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How to win in winner-take-all markets (part 1)

”The Winner takes it all, the loser’s standing small.” The lyrics of ABBA has become the soundtrack of the new digital markets. We see it over and over again these days, the almost inevitability of one company becoming the dominant market leader. Research shows that there are three processes that determine who will become the winner. Ignore them at your own peril.

My first real entrepreneurial venture was an educational games company named Levande Böcker. It became quite a success and I attribute that, to a large extent, to our focus on becoming the dominant company in this new market. The advantages of being a clear market leader became a virtous cycle of attracting the best publishing partnerships which led to kids and parents wanting the games which led to retailers giving us more and more shelf space which led to happy publishers and so on. I don’t remember where we got the idea from but I remember that we applied the logic from day one in all our contacts with partners, customers and employees. It is with some embarrassment that I recall our first e-mail, sent out before we even where a company, stating that we were ”the Scandinavian market leader of educational games”. But it worked and it seems that this tactic of ”creating illusions” is a common one in the arsenal of many market winners in the making.

On a much bigger scale we can see the same principles and strategies being applied in a number of digital markets by companies like Google, Facebook, Amazon or Uber. In a very interesting paper in the Academy of Management Journal two professors of Insead and Stanford, Filipe Santos and Kathleen Eisenhardt describe the processes, structures and power tactics that entrepreneurs use to dominate new markets. Perhaps you are not seeking world dominance but nevertheless the same principles apply also in your local or regional niche. Will you use them to your advantage or will you watch someone else ”take-the-market”?

Three processes to create new markets

Santos & Eisenhardt did a massive amount of research to reach these conclusions. In their case study of five entrepreneurial firms they tracked every boundary decision in these firms resulting in over 800 pages of transcribed interviews and hundreds of articles. The analysis showed that there are three processes that shape the boundaries of a new market in a way that is as favorable as possible for the entrepreneur:

  • Claiming a market
  • Demarcating a market
  • Controlling the market

These processes shape the new industry structure in three different ways. The purpose of claiming a new market is to become the ‘cognitive referent’ of that market, i.e. to become the company that customers, partners and employees associate to when somebody mentions the market. As an example, who do you think of when you hear ”internet search”? You are probably thinking of Google as they are the cognitive referent of internet search. So how do become the cognitive referent when you are a new start-up without resources?

Three ways to become the cognitive market leader

According to Santos & Eisenhardt there are three mechanisms that entrepreneurs use to become the cognitive referent. The three mechanisms are adopting templates, signaling leadership and disseminating stories. Adopting templates means that the entrepreneur use terms, vocabulary, symbols or practices from an established markets that are related to the new market. As an example Amazon used the symbol of a shopping cart to make the customer feel familiar with the shopping experience off-line. Online Universities often have the symbol of a school or university to convey the same feeling of familiarity. The combination of novel and familiar attracts the attention of us humans.

Signaling leadership is when you act in a way that convey power, market leadership and expertise in the new market. Many times the entrepreneurs create the illusion of leadership without actually having it. Examples of these types of actions can be that the entrepreneurial company initiates standards for the market or establishes ”best practices”. It could also be emphasizing the largest selection of products or featuring high-profile people using the service. These exaggerations, signals and symbols gain attention to the company as a leader in the new market. Media is often interest in describing the novel markets which provides an opportunity for the entrepreneur to get the association between the new market and the leading company.

Media can also be helpful when applying the last mechanism, telling stories. The stories can be real or fictitious and they usually raise awareness about the founders, the company and the new market. Emotionally charged stories stick much stronger in peoples minds than facts and they are particularly effective when taking the perspective of the user or reader in an unusual situation or solving an important problem.

Next week I will continue with the two other principles: demarcating a market and controlling a market. Until then, take action.

Do this now:

  • How do you define the market you want to become the leader in?
  • How could you adopt templates, signal leadership and tell stories to claim that market?
  • Take at least one action in each category and if you like e-mail me about your results.
    I would love to hear about your experiences.

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

A quote to ponder:
”Winning isn’t everything, it’s the only thing” Vince Lombardi