Why Dominant Companies Are Vulnerable

Apple’s TV ads — like the one excerpted here — have humorously contrasted Macs and Windows-based PCs. But when Microsoft invested money in Apple in 1997 to ensure Apple’s survival, it may have been a smart strategic move for Microsoft.

Image courtesy of Apple Inc.

It is widely assumed that in many technology markets, dominant players have a powerful advantage and often are able to leverage that edge over time. But this is not necessarily true. Over the past decade, popular social networking sites including Friendster, MySpace and Bebo initially picked up a large number of users only to lose ground to new competitors and fade into the background.

Facebook, by contrast, has succeeded at dramatically expanding its position in the global market, even as it has worked to manage an increasing number of dissatisfied users. Similar patterns of emergence, growth and dominance, followed by consumer disenchantment or ambivalence and a loss of brand equity have affected well-known technology companies such as Microsoft and AOL. Why do companies move from market strength to vulnerability?

Research has shown that several factors influence a company’s ability to retain market leadership, among them technological innovation, changes in market structure, short product life cycles, capital strength and promotional prowess. However, one critical factor has largely been ignored: the psychological forces that drive decisions consumers make and, specifically, the degree to which people feel they have choices. Over the past decade, we have taken a behavioral economics approach to analyzing this phenomenon.

Once people have learned a company’s unique technology interface, they become more efficient using that interface and are often reluctant to switch to competing products that require new skills or allow for only limited transfer of current skills. As companies such as Microsoft have demonstrated with its Windows operating system and Office software, early movers with dominant market shares are in an ideal position to provide customers with interface-specific experience that creates this type of competitive advantage.