Another quiz: Which innovator came up with the idea for online brokerage services? If you answered Charles Schwab or E-Trade, again you are wrong. Two Chicago brokerage firms — Howe Barnes Investments Inc. and Security APL Inc. — launched the first Internet-based stock trading service, a joint venture called the Net Investor, in January 1995. Schwab did not launch its Web-trading service until March 1996.
Both examples highlight a simple point: The individuals or companies that create radically new markets are not necessarily the ones that scale them into mass markets. Indeed, historical evidence shows that in the majority of cases, product and service pioneers are almost never the ones to conquer the markets they create. For at least 20 years, the Xerox Corporation has been derided for its inability to successfully commercialize scores of new products and technologies, including, notably, the now ubiquitous personal computer OS interface, developed at its PARC research center in Northern California. In reality, Xerox’s failure is more the norm than the exception.
For those brought up to believe in the enduring value of “pioneering” and “first-mover advantage,” such a statement may come as a surprise. However, recent work by many scholars, including William Boulding, a professor at Duke University’s Fuqua School of Business, and Markus Christen, an assistant professor at INSEAD; former Booz Allen Hamilton executives Rhonda Germany, Raman Muralidharan, Charles E. Lucier, and Janet D. Torsilieri; Steven P. Schnaars, a professor of marketing at Baruch College’s Zicklin School of Business; and Gerard J. Tellis, of the University of Southern California’s Marshall School of Business, and Peter N. Golder, an associate professor at New York University’s Stern School of Business — as well as our own research — has shown that the widely held belief that pioneers enjoy first-mover advantages and grow to market dominance is simply wrong.
Our research, which examined the early evolution of several new markets, provided a number of clues about how markets are created, how they evolve, and what their structural features and characteristics are in their early formative years. (See “Research Methodology,” at the end of this article.) In industry after industry, we saw the same pattern unfold: Upon the creation of a new market, there’s a mad entry rush by scores, sometimes hundreds, of players to colonize it. At some stage in the evolution of the market, a “dominant design” emerges, which standardizes the core product or service being produced, gives it its lasting identity, and defines the identity of the market it serves. Upon the emergence of this dominant design, a shakeout and consolidation takes place in the market: The overwhelming majority of early movers that choose the wrong design go out of business; a few prescient (or lucky) ones that bet on the winning design survive, and a handful of these grow to market dominance.
For example, more than 1,000 firms populated the U.S. automotive industry at one time or another between its creation in 1885 and the introduction of Ford’s Model T in 1908; dozens of new carmakers entered and exited the industry each year during that period. Yet by the late 1950s, only seven auto manufacturers were left in the United States. Similarly, there were more than 274 competitors in the tire market in the early 1920s. Fifty years later, no more than 23 had survived. And from a peak of 89 competitors in the television-set industry in the 1950s, only a small number of U.S.-owned manufacturers existed at the end of the 1980s — and none after 1995.