Friday, July 31, 2009

Market Rebels

Author:Hayagreeva Rao, Hardcover: 222 pages

Princeton University Press; 1st edition, 2009, US$24.95

Hayagreeva Rao wants you to "stop thinking like bureaucrats and to start thinking like insurgents." In Market Rebels, Mr. Rao explains how market rebels, i.e., social activists, can either enable or constrain radical business innovations, and in so doing these rebels represent either a potential opportunity or pose threat to businesses.

Relying on examples of how the automobile became popular in the early twentieth century, or why the cochlear implants were shunned by the deaf community, or what lead to the success of micro brewing, or how shareholders' rebelled against corporate boards, Mr. Rao describes the social activism that either contributed to the success of certain radical innovations or hampered the possible growth of other.

Market Rebels identifies social movements as collective struggles to bring about social change. Such movements are born to "reshape markets when normal incentives are inadequate and when actors are excluded from conventional channels of redress to address social costs." For instance, when ordinary share holders were preempted from sponsoring resolutions at annual meetings, they rose in revolt to institute change that made corporate boards more accountable.

Giving examples of how social movements can help radical innovations succeed, Mr. Rao describes the case of private automobile and its acceptance by the public in a relatively small time. When the private automobile was first introduced, some opposed the idea and called cars a "devilish contraption". Up until the beginning of twentieth century, for the past thousands of years human beings had commuted either by foot or by animal driven carts. The introduction of private automobile was indeed a radical idea. So how did the automobile gained cultural acceptance and legitimacy?

Mr. Rao argues that the acceptance of the private automobile was largely driven by private clubs of automobile owners who popularized the use of private automobile. In fact, the American Automobile Association began as an umbrella group of local auto clubs in the early 1900s. It was partly due to the initiatives of such clubs that helped popularize the private automobile and addressed the concerns of those who opposed it.

After describing the success of private automobile almost a 100 years ago, Mr. Rao then attempts to explain why the electric car did not gain the same acceptance. He argues that the electric car failed to attract the imagination of user groups. He particularly points to the lack of interest amongst the California motorists as the reason for the electric cars not gaining ready acceptance similar to the one enjoyed by the first generation of cars running on combustion engines.

While there is merit in most arguments presented in Market Rebels, one may find some reasoning rather reductionist. Whereas the private automobile introduced in the early 1900s qualifies as a radical innovation, cars running on hydrogen or electricity may not be such a radical innovation. Unlike the first generation cars that revolutionized mobility, electric cars in fact offer less mobility (because of frequent recharging requirements) than those running on combustion engine, and at the same time electric cars cost more.

What about Segway, the ultimate innovation in personal mobility. Introduced in 2001, it was believed that Segway would gain mass acceptance by the public and the industry. In fact, it was believed that the courier industry, including the postal services, would adopt Segway en masse. Almost eight years hence, Segway continues to struggle for mass acceptance even after landing coveted celebrity endorsements, including the founder of Apple, Steve Woznik, bought one for himself.

The untold story of Segway also includes resistance from the government agencies including some municipalities in North America that enacted regulations prohibiting its use on sidewalks and in other public places. At almost $5000 apiece, Segway remained unaffordable for most.

Market Rebels argues that lack of social movements promoting Segway is behind the dismal performance of the radical business innovation. Despite the ingenious engineering design, Segway barely qualifies as a radical innovation in mobility. It offers almost the same mobility of an ordinary bike at a much higher price. And unlike cars, which in early 1900s were favored by the rich and famous, who happened to be older than the rest, Segway attracts the younger cohorts who may not have deep enough pockets to acquire this high-tech gadgetry.

Could it be that the marginal increase in utility brought about by the innovation in comparison to the status quo determines the acceptance of a new technology or idea. This implies that the marginal benefit of a new technology when made available at the right time and at the right price determines its mass appeal and adoption.

Mr. Rao refers to Steven Klepper and Elizabeth Graddy who studied 46 industries to determine how long it takes for an innovation to be accepted and adopted. The authors discovered that on average it takes 29 years for a new idea to move from inception to cultural acceptance. Some innovations took only two years to become popular, whereas others took almost 50 years. Klepper and Grady believe that the time it took for innovations to enjoy mass appeal was based on their cultural acceptance.

But what about the right timing? If an innovative idea is introduced ahead of its time, it may not gain mass appeal that it deserves. Market Rebels refers to the movie The Solid Gold Cadillac, which introduced the idea of shareholders activism some 50 years ago. In the movie the character Laura Partridge questions the directors of a company about the perks they had awarded themselves. She then mobilizes shareholders against the directors and wins a Cadillac for her activism.

It was 50 years after the movie that the shareholders of Home Depot revolted against its board for awarding a generous package to its CEO Robert Nardelli under whose leadership the stock price experienced great volatility. At the same time, Lowe's, a competitor of Home Depot, saw its fortunes rise much faster than the Home Depot and for that its CEO received a fraction of remuneration paid to Mr. Robert Nardelli. The opposition by a small number of activists partially contributed to Mr. Nardelli's departure from the Home Depot.

While some social movements succeed, many other do not. Market Rebels explains how small communities continue to resist big box retail. Large retailers such as Wal-Mart often attract strong resistance from communities who fear that the arrival of chain stores may result in a net loss of jobs. However, with Wal-Mart being one of the largest corporations in the world, and big-box retailers outperforming their competition in retail sales, one may argue that despite opposition by social groups, market rebels have failed to stop certain radical innovations, including the big box retail.

There may not be any organized social movements supporting big-box retail, however, the annual 350-billion plus dollars revenue of Wal-Mart suggests that its record-setting sales may in fact be an outcome of a latent social movement of consumers who prefer bargains over other tangible benefits of shopping.

While the social movements may not have succeeded against the big-box retail, they certainly have succeeded against other businesses, such as tobacco. By bringing together lawyers and health advocates, social movements provided the platform against large tobacco companies which saw banning of smoking in public places throughout North America.

Thus, while certain market rebels help promote an idea of innovation, such as the early dedicated computer enthusiasts who put computer terminals in streets as community bulletin boards, other rebels have helped defeat innovations such as cochlear implant. Mr. Rao is justified in warning that social movements may pose a threat to certain ideas and may facilitate mass appeal of certain other innovations.

So if you will be launching a radical innovation, and would like market rebels to be on your side, you must then stop thinking like bureaucrats and start thinking like insurgents.

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