How some of CEE’s start-ups are using groove-in to create dominant market positions

The fusion of technology and globalisation is transforming markets and rendering traditional economic models obsolete. Some smart CEE firms are taking advantage.

The convergence of technology and globalisation is changing the world. It is undermining the laws of economics, rendering established models of business strategy irrelevant and transforming markets.

Although most entrepreneurs and managers sense that there is opportunity to create value through greater use of technology, most of them struggle to get beyond thinking about how it can provide access to new customers or improve internal efficiencies. Very few really understand how digital disruption is changing the nature of competition itself.

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• ‘Now is the time to invest in Moldova’
• The Polish AI start-up helping firms navigate the digital transformation

In a series of articles over the next few months I will explore and explain how digital disruption is changing the nature of competition. It was economist Brian Arthur in 1996 who foresaw how a process, that he called groove-in, was challenging existing laws of economics, transforming markets and rendering traditional models of strategy redundant. 

Groove-in has two components, technological and psychological. Psychological groove-in captures the idea that learning new technology is difficult and once the effort is made people are reluctant to learn additional, or alternative, technologies. 

This is the reason that Facebook successfully triumphed over MySpace and Friends Reuinited. Do you want your friends to be on three different networks that have access individually and learn to use differently, or is it better to have them all on the same network?

The Revolut effect

A classic question asked when paying a restaurant bill in Central and Eastern Europe is Do you have Revolut? In other words, if we are both using the same payment network, can I simply transfer my share of the bill from my phone to yours using Revolut. 

Making money transfers and payments fast and mobile is being used to groove customers into the Revolut network; it also generates enormous amounts of data that, Revolut at least, is explicitly seeking to exploit for its marketing value to third parties. 

What we might call technological, groove-in captures the idea that to collaborate with digital technology we need an agreed shared standard. Whoever controls this standard effectively assumes leadership of an entire marketplace. It is control of the .doc format that has enabled Microsoft to be so dominant in office software for so long. 

Equally it is control of software standards that enables Google and Apple to so effectively control the mobile phone business. It is a lesson that Nokia, with its emphasis on hardware, failed to learn and that ultimately put the firm out of business.  The power of such groove-in was laid bare with Microsoft’s ill fated efforts to break the mobile phone duopoly.

From processing goods to processing information

The power of combining psychological and technological groove-in is shown in the success of Apple to lock in customers to their ecosystem. Right now we see firms like Smartbill trying to combine psychological groove-in with a new and poorly understood process of compliance following the compulsory introduction of e-invoicing in Romania. 

However, they are trying to go beyond that to create the technical standards for sharing invoices and become the de facto market dominator.

Groove-in led Arthur to suggest that the rise of digital technology and its convergence with globalisation was leading to a “shift from processing goods to processing information” and, in turn, from diminishing to increasing returns:

“Increasing returns are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage…diminishing returns hold sway in the traditional part of the economy—the processing industries. Increasing returns hold sway in the newer part—the knowledge based industries,” he wrote in 1996.

Ten years later, Chris Anderson—in his book, The Long Tail—argued that digital disruption, driven by the groove-in described by Arthur, leads to monopolistic competition, leaving the majority of challengers in the so-called long tail. 

Can you think of any market that has been disrupted by digital technology that is dominated by more than three major firms? “When you can dramatically lower the costs of connecting supply and demand, it changes not just the numbers, but the entire nature of the market,” Anderson wrote.

Richness and reach

In Romania we see how, learning from Amazon’s customer rating scheme, local player eMag has used psychological groove-in to assume a highly monopolistic market position. Dominant players can offer an almost limitless range of products. 

Whilst according to Harvard Business School professor Anita Elberse, “search and recommendation tools can keep a selection’s vastness from overwhelming customers” and whilst products that can be digitised offer the potential of near zero marginal costs of distribution, it is clear in that, “Apple’s iTunes Store lists millions of albums and songs; Amazon offers more than 250,000 albums, whereas even the largest off-line music stores typically stock only about 15,000.”

Dominant players able to gain groove-in are simultaneously able to gain both richness and reach at near zero marginal cost. 

It is evidence that groove-in is taking place that is the primary source of tech company valuations that seem to have nothing to do with their revenue streams. 

Think about it: if you see, in a market that will ultimately be dominated by just one to three players, evidence of one company pulling ahead, wouldn’t you want to invest in that?

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