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.
"Parallel Play: Startups, Nascent Markets, and Effective Business-model Design." Administrative Science Quarterly, forthcoming.
