When Henry Ford shifted production solely to the Model T, it was a decision shrouded in risk. This level of experimentation was common in the automobile industry at this time, but what separated the greats, like Ford, from the rest happened to be quite a bit of luck, says new research from Maryland Smith.
The paper, produced by Maryland Smith’s Brent Goldfarb, David A. Kirsch, and Smith PhD Sandeep Pillai – now an assistant professor at Bocconi – examines how early automobile entrepreneurs found an edge over their competitors through experimentation.
It’s true that more financially successful companies were in better positions to take risks on different models, Goldfarb says, but sustaining this success also required that these companies learn from their experiences trying to build and sell cars.
“If we made the argument that those who experimented more did better because they learned more than their competitors, then we wanted to get to the bottom of whether that learning actually did take place at the time,” says Goldfarb, associate professor of management and entrepreneurship, and the academic director of the Dingman Center for Entrepreneurship. “It turns out, that’s exactly what we found.”
Before the invention of automatic ignition, starting a car required the driver to manually turn a crankshaft, which happened to occasionally backfire and kill people. That’s an example of learning by experimentation, Goldfarb says, because automotive companies quickly learned that this was a major problem. Different firms then experimented with several types of automatic starters including electric, pneumatic, and hydraulic. Electric starters quickly proved superior and are still used today.
“Implementing each potential solution was an experiment, but trying each potential solution was a strategic choice – a strategic pivot,” Goldfarb says. “These are irreversible commitments that are made with uncertainty.” Choosing to try a pneumatic starter solution was not an unwise choice, but it was unfortunate in that it put the firm that did so at a disadvantage relative to those that chose the winning technology, electric starters. In fact, choosing the wrong technology may have put the firm at greater risk of failure.
“Studebaker, a horse carriage firm, initially chose to produce electric cars in 1900,” Kirsch says. “This was a reasonable option as internal combustion technology was immature and unimpressive at that time. However, internal combustion turned out to be the winning strategy. Studebaker was unlucky. We remember the name Studebaker because of their eventual pivot to internal combustion, which was only possible due to their very deep pockets.”
Strategic pivots should be based on learnings from prior market experiments. “They may be educated guesses, but they are still guesses,” says Kirsch.
“The best strategies are often discovered by chance and not necessarily by design,” says Goldfarb. “Some will get it right and some will get it wrong, and that has to be by chance – otherwise why experiment in the first place?”
That being said, certain people, like Ford, are in better positions than others to succeed, so it can’t all be boiled down to luck, says Goldfarb. But a good part of it is, and Goldfarb hopes that is part of the discussion surrounding these figures moving forward.
“I hope that people come away with the insight that a lot of what we view as great decision making also involved a great deal of luck,” says Kirsch.
“Some leaders get this. I’m always in awe of successful people who recognize how lucky they were,” Goldfarb says.
Read more: “The Origins of Firm Strategy: Learning by Economic Experimentation and Strategic Pivots in the Early Automobile Industry” is published in Strategic Management Journal.
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