New markets and networks
There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
William Shakespeare, Julius Caesar
For whosoever hath, to him shall be given, and he shall have more abundance; but whosoever hath not, from him shall be taken away even that he hath.
eBay and Google were, together with Microsoft, the businesses that benefited most from powerful forces that until recently scarcely anyone had heard of: network effects and feedback loops. This chapter describes how these and some of the other distinctive features of the networked economy have helped a few lucky winners to take almost all the prizes.
First we look at the fundamental ways in which new markets have always been different from mature ones. Our economy may seem uniquely entrepreneurial, but the stories of Jeff Bezos and Bill Gates have much in common with that of a great entrepreneur of a century ago.
Henry Ford created a mass market for motor cars and played the greatest single part in the creation of the largest industry of the twentieth century. It started with a radical idea, in fact a string of them.
At the beginning of the last century, the automotive business was a craft industry. In America alone there were 275 manufacturers by 1911, most of them making tiny numbers of fancy cars for tiny numbers of rich people, the only ones who could afford them. Ford was initially no different, but Henry had an idea that alarmed his investors – to make a very simple, much cheaper car that ordinary folks like farmers could afford. He aimed to “democratise the automobile . . to build a motor car for the great multitude.”
The idea was partly about the division of labour, but even more about a revolution in costs. Instead of workshops where skilled engineers spent weeks lovingly producing beautiful, expensive vehicles, he organised teams of semi-skilled workers in a large factory, each performing a few simple tasks repeatedly, and between them producing a tin lizzie every three hours. The first Model T appeared in 1908 and cost only $825, when most cars started at $2,000. In 1909, he sold 18,000, and by 1912, 170,000. Ford was determined to bring the cost down further, building bigger and better factories. From 1914 conveyor belts, took the car to the worker for assembly, reduced the time to make each one, eventually to 93 minutes, and brought the price down to $360. Two years later, half of all cars made in America were Fords, and in 1920, it sold a million of them.
Ford’s vision was about mass marketing as much as mass production. He developed what was perhaps the most universally compelling customer proposition of the century – convenient, affordable, flexible transport for everyman and his family. He also developed an entirely new business model, which was copied by other manufacturing industries, and set up a national network of franchised dealers to sell and service Ford cars.
His most shocking innovation, described by the Wall Street Journal as “an economic crime”, was to offer workers a wage of $5 a day for shifts of only eight hours. The going rate at the time was $2.34 for nine hours shifts, but staff turnover was a serious problem. Paying more meant that he could attract the best workers – and enabled them to afford cars themselves.
The Ford Motor Company shared many qualities with recent market creators: it built formidable capabilities and economies of scale that for some years no other manufacturer could match. There was also paternalistic discipline for the workers, enforced by Ford’s Sociological Department, but it did not extend to finances: Ford refused ever to have the company’s books audited. He also refused until 1927 to bring out an alternative to the Model T, which famously could be any colour so long as it was black.
This inflexibility almost turned triumph into disaster. Others had managed to master the techniques of mass production, and one of them, General Motors under Alfred Sloan, developed capabilities that Ford lacked – in branding, styling, organizational structure and market segmentation – “a car for every purse and purpose”. Sloan’s better-managed company edged Ford out of industry leadership, but it recovered and went on to enjoy a profitable oligopoly with GM and Chrysler that lasted decades.
Many innovations have transformed the automotive industry since the 1920s, but mostly incremental rather than disruptive, and capabilities and propositions evolved gradually. In the 1970s, however, the American industry was shaken by massive hikes in the price of oil and by competition from Japanese and German manufacturers with better production methods and quality control, and has never really recovered from these shocks. The eclipse of the distinctive capabilities of GM and Ford by Toyota, Honda, BMW and Volkswagen has eliminated their former competitive advantage.
Plus ça change
Henry Ford was a classic market creator who eventually lost leadership of his industry. He possessed most of the attributes of recent successes, and many of the weaknesses of imperious entrepreneurs. The Ford story also illustrates the fundamental features of all new markets that make them different from mature ones:
- Suppliers are meeting a significant customer need that was not previously being satisfied, or only poorly. The extent of this need – latent demand – is the main determinant of how large the market becomes. In a few cases, like low-cost air travel, the need had long been clear but was ignored by incumbent suppliers. In most radically new markets, the need had not been clearly articulated beforehand. Nobody knew in 1980 how much they ‘needed’ a personal computer, let alone a search engine, or how much difference a skinny café latte could make to their lives. Yet these products quickly came to be seen as essential by millions of customers because they offered them something of real value.
- New markets are conceived by a radical innovation or a series of them – in technology, product design, business process or model. The market for PCs was driven primarily by technological developments that later ‘discovered’ all kinds of customer needs. Amazon’s innovations were Jeff Bezos’ strategy and model for the business and the IT systems his colleagues’ developed . They also built on the innovations of those who created the Internet and the Web.
- Business models seem bizarre, and other features of the market are difficult to make out. At the outset it is unclear who will sell what to whom, if indeed any money ever does pass hands – viable business models can take years to emerge and frequently never do. What look like promising new markets often turn out to be damp squibs or tiny niches. Even in the most exuberant cases, it is impossible to predict how fast they will grow or how big they will become.
- To compete in the new market, suppliers must possess unusual capabilities. The lack of these is the most common barrier to other suppliers, including incumbents in markets invaded or subsumed by the new one. Typewriter manufacturers (other than Olivetti and IBM) had no means of competing with PC makers, nor corner stores with the prices and choice offered by giant supermarkets. Mail order companies however found that they already had many of the capabilities to be effective online retailers.
- These capabilities enable the first supplier(s) to make compelling new customer propositions that address the unsatisfied need.
In the new markets described here, the unmet needs, levels of innovation, business models, capabilities and customer propositions were all clearly distinct (with the benefit of hindsight) from those in any previous market. The reason sales rocketed was that the needs they identified or discovered came to seem vital to their new customers. They were thirsting, whether they knew it or not, for better coffee, more convenient ways to buy books and to trade with each other. The market creators were successful primarily because of their imagination in spotting these needs, their creativity in devising ways to meet them, the exceptional capabilities they developed, and the compelling propositions they were able to make to customers.
Not many entrepreneurs set out to create a new market, nor do they do so literally in the way that a designer creates a new product or a composer a symphony. To what extent is it meaningful to speak of a company creating a market, and is it a sensible goal?
What all the market creators described here did was open up ‘competitive white space’ that other suppliers were ignoring. Their vision and the actions they took were critical to how and when each market developed and the shape it took. It was their capabilities that largely defined the new market. Consequently all of them initially enjoyed enormous competitive advantage – something close to a monopoly for a time. This is the prize that market creation offers.
There are essentially two strategies for holding onto it. One is to keep capabilities so distinctive and customer propositions so compelling that competitors cannot match them. The other is to cultivate strategic assets that act as barriers to competitors. The two are not of course mutually exclusive – the safest strategy combines both.
Strategic assets can take several forms – from the legal monopolies of post offices to the brands and distribution channels of Coca Cola. When the idea of a new economy appeared, a new set of strategic assets and concepts captured the imagination of many entrepreneurs and investors – first mover advantage, scalability, feedback loops and network effects offered the hope of quickly dominating a large new market. Many of those who tried were more intent on pursuing this dream that on cultivating the essential attributes of market creators.