Why Your Company Wants to be a 'Cognitive Referent' (Hint: SpaceX)

 
 
Companies that come to epitomize a nascent market—think Starbucks and boutique coffee—can capture greater success than other startups, says Rory McDonald. Is there a roadmap to becoming a “cognitive referent”?
 
 
by Roberta Holland

When Rory M. McDonald was working on his PhD at Stanford University in 2007, it was the heyday of the lean startup in Silicon Valley. “It seemed like pretty much every week there was some new market category being touted as the next big thing,” says McDonald, an assistant professor in the Technology and Operations Management Unit at Harvard Business School. After all, 2007 was the year that Twitter was founded; Airbnb formed the following year.

For startups jockeying for position in nascent markets, pressure is intense to come up with a viable business plan before running out of money. Unlike mature industries, nascent markets offer little certainty and plenty of ambiguity—undefined customers, unclear products or features, uncertain customer demand, and even an ill defined set of competitors.

Yet, for these startups to have the most success, they need to keep their eyes on a prize bigger than just creating the market. They need to epitomize the market.

“If they become the cognitive referent, they gain an unequal share of the gains from doing so”

“The goal is not only to make sure that the product category takes off, but to become the firm that comes to define it—Google and Internet search, Starbucks and coffee, YouTube and video sharing,” McDonald says. “In some cases, the names of these companies are so inextricably linked to the actual product category itself that it becomes like a verb. We ‘Google’ it.”

A company that is synonymous with a product or service is what McDonald and others in academia call a cognitive referent. Simply put, a cognitive referent is the king of its category. More importantly, it enjoys all kinds of benefits over competitors further down the brand-recognition chain. The smartest people want to work there. The sharpest investors want to work with them. The press wants to write about them. Cognitive referents have buzz.

McDonald delves into how companies can come to epitomize a market in the working paper Becoming a Cognitive Referent: Market Creation and Cultural Strategy.

An entrepreneurial firm in a nascent market likely won’t be the only player, but it should try to become the first player that comes to mind when customers, analysts, or the media think about the new market category. McDonald points to recent examples such as SpaceX in commercial space flight and 23andMe in personal genomics.

“These entrepreneurial firms want this new market and product category to take off, but if they become the cognitive referent, they get an unequal share of the gains from doing so.”

Is there a roadmap or strategy that firms can follow to gain cognitive referent status?

Even robots know that Google is a verb meaning market dominance. ©iStock/maislam

To find out, McDonald fixed his sights on the emerging market of online investing, studying five unnamed competitors at the beginning of their race to the top and following their actions and success as the market developed over several years. His inductive research included perspectives from founders, CEOs and numerous executives, board members, partners, customers, analysts, and the tech and financial press.

Two of the firms became cognitive referents for online investing while the other three fizzled out. What spelled the difference between success and failure?

MAKING A GOOD IMPRESSION

McDonald focused on the startups’ cultural strategies—rhetorical activities in terms of what they said and how that mapped to what they did, and symbolic activities like using labels or analogies to similar players in other verticals. In other words, how did these companies choose to present themselves to the outside world?

“What ended up being a really important symbolic activity for these companies was recounting their founding story,” McDonald says, adding that it often was about how the founder—or a relative of the founder—used an existing solution that didn’t work very well and wanted something better.

“These stories ended up being a real kind of consistent touchpoint throughout their history that they tried to share as often as possible. The nice thing about it is it not only conveys authenticity and why these people are doing what they’re doing, but it also conveys the market need.”

There were differences in how companies handled their founding stories, though. Virtually any startup goes through one or several iterations before hitting on the right product and the right target customer. The more successful executives were “very effective revisionist historians,” who artfully morphed their founding stories to fit their current iteration, creating a narrative arc as the companies evolved, McDonald says.

“The founding story that’s associated with a Facebook app becoming a regulated financial adviser—those are two totally different businesses. Yet they were able to sort of leverage this subtle change in the founding story over time,” he says.

When startups are pivoting to adapt their product or service, they need to be aware of how they frame those changes for external stakeholders and their employees. A dramatically changed business model could lead people to think the firm has failed rather than evolved.

GETTING THE LABEL RIGHT

How the firms dealt with labels, which often were attached to them by external sources like analysts or the media, also factored into a company’s success. As onlookers tried to make sense of the new platform for online investing, some of the firms were dubbed the “Facebook of investing.”

“In some cases those words end up doing a very good job of describing it. In other cases they did not,” McDonald says. And that’s a potential trap.

In his study, several of the poorer-performing startups embraced catchy labels and even used them in their own marketing materials. “Startups are dying for resources and attention. They were so excited to get that [attention] that they didn’t think about the fact that they would likely change their product or their business model over time, which would make the label less relevant to what they were doing.”

In contrast, the startups that would ultimately become the cognitive referents controlled their messages carefully, expending much effort to correct labels or comparisons they felt were inaccurate and explain their differences.

For rhetorical activities, those who became category winners employed narrowly directed attacks on specific existing solutions rather than bashing the whole industry.

“The companies that didn’t do very well were basically calling out everyone—taking on anybody and everybody, and as a result they got quoted in the press a lot,” McDonald says. “It’s pretty exciting to say why the mutual fund industry is terrible, why financial gurus don’t really know anything, and stuff like that, but it also requires a ton of time and energy.”

Also different was how the firms chose to launch, either on a large stage such as at a tech conference or financial news network, or on their own. The cognitive referents traded the additional publicity that a big public debut offered for tighter control over their timeline and for having a meaningful message that would resonate with customers. Not all publicity is good publicity, in other words.

MARKET CREATION NOT AS IMPORTANT AS COMPANY CREATION

Perhaps the biggest difference between winners and losers, though, was the role that technology entrepreneurs play in creating the new market.

“We oftentimes think about entrepreneurs as missionaries because they’re engaged in evangelism—trying to convert people to a new technology or convince them to use something new. The firms that took that approach ended up not doing very well,” McDonald says.

What went wrong? Wasted resources. “They were investing heavily in market creation activities as opposed to activities that would establish themselves as the cognitive referent in the market. So they ended up actually undermining their own performance even while they helped the market take off.”

The successful firms focused first on trying to solve a problem and then getting attention for their solution. “These firms ended up riding the coattails of the other firms who were doing all that hard work of making the market take off. So they really conserved managerial time, attention, and resources to work on the product and make it better for customers.”

McDonald cites the example of Theranos, a Silicon Valley startup that promised to revolutionize the blood testing market. The company and its founder were riding high, adorning the covers of magazines and making headlines. But the momentum slowed in October after a negative write-up in The Wall Street Journal, which questioned several of the company’s claims.

“Maybe the technology isn’t where people thought it was, and I think for me it reinforced this idea that how you publicly describe your firm is a double-edged sword,” McDonald says. “In this case, there was a lot of press written about Theranos that put it in the spotlight. When you’re not really ready, i.e., you haven’t quite solved the problem yet, that can be very problematic. I’m hopeful they can overcome it.”

About the Author

Roberta Holland is a writer based in Boston.

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