Overshoot and Recreate:
Increasing Returns and Stages of an Enterprise
James B. Smethurst
[Author's Note: This model was developed
in collaboration with Bryan Coffman in July and August, 1997.
Please also refer to the traditional Stages of an Enterprise model.]
In the new, hyperchange economy, more and more organizations are discovering
that traditional business models are no longer effective. Today's economy
is demanding, unforgiving, and full of more opportunities than ever. Increasing
returns is driving companies to approach growth in radically new ways,
changing with it MG Taylor's Stages of an Enterprise model.
"Increasing returns" is a phenomenon that challenges the classical
economic assumption that the more widgets that you have, the less each
widget is worth--decreasing returns. If you have one TV, getting a second
one is not terribly important, and a third becomes trivial. Increasing
returns postulates that the more widgets are out there, the MORE valuable
each one becomes. Kevin Kelly ("New Rules for the Network
Economy") uses the example of the fax machine. The first fax
machine ever produced was worth nothing--there was no one to send a fax
to. The second fax machine made the first one valuable. Now each additional
fax machine sold adds value to every fax machine sold before it because
it ADDS TO THE NETWORK of fax machines. There are now more people who
can send and receive faxes. Thus the value of fax machines comes not from
their scarcity, but rather from their plenitude!
The story of increasing returns is one of market share. Take another
example of increasing returns: the VHS vs. Betamax wars. It is generally
agreed that the Beta was the better machine, and yet the VHS is now not
only dominant, but exclusive in the marketplace. How did this happen?
Wouldn't "rational" consumers choose the better product? The
surprising answer is that, while rational, the success of VHS depended
on chance as much as anything else. When VHS and Beta first hit
the market, no one knew which was the better product. For some reason
(or no reason), a few more people bought VHS than Beta. Now an interesting
thing begins to happen. People who are considering buying VCR's ask their
friends what they should get, since it is convenient to be able to share
video tapes or to have a friend record a program for you. Thus more people
began buying VHS than Beta since a majority of their friends had VHS.
Now video rental stores began popping up, and it made very little sense
for them to stock BOTH VHS and Betamax tapes. After doing a little market
research, more rental store owners chose to invest in VHS tapes than Beta
tapes. This, in turn, encouraged more buyers of VCRs to purchase VHS machines,
since those were the tapes that were more readily available. Thus increasing
returns turned a very small initial difference in market share into VHS's
market domination and Beta's extinction. By becoming the market standard,
VHS made its competition irrelevant. VHS defined the market.
There have been a few companies, mostly in the high-tech industry, that
have learned the lesson of increasing returns: you must gain market share
fast and cheap in order to become the standard in a new market. This requires
very rapid growth from the beginning in order to jump-start the increasing
returns cycle that will allow you dominate a market and generate revenue
down the road. This rapid growth should eliminate the competition, but
it also generates a momentum of growth that is very likely to be unstable.
This is the "Overshoot and Collapse" path that the traditional
Stages of an Enterprise model warned us against BECAUSE it was unstable.
In an economy where instability is the rule, invoking Overshoot and Collapse
in order to gain market share (or create a new market) becomes the preferred
America OnLine is a terrific example of this approach, although
it is arguable if it was their intention to do so. AOL's initial growth
was astronomical. With heavy marketing and incentives for joining, AOL
attracted, literally, more members than it could handle. At the moment
when the Internet was becoming popular, AOL offered people an easy way
to get on board, and it offered special incentives for members who enticed
their friends to sign up. As a way of keeping members, AOL allowed members
access to exclusive chat rooms, the ability to view who among the other
AOL users they knew were currently signed onto AOL, and the happy ability
to retract e-mails sent to other AOL users before they were viewed. When
they maxed out their capacity and users frustrated with busy signals began
switching to local ISPs, AOL quickly ramped up their capacity by orders
of magnitude--not to handle the members they had at the time, but to handle
the membership they hoped to reach in the future.
The lesson here is that of re-creation. The initial rapid
growth of a company should win it market share, but it will not be a stable
entity. The question comes quite rapidly--as soon as the company hits
its peak and begins to turn down the "Collapse" curve--"What
do you want to do with this market?" At this point, you have customers
and a huge share of the market. Now what? What do you want to create now?
It is at this moment that you must push the Entrepreneurial Button and
recreate your company. Create a vision for what you want to do with your
new-found market and build to that vision. Fixing the glitches in the
current system will be too slow, too inefficient, and generally futile.
Like AOL, you must build your capacity for the future of the market you
just created. Now that you have their attention, drive them to a new place.
Only by recreating the organization to achieve something newer, bigger,
better and different can you hope to pull the organization out of its
collapse path and onto a successful curve--a curve, incidentally, that
would be impossible WITHOUT having first gone through the Overshoot and
The on-going browser wars are another manifestation of this
phenomenon. Microsoft can give away its Explorer because it makes its
money off of other products and services that the Explorer makes available
to its users. Kevin Kelly calls this "Follow the Free",
but the curve is the same for products as well as organizations--give
away a lot of it cheap in order to win market share, and come in later
to USE the market to generate profit.
It is also an interesting exercise to look at the battle
between the Macintosh and the PC
from the same vantage point. Because it was licensed to just about anybody
to manufacture, the PC became the standard in markets across the world,
which allowed software and hardware developers both to focus on one operating
system and innovate their products by having so many more people working
on the same problems. Apple held very tightly to the Macintosh and therefore
lost the ability to have licensees innovate and enter new markets for
This approach to growing a business or generating products
is laden with risk, but ironically enough, it is becoming the safest way
to proceed in an economy driven by change. By keeping the Entrepreneurial
Button in mind, by being willing to let go of the ladders that got them
to where they are, organizations can grow rapidly enough to dominate markets
yet stay nimble enough to survive through and to thrive on re-creation.
See also: Looping and Leaping:
Quantum Mechanics and Stages of an Enterprise
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