Vol. 2, Issue 6
Nov - Dec 2004
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The 6th Wave
Winner Takes All:
Understanding the Dynamics of Market Domination and Standardization

Henk Akkermans
TU Eindhoven and Minase BV
The Netherlands

In innovation-driven markets, everybody's rushing to be first on the market, first to reach market volume to become the market leader. That the supply network dynamics that arise from this rat race are considerable and fairly vicious, we already saw earlier on in this series. Now is the time to ask why everybody's in such a rush.

No doubt, everybody's doing this because everybody else is. It's like the two men chased by a wild boar, where the one says to the other, "I know I can't outrun the boar, but that doesn't matter as long as I can outrun you." So, if there is a market demand, it pays to be there before your competitor because all the products and services you sell to these customers can't be sold to them by your competitors.

Henk Akkermans is one of the founders of Minase, a consulting firm based in the Netherlands that focuses on helping companies in improving design and coordination of the supply networks they form a part of.
System dynamics modeling and simulation play an essential role in this, both to engage stakeholders from different backgrounds in a constructive strategic dialogue and to provide the analytical rigor needed to tackle complex problems effectively. Henk has been developing system dynamics models with major companies from the aerospace, electronics, ICT and life sciences industries such as AKZO, Ameritech, Atos Origin, Boeing, Compaq, DSM, KPN telecom, Philips Electronics and Stork Aerospace for the past eleven years. He is also an assistant professor at Eindhoven University of Technology, from which he holds a Ph.D., and where he teaches supply chain management and system dynamics and conducts research, often based upon his client work.

E-mail: henk@minase.nl or h.a.akkermans@tm.tue.nl .

But in high-tech markets, there is much more at stake. If I can become the market leader, my product can become the standard and that's worth a lot. When I'm the standard, I get to set the rules of the game. Part of that is internal: I can focus my innovative efforts on what I already do well and thereby increase my chances of maintaining market leadership for the next product generation. Of course, when I am the market leader, I get the most revenues, which I can use to finance this innovation. But a lot more is external: when I am the market leader, I have the largest number of customers. So, the word-of-mouth effect of existing customers warming up potential customers for our products and services works strongest for me.

And it goes on. Other companies that want to develop add-on products or services will be most eager to do this for the product of the market leader. The more people use Windows PCs, the more interesting it becomes to develop add-on software, hardware and services for Windows PCs. And, this makes Windows PCs even more attractive for customers. Similar arguments apply to mobile phones (think about card kits, for example) or credit cards or even the iPod.

It's not that in high-tech markets the winner really takes all, but she surely does take a lot. You can get very theoretical and mathematical about this, and when you do, you usually find that, in most markets, two standards tend to be the most likely end result . So, Windows and Apple, DVD R- and DVD R+, 110V and 220V, English and .. (French? They'ld wish. Spanish? No se. Chinese? Most likely).

For a systems thinker it is important to be aware of the feedback loops. Lots of them are positive, are reinforcing. Earlier presence leads to more customers lead to more word-of-mouth leads to more sales and hence more customers. More sales lead to more revenues lead to higher product development budgets lead to greater future attractiveness lead to more customers in the future. Greater customer base increases attractiveness for development of add-on products, which future increases product attractiveness leading to more sales.

And there are some negative or balancing ones. Greater market share creates fears for market dominance and monopolistic behavior, and so a wish to develop and use products outside of the standard. The greater the sales, the greater the installed base. The greater the installed base, the more focus on serving existing customers and existing products. Hence, the less focus on the relentless pursuit of innovation, on being state-of-the art, on being always first on the market. And such a reduced focus means lower likelihood of future market leadership.

Also, it is important to note the path-dependencies involved. That is, how small things early on have a big impact later on. Once you are on top, there is so much working for you that you really have to screw up seriously for a long time to fail. But, in the beginning, the smallest change can, in retrospect, have a decisive impact. So, that's why everybody's rushing to be first on the market. Being first today may well mean remaining in the lead for the rest of the ride.

Winning the first play may not be a guarantee for winning all, but, in high-tech market dynamics, losing the first play definitely costs a whole lot more than just the first play itself .

This article is the seventh in a series of eight articles by Akkermans about Supply Network Dynamics. The 7th Wave will be described in the next edition of the Connector. To read the introduction to this series, click here.