Want to succeed in business? The common wisdom is that two types of companies flourish. In the first camp are market-driven companies that use deep consumer and competitor insights to develop their strategies. Think Netflix and Zappos. One of their prophets is Tony Hseih, CEO of Zappos, and author of Delivering Happiness.
In the other camp are market-driving firms that use disruptive innovation. Think Amazon, Apple, and Tesla (the first two are also customer experience leaders). Their prophet is Clayton Christensen, author of The Innovator’s Dilemma.
Yet there is another type of company that can create significant competitive advantage by the market driving—shaping what consumers value—but without disruptive innovation. Think De Beers and Starbucks.
Our research team sought to answer three questions: How do firms drive markets without technological innovation? How do they create enduring competitive advantage as market drivers? And when is market driving more effective than other approaches?
We chose the U.S. wine market as the subject of our study. With annual sales notching $35 billion, it is mature, technologically stable, and intensely competitive with more than 15,000 products—yet some enjoy remarkably enduring advantage, making it ideal for in-depth research. Here are the key findings.
Creating an Artistic Vision
Winemakers view consumers as unpredictable, lacking knowledge and experience. Rather than cater to fickle consumers, winemakers pursue an artistic vision, shaped by the terroir (soil, climate, topography, weather, light, and more), with most considering financial success as secondary to achieving their artistic ambitions.
Placing profit second might appear odd, but winemakers are guided by a status-based logic. By feigning economic indifference, winemakers build symbolic capital they can use to influence other actors, such as critics, to help educate consumers and shape their tastes to reflect the winemaker’s artistic vision.
Building Relationships to Influence Consumers
Critics, the media, and the press play an especially important role in the wine industry. Choosing among the 15,000 wines available today can make consumers anxious, even fearful, so they rely on experts, who typically score wines on a 1-to-100 scale. By creating the appearance of an objective opinion, critics can move markets. A single additional rating point from the powerful Robert Parker or his colleagues (on a 1-to-100 scale) generate 3.26 dollars (2.8 euros) extra profit per bottle. A difference of 10 points can mean millions of euros in extra revenue for a large-scale producer.
By influencing critics, firms influence consumers. Based on what consumers learn from experts, consumers play their own status game. Consumers visit wineries, attend private tasting events and seminars, and join wine clubs, sharing their expertise with true believers. Like many markets, these true believers drive sales—12% of consumers purchase 25% of all wine sold.
Gaining Status to Win Market Leadership
Firms use social influence process to create an advantage over their competitors. By gaining status, they gain influence, and through influence they shape what consumers value to reflect their vision. By doing so, winners of the status game influence what consumers value, the actions of their rivals, all shifting the flow of industry resources in their favor, producing economic advantage.
Success arising from status has a long life. Famous winemakers become celebrities, gain more opportunities such as frequent reviews and friendships with critics. Consumers pay high, even extraordinary, prices for high-status wines despite the availability of thousands of excellent, lower-priced alternatives. High-status firms create clubs or memberships to which membership is limited, Consumer wait years for the privilege of buying some wines. Low-status firms may make delicious wines, but the market regards them as inferior. Making a delicious wine is one thing. Making a famous wine is another thing entirely.
Study Implications for Other Industries
Firms drive markets through status when the product is complex, consumers have poorly-formed preferences, lack expertise, and learning is difficult. Under those circumstances, however, no firms win alone. Firms gain status by winning it from others. Firms gain advantage, in other words, through collective rather than individual action.
Managers at market-driving companies can use our study to understand how to influence markets without relentless innovation. Successful market driving firms are become teaching organizations, developing their strategies from the inside-out and create opportunities by educating the market. They engineer a system of alliances to influence consumers and shape the social consensus about value.
From this perspective, every winner of the status game deploys a powerful competitive weapon: its brand, which reflects a unique vision that defines success in the market. For every computer maker, there is Apple. For every online retailer, there is Amazon. And for every winemaker, there is Chateau Latour, whose rarer vintages command prices in excess of $1,000 per bottle while a neighboring winemaker struggles to sell products for $20.
Ashlee Humphreys and Gregory S. Carpenter, “Status Games: Market Driving Through Social Influence in the U.S. Wine Industry,” Journal of Marketing, 82 (September).
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Ashlee Humphreys is Associate Professor of Integrated Marketing Communications, Medill School of Journalism, Northwestern University.
Gregory S. Carpenter is James Farley/Booz Allen Hamilton Professor of Marketing Strategy, Director of the Center for Market Leadership, and Faculty Director of the Markets and Customers Initiative, Kellogg School of Management, Northwestern University.