- People are worried about the domination of tech giants like Facebook, Salesforce, and Uber.
- But as economist Paul Geroski explained years ago, this domination is a natural part of innovation.
- Kevin Maney has been a technology journalist for 25 years, has authored or co-authored seven books, and now works at the consultancy Category Design Advisors.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
The ability of companies like Facebook, Salesforce, and Uber to suddenly establish and dominate a new part of the market may seem new, but an economist who died before many of them even got their start helps explain the sudden power of these firms.
Paul Geroski was born in the US but spent most of his adult life in the UK, first as a professor at several universities and then as chairman of the UK’s Competition Commission. Geroski died of cancer in 2006 at age 52, but his 2003 book The Evolution of New Markets should be studied by every entrepreneur who wants to develop and dominate a new market category.
His insights also show that despite calls to curb today’s domineering tech giants, we’ll likely always have domineering tech giants – but not always the same ones.
The cycle that explains it all
The heart and soul of Geroski’s thinking about the evolution of market categories is a seemingly simple graph that looks like this:
First, category is born when an innovation – like ridesharing a decade ago, or virtual reality more recently – first surfaces.
At the start, a category usually has just one or two companies in the space — the number of these firms is represented by the blue line. These first entrants are the inventors and pioneers. But soon, as the innovation starts to look promising, a ton of companies pile into the category.
For instance, think of the various versions of smartphones that were introduced in the early 2000s by companies such as Blackberry, Motorola and Sony. Palm, Casio and Apple tried making handheld computing devices that were also smartphone precursors. Early adopters bought and used many of the competing designs, but none caught on broadly.
At some moment in any category’s life the market decides that one design is the winner. Geroski suggested there is no way to pinpoint why that happens. As he noted in his book: “A dominant design will emerge when it becomes clear that the majority of consumers are content for a particular design to be selected, when a bandwagon forms that focuses the choices of consumers on a single particular design.”
In some cases, the winning design is clearly superior – but not always. Other times, Geroski argued, a company’s lesser design wins because that company does a great job convincing people that it should win and the choice had already been made for them.
One way or another, years after an innovation first surfaces, a dominant design gets chosen by the market. In 2007, for example, the market chose Apple’s iPhone. Apple at that point had so much public trust, its version of a smartphone instantly overtook the category.
Apple essentially convinced us that a choice had been made. Smart companies work to engineer such a bandwagon movement — a process called category design that is described in the book “Play Bigger,” which I co-authored.
Once a dominant design gets chosen, the number of companies in the space collapses as competitors lose out, join the dominant ecosystem, or get acquired.
This goes on until just a few companies remain – a clear category superstar followed by a couple of would-be contenders.
But the number of vendors in a market tells just one part of Geroski’s story. The green line in Geroski’s graph represents the other part: the overall value of a category.
When a category is born, it’s worth almost nothing in revenue. Few potential customers even understand the product yet. As new entrants pile in and try out different designs, the category gets a little more valuable. Early adopters jump in, but most people stay on the sidelines, waiting.
Then everything changes once the dominant design gets chosen. The mass market feels safe adopting that new innovation. As Geroski explains, at that point buyers believe the product won’t disappear or be usurped, and that a supporting ecosystem will grow around it. Customers rush in, and the category’s overall value rockets until, years later, the market gets satiated and the value levels off.
Put it together, and you can see why society naturally ends up with a few super-valuable companies dominating their categories.
“The outcome of this consolidation process often comes to define the market,” Geroski wrote. “It yields a well-defined, widely recognized product, and (typically) a small set of associated producers who form the backbone of pretty much everything that happens thereafter.”
Assuming Geroski is right, new innovations actually need that consolidation around a dominant design to have widespread impact. We don’t want ten unique smartphone designs, all working differently, incompatible with each other, with new ones constantly appearing and old ones disappearing. Most people want one or two designs that we’re certain will be around for a while.
Geroski based his research on the automobile industry. The first cars appeared in the late 1890s. By 1910, there were 485 car companies, all making different designs. In 1908, Henry Ford produced the Model T. Within a few years a dominant design similar to the Model T took hold and the market consolidated, eventually down to just three major companies in the US.
Once Geroski understood the dynamic in the automobile category, he studied other market categories, and realized that the same pattern plays out again and again – in fact, that it must play out in order for a new category to emerge.
For an entrepreneur, there’s a lot to take away from Geroski’s work. Figure out the category the business is in and where it is on the category journey. If the category is just beginning its evolution, expect a flood of competitors until one design wins. If a dominant design has been chosen, the entrepreneur is not likely to get far with a competing design.
If a category is mature, don’t even bother. Instead, look for a way to do something different that looks and feels like a new category, and start the category evolution cycle all over again.
Displacing the incumbents
Often, a mature older category gets usurped by a new category, the way smartphones displaced analog cell phones, or streaming TV is displacing cable TV. Companies often have a hard time leaping from an old category they dominated to a new one they don’t, which is why tech giants rarely hold onto their power generation after generation.
IBM couldn’t be beat in mainframe computers. Instead, it got beat by a new category of personal computers. At some point, a new category will challenge Facebook, Google, Amazon and Apple. But no one is likely to unseat them inside the categories they dominate.
Finally, of course, entrepreneurs must do everything they can to wind up developing that dominant design at the moment when the public is ready for it. Geroski would no doubt say there’s no way to absolutely ensure your design will win, just as there’s never been a sure way to know a song will be a top-ten hit.
Still, understanding that the ultimate goal is to be the dominant design in a flourishing new category can inform a company’s strategy and focus its efforts. Staple Geroski’s chart to the wall, and work to be that one dominant company when the category’s value hits its peak.
Read the original article on Opinion Contributor. Copyright 2020.