Dominant Design in the Emerging Blockchain Industry
Info: 4112 words (16 pages) Dissertation
Published: 9th Dec 2019
Tagged: Information Systems
Bitcoin seems to have benefitted from a first-mover advantage in the emerging blockchain industry. The literature on first-mover advantages suggests that there are important factors that impact the relationship between pioneering companies and a sustained performance advantage over new competitors that enter the industry. This paper explores conceptually the impact of developing a dominant category on the formation of an industry. Empirical research is in progress.
The advent of the blockchain technological infrastructure was a shock to the environment and economy, igniting informational asymmetries that are often the root of entrepreneurial activity. Bitcoin has emerged as the most popular, and valuable, cryptocurrency to be built on the blockchain infrastructure. With Bitcoin being the first enterprise to build on the blockchain infrastructure, and still clearly the benchmark for creating value in terms of market capitalization, we now have the opportunity as researchers to examine the dynamics of the first-mover advantage and how it contributes to the growth and development of emerging industries. When a venture is organized as a first-mover, or pioneer, of an industry, it is communicating to the public about what knowledge it has extracted from the environment and has deemed commercially valuable (Acs, Audretsch, & Lehmann, 2013; Lieberman & Montgomery, 1998). This process of learning and knowledge management induces an endogenous cycle of knowledge spillover to and commercialization by other aspiring entrepreneurs.
However, optimized commercialization in the blockchain industry is an aspiration yet to be achieved. Isomorphism is an institutional concept suggesting that once a sustainable method of success has been identified in an industry, then competitors will mimic the example and organizations will become increasingly homogenous (Deephouse, 1996; Haveman, 1993). Similarly, the concept of dominant design comes from the strategy literature and suggests that there is a window of opportunity for entry into emerging industries and that the window closes when a dominant design has been established (Suarez, Grodal, & Gotsopoulos, 2008). Currently, the ventures that compose the blockchain industry have not exhibited homogeneity or a dominant design; thus, the industry is still in infancy and not fully developed. The opportunity remains for entrepreneurs to discover the optimal methods for commercializing the blockchain infrastructure. This paper explores the phenomenon empirically for factors that may have value in predicting the ultimate sustainable form of emerging industries. By examining the learning processes, communicated value propositions, and performance of blockchain ventures, it is possible to advance our understanding of and ability to foresee industry development, particularly as it relates to the growing popularity of cryptocurrency and blockchain technology.
Examining aspects of pioneering organizations in the context of emerging industries has valuable implications. One prevalent issue with the study of industry emergence is the difficulty involved in collecting quality data while an industry is still in an emergent phase (Forbes & Kirsch, 2011). The empirical shortcomings have naturally led to a lack of attempts to theoretically understand the mechanism of industry emergence and formation. Additionally, whereas the existing literature on first mover advantages focuses on the benefits that accrue to the pioneering organization(Lieberman & Montgomery, 1988, 1998; Markides & Sosa, 2013; Suarez et al., 2008; Suarez & Lanzolla, 2007), studies on the effects of pioneers on industry emergence are much rarer. An enhanced understanding of these dynamics should inform the first-mover advantage and emerging industries literatures, as well as pioneering practitioners.
This study addresses the research question: what role do pioneering organizations play in the development of emerging industries? Entrepreneurship theory informs us that knowledge often originates in incumbent firms, institutions, and research universities, and that entrepreneurs act as conduits for the spillover of commercially valuable knowledge into new ventures, with innovation and growth being the ultimate result (Acs et al., 2013). Building on this premise, we reference the strategy literature to determine how to identify pioneers and first movers (Lieberman & Montgomery, 1988, 1998), and the timing of entry for new market participants (Suarez et al., 2008).
2 Theoretical Development
Imitate or innovate? What is the best strategy for companies in a period of intense technological advances and a shortage of time to develop new products? There is no consensus as to the advantage of pioneering; it is only known that it tends to vary between different product categories and different international markets (Lieberman and Montgomery, 1998). The search for pioneering has an impact on different sectors of an organization and constitutes, in many markets, a recurring strategy for obtaining a competitive advantage. The search for pioneering is essentially a strategic issue, coupled with the orientation to initiative (Lumpkin and Dess, 1996) and the establishment of competitive advantages. If superiority in the area of product development represents the main weapon for the achievement of pioneering (Lieberman et al., 1988), essentially strategic issues, such as difficulty in defining the market and the product, are the main barriers to its attainment (Dyer, Gupta and Wilemon, 1999). The pioneering studies focus on the market for consumer goods and industrial goods of all kinds. They have deserved the attention of researchers, especially high-technology markets, where, presumably, the speed of product development and launching represents a significant advantage (Bayus, Jain and Rao, 1997; Workman, 1993). Services are hardly part of these studies; among the various works consulted for the elaboration of this paper, none dealt with this economic sector.
The theoretical basis necessary for this study goes back to the approach of the concepts of strategy and strategic positioning and the advantage of pioneering.
2.1 Strategy and strategic positioning
According to Quinn, Mintzberg and James (1991), there is no universal definition of what strategy is. Theorists and practitioners have used the term in different ways over time.
For Drucker (1999), “every organization operates on a business theory, that is, a set of assumptions about what a business is”; the role of strategy, then, is to convert that theory into performance, enabling the organization to achieve the expected results.
Quinn, Mintzberg and James (1991) understand as necessary the distinction of some concepts that are often used together. Thus, they define strategy as “the plan that integrates the main objectives of an organization, its policies and actions into a cohesive whole”. On the contrary, strategic decisions would be those that determine the direction of an organization.
Already ‘objectives’, ‘policies’ and ‘programs’ – the other terms that frequently appear together – constitute, respectively, what is to be achieved, the rules that express the limits of action of the organization, and the detailed sequence of actions necessary for attainment objectives.
For Porter (1996), the major difficulty surrounding the concept of strategy lies in the confusion with the concept of operational efficiency. According to the author, the great competitiveness of the 70s, 80s and 90s eventually stimulated this difficulty, since these periods were marked by the emphasis on productivity, speed and total quality. Porter says that “strategy and operational efficiency are both essential to superior performance,” but while the former is about performing different activities of competitors, the latter refers only to performing better the same activities as competitors.
Quinn, Mintzberg, and James (1991) understand that strategy assumes several meanings, and can be understood as a plan, a pattern, a position, and a perspective. For the purposes of this article, only the vision of strategic as a ‘position’ is concerned, and it is to her that we will stop. As defined by Quinn, Mintzberg and James (1991), then, “strategy is a position, a means of identifying where the organization stands” in the environment / market. It is, in a business vision, the product and the market of its performance. According to Levy (1986), competitive strategy consists of two fundamental decisions: the “business portfolio” (in which business the company must act) and “positioning” (what the concept of each business is). Both are, according to the author, inseparable decisions, full of synergy and dependence.
Porter (1996) points out that the strategic position is adopted with a long-term horizon and consists of developing activities different from those of competitors, or performing the same activities in different ways.
2.2 Advantage of pioneering
Although they have been the focus of countless studies over the past two decades, the issues surrounding the pioneering advantage have been essentially to the study of consumer goods, giving less attention to the service sector. One of the last published works on the subject proposes precisely the deepening of researches in other economic categories, given the influence that its peculiarities can exert on the results (Robinson and Min, 2002). In any case, it is known that this is a complex and controversial subject, as Kerin, Varadarajan and Peterson (1992) point out.
According to the bibliographical survey carried out for this study, it is possible to observe that the researches carried out on the subject compete for two questions, basically: 1) what leads a company to pioneering ?; and 2) is pioneering synonymous with success? This work – and consequently its literature review – will concentrate on the second question, without, however, ruling out the first.
Regardless of the path adopted, it is a relevant approach in the current competitive scenario, given the strongly dynamic nature of the economies. It is also a topic that transcends the boundaries of organizational functions, constituting a strategic element for organizations from different markets. Its impact is felt in investments in research and development, in an organizational environment of high pressure and collection and even in the waste of resources due to development errors (Dyer, Gupta and Wilemon, 1999). Aiming for pioneering brings with it several important decisions, linked to product conception and the tradeoff between performance level and time to market (March, 1994; Bayus, Jain and Rao, 1997).
Speeding up the launch of a product on the market may not be a good strategy, according to Bayus, Jain and Rao (1997). The authors point out that the success of this strategy will depend on the company’s knowledge of the market, whether on the part of consumers or competitors. Companies with innovative products can establish sustainable advantages over the pioneers (Shankar, Carpenter and Krishnamurthi, 1998), observing their movements and entering moments of less technological and market uncertainty (Lieberman and Montgomery, 1988). Schnaars (cited by Cahill, 1996), in a paper published in 1994, studied 28 products from the most different sectors and levels of technology employed. In all, followers have outgrown pioneers, either by adopting more competitive prices, imitating and improving products, or simply by holding more market power. Of these three strategies, only the second could be faced by the pioneers, through constant innovations in the product. Schnaars concludes, therefore, that pioneering is only an initial advantage, and not a guarantee of success. In this same line, studies indicated that the superiority in attributes considered relevant by the consumer can also guarantee preference for the followers, to the detriment of the pioneers (Zhang and Markman, 1998). The continuous improvement of the product and the establishment of marketing strategies aimed at differentiating would be the best way for the pioneers to defend their position (Cahill, 1996).
Other research, in contrast, points to the advantages of pioneering. The “temporary monopoly” of a particular market, according to Robinson and Min (2002), would compensate the risks associated with the uncertainties offered by the market and the technology, granting advantage to the first entrants. The advantage determined by the “monopoly” is evident when observed the rates of permanence in the market of pioneers and followers. Of the former, at least five years remain on the market 87%, as opposed to 70% of the followers; 66% of pioneers and 48% of followers reached ten years. When excluded from the analysis of the “monopoly” period of the pioneers, the 17% advantage over followers relative to product survival in the first five years drops to 11%. Likewise, the difference in the analysis of the ten years falls, from 18% to 7%. The indexes obtained by the work of Robinson and Min (2002) are consistent with those raised in previous works (Agarwal, 1996; Goldere Tellis, 1993).
Also, according to Robinson and Min (2002), the “temporary monopoly” of the pioneers allows them to enjoy some advantages at the moment the market becomes competitive. These advantages are mainly related to consumer loyalty, greater product line, superior distribution and establishment of market standards. In a similar direction are the conclusions of the studies of Carpenter and Nakamoto (1989, 1994). The authors indicate that the pioneers influence the definition of the factors that become reference for the evaluation of the products by the consumers and tend to play the role of “standard” of the product for the market. This second factor, especially, is that it protects the advantage of the pioneer. Carpenter and Nakamoto say that when pioneering a new category of products, pioneers end up “shaping” consumer preferences, also setting price benchmarks. The sources of advantage of the pioneers would thus reside in aspects related to consumer behavior, especially with regard to cognition. This argument is corroborated by Kardes et al. (1993), who point out that pioneer brands are more easily remembered and considered for consumer choice. According to Muthukrishnan (1995), the difficulties inherent in the choice between many brands would also benefit the pioneers, supported by the fact that consumers tend to have a favorable attitude to them (Alpert and Kamins, 1995).
If there is no consensus on the advantages of pioneering, analyzes of the characteristics that would differentiate pioneers and followers are somewhat more conclusive. For Lieberman and Montgomery (1988), the pursuit of innovation and pioneerism would be the recommended strategy for companies with better skills in developing new products; companies whose strengths are in marketing and production should play the role of followers. Robinson, Fornell and Sullivan (1992) presented partially similar conclusions, indicating, however, that pioneering research and development skills did not affect time to market. A combination of better product development and an understanding of market needs would help define the market entry strategy (Bayus, Jain and Rao, 1997). As Lieberman and Montgomery (1998) conclude: there is no simple recommendation as to the advantage of pioneering.
In 2009, Bitcoin emerged as the first blockchain venture to be launched on the blockchain infrastructure. The Bitcoin enterprise allows consumers to engage in transactions without using a distributed ledger system, eliminated the need for a financial intermediary. The roots of the Bitcoin innovation are found in the new knowledge generated by blockchain’s shock to the current economic institution and system for storing and sharing information. As the first blockchain venture, Bitcoin should follow one of two paths in shaping the development of the blockchain industry: they will accrue benefits that manifest as higher performance relative to the ventures that follow, or they will concede their advantage to the pressures of external competition (Lieberman & Montgomery, 1988, 1998; Markides & Sosa, 2013; Suarez et al., 2008; Suarez & Lanzolla, 2007).
Now that there are over 1,500 blockchain ventures in existence, it is sufficient to assert that a new industry has emerged around a platform, the blockchain technology infrastructure, and the idea that decentralization will be a disruptive force to the economy (Swan, 2015). Swan provides anecdotal evidence that the concept is still indistinct, which suggests that the industry is still developing and innovation has not taken place in the form of providing a valuable product or service. As the pioneering venture, Bitcoin attempted to translate information about capabilities of the blockchain infrastructure and organize it into a cryptocurrency product: digital cash. Along with smart contracts and specific applications, currency represents one of the fundamental categories that are evident in the emergence of the blockchain industry (Swan, 2015).
The apparent multiplicity of categories is a strong signal of an industry still in the nascent stages. Industries at the beginning of their life cycle are ripe with uncertainty and complexity rather than well-defined characteristics, prompting early industry entrants to introduce categories that are of a wide variety and different from those proposed by incumbent ventures (Suarez et al., 2008). An explanation for the exponential growth of new entrants into the blockchain industry could be that knowledge was originated initially with the blockchain infrastructure and Bitcoin as the industry pioneer, and thereafter spilled over into the hands of entrepreneurs who formed ventures to capitalize on the knowledge they had acquired (Acs et al., 2013). By establishing different categories, new entrants into the blockchain industry are expressing what they interpret as commercially valuable knowledge and, in combination with their own prior knowledge, adapting it to develop their own value proposition.
In emerging industries, there exists a “window of opportunity” that represents the ideal timing for market entry (Suarez et al., 2008). This window is conceptualized by a dominant category that represent the beginning of the window, and a dominant design that signifies the end of the window and the maturation point of the industry. This is the point where isomorphism tends to take place and organization tend to creep towards homogeneity (Haveman, 1993). Though the blockchain industry is clearly not at the point of declaring a dominant design, it is highly likely that a dominant category is becoming more evident through ventures’ value propositions. Suarez and his colleagues (2008) found that as the rate of industry entry increases, the industry eventually arrives at a dominant category. Due to this finding and the more exploitative nature of their learning processes, we expect that later industry entrants will be more aligned with the dominant category.
Entrepreneurship literature recognizes the role of knowledge in developing venture ideas and creating wealth. Knowledge that originates is existing firms, research universities, and other institutions spills outside of organized boundaries and is translated into innovation and economic growth by entrepreneurs (Acs et al., 2013). Additionally, searching for valuable knowledge within specifically identified information channels increases an entrepreneur’s chance of generating wealth. Newer entrants into the blockchain industry can apply these processes by exploring the existing ventures as sources of knowledge that can be used to develop their venture idea for creating value and constraining their search for information to the dominant category in the industry. Thus, the combination of exploratory learning processes and a value proposition expressing the dominant category of the industry manifests in increased performance as measured by market capitalization.
Proposition 1: Later entrants will be positioning their value proposition in the dominant category more often than early entrants will.
Proposition 2: Ventures that use more exploratory rather that have a value proposition within the dominant category of the blockchain industry will have a higher market capitalization.
Pioneering companies play a role in emerging industries’ progression into the maturation stage. As is common in many entrepreneurial ventures, successfully establishing an industry benefits from incumbent ventures’ knowledge of the dominant category prevalent in the industry and searching for knowledge within it in efforts to achieve continuous innovation and industry growth. As the pioneer of the blockchain industry, Bitcoin is equipped with unique knowledge of the blockchain infrastructure and an exploratory learning emphasis that enables them to remain influential and informed on the dominant category that is forming and will continue to form in the industry. In this way, they are driving the growth of the industry. However, new industry entrants can make contributions as well by becoming and remaining aware of the dominant category and searching for knowledge within it that can be combined with their own unique stock of knowledge. In this fashion, the blockchain industry will find its way to a dominant design.
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