MCDONALD & EISENHARDT. (2019). Parallel Play: Startups, Nascent Markets, and Effective Business-model Design.

Authors:
Rory M. McDonald – Harvard Business School
Kathleen Eisenhardt – School of Engineering, Stanford University

Interviewers:
Chang-Wa Huynh – HEC Paris
Madhulika Kaul – HEC Paris

Article link:
https://doi.org/10.1177%2F0001839219852349

Question 1. Was the choice of qualitative methods a natural one when you started the study? How did you end up selecting this particular context?

Methods

Yes, the choice of qualitative field methods (and particularly a multiple-case, theory-building study) was a natural one for us for a couple of reasons. First, Kathy was the co-chair for my dissertation, and I had been looking for an opportunity to learn and apply the craft of theory-building from cases. Kathy helped to develop and popularize the method, and she is a great teacher and mentor to doctoral students. I was excited to learn as we did the research.

Second, we were interested in (and I remain interested in) how firms navigate nascent markets, which we conceptualize as novel (new-the-world) economic-exchange structures characterized by buyers and sellers, originating from a new product or service category that lacks business precedent. Hoping to study the earliest stages of such contexts, we believed that firms’ initial moves disproportionately shaped both the evolution of the market and their viability within it. It is very difficult to study these kinds of issues using traditional quantitative methods, especially when they rely on archival data. And if a researcher is able to do so, it probably means that market ‘successfully emerged.’ In contrast, we began our study before winners, losers, or even market viability had become evident.

Context

Today, there is a steady stream of emerging innovations that are leading to nascent markets—from commercial drones and autonomous trucks, to virtual and augmented reality, to plant-based meat substitutes—and we’ve started studying some of these. When we began our research, it was a new wave of Internet companies—inspired by social networks (Facebook) and enabled by Web 2.0 technologies—that was emerging. We became particularly intrigued by the various Fintech categories that kept popping up. These digital startups sought to challenge and perhaps even displace traditional financial services by changing the way that consumers save, lend, and invest (we ended up focusing on the investing vertical). In the Fintech space, the startups’ products, services, and technology were new. But, the most significant innovations by far related to the business models they eventually employed.

Question 2. The paper mentions that it is part of a larger research program. Where and how do you see this specific research program evolving? Can you tell us more about it?

Sure. In a nascent market, a conventional approach to strategy makes little sense. When a market (or a new business category) is in a state of formation, executives may not know which points of distinctiveness are likely to be most important to their firm’s customers. They may not even know who those customers will be. Moreover, the competition typically consists of small startups that are equally in the dark. Conducting an industry forces analysis is probably less productive when those forces are in constant flux and when actors like rivals and buyers may suddenly emerge or disappear.

Established companies by definition have established business models. They know how to create value in a given space. Their primary strategic question is how to do so in a way that outstrips the competition. By contrast, firms in nascent markets don’t know what business model will actually make sense or perhaps even what business models might exit. Most can’t even answer the age-old questions “Who is the customer?” “What does the customer value?” and “How will we deliver that value at an appropriate cost?” These entrepreneurs may have hypotheses, but they cannot know whether their hypotheses will pan out.

In our minds, the uncertainty and extreme ambiguity of new markets requires not just a different kind of strategy but a different framework (or set of frameworks) for strategic thinking.

The larger research program seeks to understand how firms effectively navigate nascent markets – i.e., domains characterized by incomplete products, uncertain technologies, and extreme ambiguity about opportunities and customer demand. Such contexts represent both a unique set of circumstances for managers and a promising laboratory for scholarship—an opportunity to extend established theories of organizations, strategy, and innovation and to develop new theories when warranted. Indeed, this dual audience is very important to us. We’re so pleased and grateful that the “parallel play” ideas appeared in ASQ, and some will be coming out in the Harvard Business Review soon.

Regarding the portfolio of research projects, we are investigating the business models that firms in nascent markets deploy, the resources they assemble, the products they introduce, and the actions they take to create new markets and categories while engaging with peers and substitutes in nascent market spaces. We seek to identify the factors that explain how some firms succeed in navigating these contexts while many other firms fall by the wayside. Certainly, ASQ has published several important articles in this area, and we look forward to seeing more in the years to come.

Question 3. Relative to optimal distinctiveness and more generally categories research, the concept of “parallel play” strikes a new balance between concepts such as cognition and agency, search and design, ambiguity and waiting and also action and reflection. Do you see other implications emerging from the theoretical reconfiguration stemming from “parallel play”? What would we need to revisit theoretically?

Thanks for bringing up the tensions that parallel play invokes. In fact, we’ve long believed that balancing tensions is a core managerial task in environments with high uncertainty like nascent markets. These tensions become particularly acute in these settings. Regarding parallel play, we recognized the tension between cognition and agency (or more simply, thinking and doing) almost immediately. A reviewer pushed us to think about design, not just search. It was then that we realized that we had, perhaps unreflectively, fallen into the elegant (and common) metaphor of NK landscapes while forgetting its core assumptions that peaks exist and the landscape can be modeled as static. Some of these assumptions are not tenable in nascent markets. Design seemed to us more relevant to emphasize. The most novel and surprising tension was between reflection/waiting and action, especially given a nascent market with fleeting opportunities. This was initially so counter-intuitive to us.

Regarding implications, we discuss a few for research on institutional entrepreneurship (especially optimal distinctiveness) as well as on learning and evolutionary adjustment literatures in the ASQ paper. That said, we think that parallel play has more implications such as for the problem (in both optimal distinctiveness and categories) of the appropriate comparison. We hope that parallel play opens up theoretical introspection on this. Parallel play also has theoretical implications for timing like when to lock into a category – and strategically whether to adopt a category early on, lead in shaping a category, or simply draft along with others until the market clarifies. Parallel play implies the last choice, but new theory on timing would be helpful. Another implication centers on competition. Theories of strategy focus a lot here. The job of the strategist, as in the vintage Mad magazine cartoon series “Spy vs. Spy,” is to identify competitors—both existing and potential—and then to outmaneuver them. Among startups in nascent markets, venture-capitalists sometimes reinforce this scenario by requiring entrepreneurs to list their competitors and to explain how they plan to distinguish themselves from the pack. We think that the parallel-play image of the preschooler playing (adjacent to her peers) in the sandbox marks a distinct departure from the calculating ‘gamester’ that permeates scholarly notions of competition and strategy.

Question 4. The paper draws from literature in child development psychology. How did you draw the connection with “parallel play” and adapt it for a management audience? More generally, would you encourage young researchers and PhD students to learn from literature outside management? How should they go about doing it?

The core idea of the paper—the Parallel Play framework—emerged very early on. The insight just jumped quickly out from the case data. We were especially struck by the data indicating that trying to differentiate and compete with peers just did not seem relevant to the winning entrepreneurs (yet so different from traditional strategy theories). Instead, we were reminded of our personal lives. While a graduate student, I had four young children who would often play near each other but not with each other. And they definitely took each others’ toys! And the way that some of our sample firms learned side-by-side but not together or in competition reminded Kathy of watching her own kids play as preschoolers. Although the core insight was there from the beginning, Dev Jennings (our editor) and our reviewers really challenged us to think more broadly and deeply about whether parallel play was just a useful (and clever) metaphor or something more. We realized that we could build out the idea into a unifying conceptual theme that tied together several insights about how firms go about designing business models in nascent markets. That’s when we began interacting in earnest between our data and the child development literature. Similar to parallel play by preschoolers, entrepreneurs engaged in parallel play interweave action, cognition, and timing to accelerate learning about a novel world.

Borrowing from peers is a key mechanism that we identified in this paper. So maybe it isn’t surprising that we think that creative ideas can arise when researchers borrow and adapt something—an idea, a tool, or a method—from an adjacent field. A classic example is Kahneman and Tversky who brought together ideas from psychology and economics to study decision-making, thus creating the field of behavioral economics. The study of organizations is inherently an interdisciplinary field. Although it draws most closely from sociology, psychology, and economics, there are opportunities for young (or any) researchers to bring in other literatures / fields that are relevant to their question or that give them insight into their data. But it’s not always clear in advance what that literature may be. So our advice is simply centered on increasing the likelihood of serendipity: Read broadly (Kathy, for example, reads Scientific American to think differently), sometimes take a course or attend a seminar outside your home discipline, and brainstorm findings and ideas with distant colleagues (a favorite of mine).

Question 5. Your paper stresses the need for waiting and reassessing especially when designing an effective business model. It is an interesting theoretical conceptualization of time. How does the notion of “parallel play” relate with previous works by one of the authors?

Preschoolers’ parallel play frequently involves making things, such as a sandcastle or a doll’s costume. Some children stop periodically to reflect on their projects before continuing. We observed similar behavior among some startups in new markets: After they committed to a general business model template to create and capture value, they paused and looked around before nailing down the particular business model. Thus, a key insight of parallel play, as you observe, is our conceptualization of time.

Kathy’s early work on fast decision making describes how (i.e., specific behaviors) entrepreneurs and others can decide quickly, and implicitly argues that fast decision making is advisable. But parallel play suggests that entrepreneurs should be aware of when (and when not) to engage in fast-decision making and more importantly, when to act quickly versus pausing and reflecting. So parallel play is an important reminder that fast decision making is a valuable tool but at the appropriate time. 

Parallel play presents a more substantial challenge, we think, to popular theories of strategy and entrepreneurship. At classic lean start-ups, for example, entrepreneurs try to identify potential customers quickly, pinpoint what they value, and aggressively optimize operations to deliver that value in a profitable way. If something goes awry, the theory is, entrepreneurs can quickly pivot to a new business model. But in an evolving market, trying to perfect a business model—even one that appears to be working well—too early can be problematic and lead entrepreneurs to miss a better model. And pivoting—while easy on the basketball court—is often costly, difficult, emotionally-charged, and time-consuming in ventures. It typically involves a “tear down” – unwinding and rebuilding aspects of a company’s business model and often the organization.

The alternative approach that emerged from our study is to leave a business model ‘purposely undetermined’: initially specifying the basic elements but leaving other elements undefined.

Any nascent market is likely to present surprises and changes—unforeseen customers and uses that no amount of experimenting would reveal. An incomplete, partially elaborated business model may increase the likelihood that entrepreneurs will acquire information that they could not easily have anticipated.

Question 6. Are there any other questions that you feel we should have asked you regarding the paper?

Thanks for the thought-provoking questions, and the opportunity to think about them and respond. It’s a real pleasure of us to be part of the ASQ blog. We appreciate your asking!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: