[L/M NET] Tim Kastelle > “Don’t Be First to Market, Be First to Scale”

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Often when people have an idea for a great new product or service, they rush to be first to market with it. We keep hearing about first-mover advantage and how you need it.

The only problem with first-move advantage is that it doesn’t seem to exist. The academic research on the topic shows that there is no such thing.

The first definitive work on this was done by David Teece in 1986 (pdf version of the paper here). He found that innovators capture about 20% of the profits generated by their new ideas. Followers and imitators capture slightly more. Suppliers get some of the benefit, but the big winners are customers, who get about 40% of the benefit of new ideas.

The study was done 25 years ago, but subsequent work has consistently found similar results.

Part of this is because innovations diffuse across an S-Curve – and this usually takes longer than we expect it to.

How can innovators try to capture more of the profits generated by their great ideas? It’s not by being first to market. In his excellent new book Sidestep & Twist: How to create hit products and services that people will queue up to buy,James Gardner suggests that one way to address this problem is use network effects to accelerate the S-Curve – to be the first to scale.

He uses the five factors that Rogers identified as the key characteristics that drive adoption, and reframes them for the network economy. His thesis is that by taking advantage of networks, you can move through the slow part of the S-Curve more quickly. This increases your chance of winning.

The five factors are:

  1. Observability: how easy is it for people to see how the innovation works? In networks terms, does usage increase through viral effects? Think about the social games on Facebook, like Farmville. Every time one of your friends played Farmville, you get an update about it. This continues until you either start playing Farmville yourself, or you block all updates related to it. That’s observability.
  2. Trialability: how easy is it for people to try out the new idea? In a network, trials are experiments. The more people test out your idea, the more likely it is that emergent properties will show up. This is how you find unexpected new uses for your idea, which expands your number of users, moving you through the S-Curve more quickly.
  3. Consistency with how we currently behave: can we fit the new idea into our existing routines? Or does it require us to do new things? The former leads to faster adoption. Within a network, this leads to herd behaviour. Gardner’s example of this is Amazon’s recommendation engine, where the more people use it, the more valuable it is, leading to more people using it.
  4. Relative Advantage: is your new idea substantially better than what it’s competing against? One way to get this is to build in effects where the more people use it, the better/cheaper/faster it gets. Think about Amazon’s recommendation engine again. Or Google. Google wasn’t the first search engine (not even close), so how did it come to dominate? By being substantially better than the others, and by using an algorithm that improved search results the more people used it.
  5. Complexity: is the new idea simpler to use than its competitors? In network terms, does increasing use lead to great simplicity? For this, Gardner talks about how “crowds of people, learning and sharing together, make it less difficult for others to join their crowd.” His example is Wikipedia – which is trying to catalog a huge amount of knowledge. The more people participate in Wikipedia, the easier this gets. And their value proposition improves.

I love the idea of using network effects to move through the S-Curve more quickly. This quick recap doesn’t do the idea justice – it’s worth checking out the book to learn more.

In the meantime, if you are innovating and you are early in the diffusion curve, ask yourself this: how can I take advantage of networks to increase the use of my great idea? If you think about this in terms of the five factors from Rogers, your chances of capturing the value that you create will increase.

So don’t try to be first to market. Try to be the first to scale.

(ralf says:
I 'fear' innovation is still key. But taking the stress out of people is very helpful for businesses and success.

Some great advice. The 5 factors do make it much easier to understand why scalability is important and how to do it. Otherwise the headline remains abstract and clients, advertisers, and agencies cannot follow. Really helpful.

Thinking about adding a pentagon diagram to the back of my mind.)

Tim is a lecturer at The University of Queensland Business School. He researches, writes, teaches and consults on topics relating to effective innovation management, with an emphasis on studying innovation networks. He blogs at The Innovation Leadership Network. Twitter: @timkastelle