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IMT 581: Case Study Analysis: Necessary Conditions and Entry Strategies in Winner-take-all Market

by on November 18, 2010

By Che-Wei Hu, Meng-Chi Lee and Zhenhua Wang

A winner-take-all market is a market in which the leading player captures the most profits. Most businesses are seeking a position in that market. There are three characteristics that businesses can use to find trace of the emergence of such market. However even within the winner-take-all market, business should apply different strategy while in the different phases of the market.

The Three Characteristics of a Winner-take-all Market
• A Change in the Basis of Competition
• Customer Lock-in
• Competitor Lock-out

Entry Strategy for a Winner-take-all Market
• Phase I: Changed basis for competition
In this phase, a new category of offering which meets a new type of demand or which reframes competitive criteria is provided by the entering player. To survive in this phase of the winner-take-all market, the new player should maintain its ownership of the standard and keep it proprietary. (McGrath, 2008)
• Phase II: Horizontalization
In phase II, Leading providers overshoot or a public standard is established. Customers defect to solutions that are cheaper, simpler or more flexible. Meanwhile, interfaces and platforms are increasingly standardized and new services are built on top of these standards. To survive in this phase, the business has to dominate a platform or component standard necessary to other players. (McGrath, 2008)
• Phase III: Bullets to the combatants
In the last phase, most solutions have been commoditized and only advantages lie in areas where solutions are not good enough. To survive in this phase, the business needs to help customers compete or conserve more effectively than they could if they didn’t buy from you. (McGrath, 2008)

Case 1: Dropbox – the Rising Star in the Online File Hosting Service Market
Being a late starter to enter the competing and nearly saturated web-based file hosting service market, Dropbox is a rising star in this field. What make Dropbox different from other competitors is its conveniences and rapid development on new features. Dropbox adopts lean startup development process which combines agile software development and customer development. Instead of going through the whole waterfall model to launch a fully featured new product, Dropbox incrementally deploys new features right after they are ready. Dropbox successfully changed basis of the online file hosting competition, the milestone it set up was solving the problem that users don’t have to keep track of which files were stored where especially nowadays everyone has more than one device that can store files.This is also a customer lock-in for Dropbox per se. Since it is really convenient to use, it’s likely that “just throw in Dropbox” becomes an everyday habit of its user. Once files in the dropbox accumulate, users might just stick to its service, seeing that folder a part of routine life.

Case 2: Tencent’s Operation Model in China
Another example is in the Chinese Internet industry. Tencent, today’s one of the largest and most used Internet service portals in China.The biggest change Tencent has made is it changed the way Internet businesses compete in China. Today, it takes advantage of its ample capital with the huge user base. Today Tencent provides its users with almost all kinds of Internet services from IM, email, blogging, microbrogging, social networking to B2C , C2C shopping, online auction, online payment, even online games, music download, online stream video, etc. and etc. By providing such a wide range of products, Tencent could make sure the cost for a user to move to another service provider is too high to be acceptable even in the case when its services are just as good as or even a little bit worse than its competitors’.Due to Tencent’s huge capital, it can develop almost all kinds of tools, games and services it intends to. It actually doesn’t have to do much R&D itself since whenever there is a new relevant service on the market.Tencent takes advantage of its ample capital and huge user base to quickly and cheaply launch new products. These products, in return, help Tencent to weave a net to capture end users, making them stick to those products since those products are not only closely related to each other, but also connect to the friends and families of the user.

Case Comparison
If we do a careful exam on both cases, we can find that although both companies are of different sizes, in different region and different phrases of development, they share a lot of in common to take advantage of a winner-take-all market. We can also tell that both companies are under different phases of the winner-take-all market.
For Dropbox, it apparently is in the first phase of the winner-take-all market – it created a new category of offering for the customer that create real values for them and it is definitely using its proprietary approach as its main strategy.
For Tencent, it is in the second phase of the winner-take-all market – it is using its existing resources (i.e. ample capital and large user base) to secure existing and new users by providing them with integrated Internet services and make them stick to those services. Meanwhile, other competitors cannot easily enter the realm because Tencent’s capital and user base cannot be easily duplicated.
Both companies have pursued a customer value center approach while providing their users with service that are flexible and useful, which is the most critical factor for any business in the service industry.

So what are your thoughts?  Do you agree A Change in the Basis of Competition, Customer Lock-in and Competitor Lock-out are the three basic characteristics of a winner-take-all market?  Can you provide more examples on businesses in a winner-take-all market and compare their characteristics?  Thanks.

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8 Comments
  1. Tien Nguyen permalink

    Although I like the three characteristics you mentioned in your case study, I don’t see the contrast between the two case studies.

    Just a suggestion that if you take more examples to compare, such as:

    Dropbox vs. megaupload or rapidshare.

    and point out why megaupload (or rapidshare) lost their market share to Dropbox, it will strengthen your arguments.

    Just my thoughts.

  2. Ke Ding permalink

    Agree with Tien’s comments. I don’t see the contrast either. Even more, I don’t think they share that much in common to take advantage of winner-take-all market.
    In my view, the case of Tencent is a little bit controversial. I’m still doubt whether it is in the second phase of the winner-take-all market. My understanding is that before entering the 2nd phase, the organization has to secure its accomplishments in the 1st phase, which is changing the basis of competition. I admit Tencent is a consolidator, or integrator, but it didn’t provide a “new category of offering which meets a new type of demand or which reframes competitive criteria”. None of its services were originated from Tencent. Tencent’s achievements was just integrating them together in a single platform – one account for all. For IM, Tencent has a strong competitor – Windows Live Msgr; for Microblog, it is not as successful as Sina microblog… In each realm, Tencent is not necessarily the winner.
    Just my thoughts.

  3. Surry Jones permalink

    Interesting case study and analysis. I like Tien’s suggestion of comparing the two examples with companies that are similar. Also, regarding the three phases, do you think both companies will progress to the third, and how would they compare?

    –Surry, Jeroen, Gauravee

  4. Interesting case study. Just want to add some trivial points. I agree with Tien, may the two case provided are not that consistent. So far, Dropbox make a good start in the file hosting service, reflecting the first phase- change the basis of competition. However, how Dropbox lock in their current users? which features support them to retain current users? In addition, how Dropbox compete with other file hosting service, like Windows Live Mesh? Maybe you can recommend strategies for both companies to extend their winer-take-all market.

  5. I really dont get why Dropbox is an example of the “winner take all ” market because dropbox though it does provide the convenience of having a feature to quickly upload files to a central database and share it with users conveniently,there are other prominent file sharing methods available there which are just as effective .However its an effective example of how innovation despite intense competition is keeping its market share intact (or enable it to grow).

    However I would be curious to know how would Tencent handle a case if the internet was thrown open and people had access to other email providers,social networking sites and blogging options .Do you feel Tencent might still be able to hold on to its impressive market share.

  6. Interesting case. A similar concept I would like to share is that of “fast-second”, a book written by Paul Geroski and Constantinos Markides. The authors talk about how large established companies can scale new innovations and capture the entire market. They discuss the strengths and weaknesses of established organizations and How smart companies bypass radical innovation to enter and dominate new market space.

    Thanks,
    Ajay, Nishant & Paul

  7. In Tencent’s case, another reason why to quickly and cheaply launch new products is that the intellectual property is not well projected by law in China. Tencent always copy new ideas from other small companies and integrate into its software which had the hug user base. So maybe unfair competition advantage is also a factor of a Winner-take-all Market, and a company have to consider it in their strategic plan.

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