Successful pioneers follow implicit rules

Google AdsWords, Instagram, Dropbox. If you thought they emerged fully formed by their creators, listen up. All three products were built on implicit rules and patterns.

Entrepreneurs in new markets resemble children in that there is much they don’t know yet. Picture: AFP

The past two decades have seen the birth of an unprecedented number of new markets. Technologies such as cloud services, warehouse robotics and smartphones have redefined entire industries, making old business categories obsolete. A steady stream of emerging innovations — from commercial drones to plant-based meat substitutes — suggests the era of market creation will continue for the foreseeable future.

It’s tempting to think of pioneers of new markets as conquering a totally foreign terrain with no proven navigational tools. But in our research we’ve learned that the most successful of these pioneers follow the same set of implicit rules and share specific behaviours. These rules and patterns often defy conventional precepts of strategy and business building.

In traditional business thinking, the essence of strategy is performing activities differently than rivals. A winning strategy positions a company to deliver value better than anyone else. The job of the strategist is to identify competitors and then outmanoeuvre them.

In a new market, however, this approach makes little sense. When a market is just forming, a company can’t possibly know which points of distinctiveness are likely to be most important to customers. Companies in a new market don’t know what business model will actually make sense.

The uncertainty of new markets requires a different framework for strategic thinking. We call it “parallel play”. Its inspiration comes from early childhood. As child psychologists have long known, three and four-year-olds typically play near one another but not together. They keep an eye on what their peers are doing (and sometimes copy them) but then return to their own projects, figuring out what “works” as they make progress toward whatever goal they have in mind. Three kinds of parallel-play behaviours distinguish high-performing new-market companies from their less successful rivals.

Borrow ideas

Young children learn individually but, because they observe one another, any group of them is performing a kind of collective experiment, enabling each one to learn more than they could alone. Indeed, preschoolers often imitate one another. Rarely do they bother trying to outdo one another. Borrowing is also typical of successful new-market innovators.

In 1999 Google founders Larry Page and Sergey Brin knew they had created a search engine superior to anything else available at the time. What they didn’t know was how to make money with it. They looked around and decided to take an idea from GoTo.com, a rival search engine that was generating revenue by allowing advertisers to pay for prominent placement in search results — but charging them only when users clicked on their ads. Google’s product, AdWords, introduced in 2000, maintained the integrity of the search but let advertisers buy small text ads that would appear above the results. Like GoTo, Google charged only for clicks, not for views.

The practice of borrowing runs counter to the conventional strategic imperative of differentiation — which traditional strategists argue is essential to avoiding the negative spiral of competing only on cost. But trying to differentiate early on in a new market can lead a company down a blind alley. Borrowing instead allows a company to lower the amount of money and time needed to design a good-enough-for-now offering by treating peers as a treasure trove of ideas and resources. Firms can then spend more on other aspects of the business model and on testing assumptions.

Test relentlessly, then commit

In a new market, we discovered, high-performing ventures didn’t just test and learn. They used that learning to choose a single template for creating and capturing value (that is, for monetisation) and spent scarce resources only on it. This goes against conventional strategic teaching, which holds that the cost and the loss of flexibility of commitment can’t be justified in uncertain markets. However, our research revealed it to be key to success — provided that firms tested alternative business-model templates first.

Consider the app Burbn, which enabled users located near one another to connect, make plans and post photos of their meet-ups. When it proved too complicated for people to engage with, founder Kevin Systrom began running tests to discover a template that captured what users really wanted. The outcome was a business model centred on photo sharing where you could post a photo with three clicks. Systrom then renamed the app Instagram.

Pause, watch, and wait

In an evolving market, trying to perfect a business model too early can be problematic. It is preferable to leave a business model undetermined. The most successful initially commit to a single template for creating and postpone optimising it until the market settles.

Any new market is likely to present surprises — unforeseen customers and uses that no amount of testing would have revealed. An incomplete, partially elaborated business model increases the likelihood that innovators will acquire information they could not easily have anticipated and allows entrepreneurs’ activities to evolve in step with a changing market.

The precepts of new-market strategy do not mean the conventional rules of strategy should be abandoned. At some point start-ups grow up, the markets they pioneered become established industries, and they must begin to observe the traditional laws of strategy and focus on competition. Every company that hopes to succeed in the long term eventually will need one or more sources of differentiation.

Entrepreneurs in new markets resemble children in that there is much they don’t know yet. They operate in environments where discovery and surprise are common. It makes sense, then, that the most successful behave like preschoolers, engaging in parallel play and borrowing, testing and watching to see what happens.

Rory McDonald is associate professor of business administration in the technology and operations management unit at Harvard Business School. Kathleen M. Eisenhardt is the Stanford W. Ascherman MD professor at Stanford University and a co-director of the Stanford Technology Ventures Program. She is a co-author of Simple Rules: How to Thrive in a Complex World.