Adam J. Fein, Ph.D. is the founder and president of Pembroke Consulting, Inc., a firm that helps senior executives of wholesale distribution, manufacturing, and B2B technology companies build and sustain market leadership. He is a Senior Fellow at the Wharton School of Business' Mack Center for Technological Innovation, and was named to Supply & Demand Chain Executive magazine's list of "Top Industry Analysts to Know", based on his in-depth work in the wholesale industry. He has published several books for the National Association of Wholesaler-Distributors and numerous articles about the expansion and consolidation of competition. 

Adam believes that in emerging industries, visibility of the innovating concept is a key factor that attracts early imitating firms. This has become a more prominent variable in the digital age.

"The visibility of innovation is now a primary driver of the speed of new entry.  New concepts that are in the public domain or based on a well-known breakthrough will immediately attract a lot of opportunistic entry and rush of new startups.  The history of early tire industry (see exhibit 7-3) illustrates this community effect because there was critical mass of people who were aware of what was going on and how to take advantage of it.  The Internet magnifies visibility, so the speed of entry following innovation has increased.  Innovation has historically clustered geographically or in communities, but the B2B marketplace explosion demonstrated how the whole process has accelerated."   

Adam notes that since business models based on emerging technologies are often unclear, the period of dramatic expansion in the number of firms preceding a shakeout is marked by experimentation, optimism, and opportunism.  

"Many start-ups in the B2B space were experiments, since no one knew what the ultimate model for online marketplace would be.  This period of experimentation is a natural by product of innovation.

During the boom period, an unsustainable glut of competitors is attracted by forecasts of high growth and promises of exceptional returns.  In the case of B2B Internet exchanges, there were clearly more firms than the market could support.  The fuel was free flowing capital that was less interested in creating long run profitability than in creating a compelling story so that venture capitalists and owners could cash out."

Beyond venture capital firms, there are many others with a vested interest in certain types of technology being adopted, who hype certain types of change. This seems to be occurring in the RFID market, for example. Wal-Mart's interest in RFID is the event that is being used to stoke interest in the category. Potential suppliers to the industry are hyping innovation and trying to convince everyone else to either invest or buy.

Adam's view is that early competitive crowding is driven by new entrants. Since enabling firms lower barriers, in most cases it is less risky for incumbents to wait and better understand which models are likely to win out. The maturing market can often create opportunity for incumbents, as the competitive field thins during a shakeout.   

"In today's environment, there are many more enablers with a vested interest in sharing innovation. They lower the barrier to imitation considerably. Some dot-com consulting firms, for example, took solutions developed for one company and resold them to as many others as possible.  The widespread use of these so-called "e-consultants" ensured that knowledge diffused rapidly to any company that was willing to pay.

For instance, incumbents did not really have to react quickly to the alleged threat of B2B exchanges because the Internet did not change the basic structure, functioning and purpose of many markets.  In these industries, incumbents have built-in advantages with their trusted brand names, customer relationships, systems that are readily convertible to the Internet, and financial depth.

In my opinion, there are very few first mover winner-take-all markets, so it is prudent to use discretion.  This is different for VC funded firms, of course.  Many start-ups are "built to flip," changing the definition of a successful start up and making early momentum much more meaningful.

To some extent, shakeouts are not necessarily bad because they are the result of innovation. In the early stages of market evolution, product or service variations are essentially experiments for what will actually be used sometime in the future.  Assuming that the technology has not become obsolete, many start-ups end up selling their entire companies for a fraction of the total capital originally required to build and create their technology.  The incumbents have the opportunity to generate actual economic profits and drive adoption."

Finally, Adam cautions that despite the recognizable pattern of boom and bust innovation, the biggest issue for most firms is in discerning where the industry is in its lifecycle.

"There is usually sharp disagreement about where you are in the lifecycle.  As John Maynard Keynes once said, "The markets can remain irrational longer than you can remain solvent."

From Hunter or Hunted - Chapter 7