The Black Swan of the Modern Marketplace: Subcategory Innovation

David Aaker

I believe that nearly all market dynamics are caused by firms that create “must haves” that define whole new subcategories and manage those subcategories to win. I also believe that too many resources and too much effort goes into understanding and implementing “my brand is better than your brand” competition and not enough toward creating or adjusting to the impact of subcategory innovation. A fascinating book by Nassin Taleb entitled The Brand Swan: The Impact of the Highly Improbable supports that logic from a much broader perspective.

Before the discovery of Australia, people in the old world believed that all swans were white; a belief that was based on enormous historical empirical evidence. But then black swans were seen in Australia and people realized that rare, unpredictable events, can occur. Since then a “Black Swan Event” has come to mean more than a rare event.
Taleb defines a Black Swan event as having 3 characteristics:
It is an outlier, beyond prior expectations or experience. It represents a qualitative change to society or marketplace.
It has a huge impact. Black Swan effects drive all society from culture to religion to historical events to economics to elements of personal lives. In contrast, ordinary events, those we read about in the newspaper, are mostly inconsequential.
After the Black Swan event occurs people find ways to make the event seem explainable and even predictable. In retrospect, a Black Swan event is not so surprising but a logical outcome of the emerging innovations and societal forces.

The concept has helped explain the stock market collapses and the changes caused by innovations such as the telegraph, the battlefield tank, and the airplane. Think of the auto industry’s Black Swan events – the invention of the automobile itself, the enclosed car, the automatic transmission, the Beetle, the minivan, the SUV, rental cars, the hybrid and dozens of others. The marketplace dynamics in-between these events are largely insignificant.
There are several implications to the Black Swan concept.

First, we largely study by examining the past, by making judgments about what works and by projecting the past into the future. The assumption is that major disruptions of the past or extreme outliers will not occur and, in any event, are impossible to model, an assumption that should be more frequently challenged. That was true of the Maginot Line that was supposed to protect France from Germany in WWII and in fact ended up failing to even slow down the German Army who did not obey the logic of history and simply went around it in a classic Black Swan event.

Second, we should spend more time thinking about qualitative changes that might occur and their first order and second order implications. We should think more about what we don’t know as opposed to what we do know. Scenario analysis tools are relevant to this task.

Third, we should spend more resources on creating and/or managing responses to Black Swan perturbations to the marketplace and less time in optimizing the current status quo.

In my terms, look for opportunities to develop “must haves” that define new subcategories or find ways to become relevant, if not a leader, in an emerging subcategory developed by others. The innovations and the new subcategories they precipitate are the black swans of the modern marketplace and the focus on “my brand is better than your brand” marketing will neither get you toward a new subcategory nor allow you to understand and adapt to market dynamics.