Sunday, May 26, 2019

Nascent Market Firms as Children: Business Model Innovation through Parallel Play

Imagine that you are on the founding team of a firm in a nascent industry. Great, isn’t it? No big and established competitors who have all the assets and customers . . . full freedom to design a business model from scratch and shape the industry in your favor. But wait, it is also an awful situation. There are potential customers around, but no one knows yet what they want. There are no examples to learn from. A ton of other firms will also try to shape the nascent industry, and their founding teams are just as smart as yours is. What are you supposed to do to win this race to reach a workable business model?

This is the question that Rory McDonald and Kathleen M.Eisenhardt answer in a new article in Administrative Science Quarterly. They look at the nascent (in 2007) industry of social investing, which was envisioned as a way to help individuals and firms invest independently or follow other investors, and to do so by sharing information about choices made and returns earned. In a way, social investing can be seen as an online game in which it is possible to participate and also see what other individuals (well, their avatars) are experiencing. Except that in this online game, the objective is to invest successfully.
 
So what did they find? The evidence showed that there was an interesting parallel to the development of young children, who face problems similar to those firms face in a nascent industry. After all, children are also learning to handle a new and uncertain environment. They have not been in the world for long, and they don’t have many examples to learn from given that most people around them are a lot bigger and preoccupied with different things. Children solve this problem through parallel play – being next to each other but playing alone, though occasionally looking at what the other kids are doing in order to pick up ideas.

The most successful firms also engaged in parallel play. They were focused on their own business model development, mostly ignoring what other newcomers were doing, except that they would occasionally pick up good ideas from other firms and copy those ideas if they fit the strategy they had developed independently. Naturally these ideas were not about how to design the business plan but rather about how to execute parts of it, such as copying a good user interface or background process. The benefit of parallel play for firms is the same as for children – the self-focus lets them develop their own approach, and the occasional borrowing of ideas gives efficiency, which in turn gives more time to develop their own approach.

There was one more similarity between successful firms and children – their ambition. The successful social investing firms were looking at other, more established forms of asset management as their competitors rather than at their peer social investment firms. Children benefit from doing something similar – copying ideas from kids who are already doing something well. After all (even though parents sometimes find it hard to believe based on what they see their children do), most kids really do want to grow up, learn, and be successful – just like firms in a nascent industry.

McDonald, R. M., and K. M. Eisenhardt
"Parallel Play: Startups, Nascent Markets, and Effective Business-model Design." Administrative Science Quarterly, forthcoming.

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