more interested in being bought by other entrepreneurs like us than being swallowed by a major competitor. The same observation was made by Santos & Eisenhardt. A greater cultural fit and higher likelihood of adding value in the new firm contributes to self serving illusions about synergies and growth prospects of the combined entity.
This concludes the processes and mechanisms that successful market leaders use to become dominant in the emerging new market. Understanding, applying or blocking these soft power strategies is essential to consider if you operate in a new market and is seeking to gain a strong competitive position as the market matures. The decisions made early in the shaping of new markets can turn out be very hard to reverse at a later stage. This has become even more evident in the new digital markets of the last years.
- Ask yourself what stage of development your home market is in? Is the timing right to apply some of theses soft power tactics.
- Specifically consider how you could apply the mechanisms of demarcating a market and controlling a market
- Take at least one action in each category and observe the results. Please send me an e-mail with your observations and results. I am looking forward to it.
Todays Quote :
”The quality of results produced by any system depends on the quality of awareness from which people in the system operate” Otto Scharmer
Want more to read?
Santos, F. M., & Eisenhardt, K. M. 2009. Constructing Markets and Shaping Boundaries: Entrepreneurial Power in Nascent Fields. Academy of Management Journal, 52: 643-671