SLOAN MANAGEMENT REVIEW Why Dominant Companies Are Vulnerable By Kyle B. Murray and Gerald Häubl December 21, 2011 Recent research suggests that, as consumers feel that their choices are restricted, many respond by turning away from the market leader. Apple’s TV ads — like the one excerpted here — have humorously contrasted Macs and Windows-based PCs. But when Microsoft invested money in Apple in 1997 to ensure Apple’s survival, it may have been a smart strategic move for Microsoft. Image courtesy of Apple Inc. IT IS WIDELY ASSUMED that in many technology markets, dominant players have a powerful advantage and often are able to leverage that edge over time. But this is not necessarily true. Over the past decade, popular social networking sites including Friendster, MySpace and Bebo initially picked up a large number of users only to lose ground to new competitors and fade into the background. Facebook, by contrast, has succeeded at dramatically expanding its position in the global market, even as it has worked to manage an increasing number of dissatisfied users. Similar patterns of emergence, growth and dominance, followed by consumer disenchantment or ambivalence and a loss of brand equity have affected well- known technology companies such as Microsoft and AOL. Why do companies move from market strength to vulnerability? Research has shown that several factors influence a company’s ability to retain market leadership, among them technological innovation, changes in market structure, short product life cycles, capital strength and promotional prowess. However, one critical factor has largely been ignored: the psychological forces that drive decisions consumers make and, specifically, the degree to which people feel they have choices. Over the past decade, we have taken a behavioral economics approach to analyzing this phenomenon. Once people have learned a company’s unique technology interface, they become more efficient using that interface and are often reluctant to switch to competing products that require new skills or allow for only limited transfer of current skills. As companies such as Microsoft have demonstrated with its Windows operating system and Office software, early movers with dominant market shares are in an ideal position to provide customers with interface- specific experience that creates this type of competitive advantage. RELATED RESEARCH K. Murray and G. Häubl, “Explaining Cognitive Lock-in: The Role of Skill-Based Habits of Use in Consumer Choice,” Journal of Consumer Research 34, no. 1 (June 2007): 77-88. K. Murray and G. Häubl, “Freedom of Choice, Ease of Use and the Formation of Interface Preferences,” MIS Quarterly 35, no. 4 (December 2011): 955-976. To examine this phenomenon, we created a set of unique websites that allowed consumers to search for a variety of news stories. We then ran a series of experiments to examine the extent to which consumers’ preferences were affected by interface-specific experience. Some participants were allowed to choose the website they learned to use while others were assigned to a single interface and given no alternatives. We found that once consumers learned to use a particular interface, they were reluctant to switch; in some cases, the initial website retained all of its users, and the competing interface ended up with zero market share. But we also found that there were limits to how far leading companies can leverage this product loyalty via customer training and a unique interface. Specifically, 51% of consumers who had no choice in selecting the interface they learned to use switched to a competing website as soon as it was available. By contrast, among consumers who were free to choose the website they would learn to use, only 23% switched to the competitor, despite the fact that