How Competition Strengthens Start-Ups
Professor Andrew Burke & Dr Stephanie Hussels
Steve Macaulay
New businesses traditionally go through tough times in the first few years.
Now conventional wisdom says that you shouldn’t enter fiercely competitive
market places because you may not survive. Now some research at Cranfield
throws new light on this. Now in the studio today are people that have
carried out the research Professor Andrew Burke and Dr Stephanie Hussels.
Now Andrew, let’s look at this research, is it true this conventional wisdom
that says don’t go into these fierce markets.
Andrew Burke
Yes it’s certainly true that highly competitive markets are a tough
environment for any business whether they are an established business or a
new business, but there are also some benefits and I think the essence of
our research is really drawing out that those benefits are bigger than
previously supposed. One of the benefits is really in relation to a
conditioning effect in that if a business develops in a highly competitive
market it becomes very market focused in terms of connecting with
customers, in terms of generating in cash and so on, now the reason it has
to be focused in that manner is because it’s survival hinges on it. The other
aspect that is mostly beneficial for a new entrant is in relation to the
incumbents, the fact that there is a competitive market there means that
there are more weaker firms to actually pick off so there are some easy
targets that new entrants can tackle and so what our research is looking at is
how these beneficial effects trade off with the traditional negative effects of
a tough competitive environment.
Steve Macaulay
So Stephanie give me some insights into how this research was carried out
and a bit more about what came out of it.
Stephanie
Hussels
We looked at cohorts of UK industry data over the years 1995 to 2004 and in
particular we were interested as Andrew mentioned in cohorts that started
in a crowded market or a more competitive space versus those that started
in a less crowded, less competitive market and contrasting to existing
studies we not only looked at survival rates which were cumulative but we
looked at them on a year on year basis, so from year zero to year one, year
one to year two and year two to year three. This allowed us really to test the
impact the environment has on business survival on an annual basis. What
we found was interesting in year one it showed that firms that started in a
tougher or more competitive landscape environment had a lower survival
rate but surprisingly and I think that’s the real fascinating part of the
research after three years that turned around and those businesses that
started in a tougher environment and then moved to a easier environment
had the highest business survival rate and the gap was actually seventeen
per cent (correction: gap is nine percent).
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How Competition Strengthens Start-Ups
Steve Macaulay
This is interesting. Andrew, let’s explore this a bit more. Let’s pick out the
implications and lessons from this.
Andrew Burke
Well we think three things are going on here. In the first level we think there
is likely to be a selection effect is that if the market environment is very
tough then any rational entrepreneur is going to weigh up and hence you
get a better quality of business starting in a tough environment. So that’s
one effect. In addition to that we have got the weak incumbent effect is that
in a competitive environment the firms that are weakened by the relentless
competition and that can make a good target for new entrants to enter and
push a firm out or capture some market space but the interesting aspect we
think is the third influence which is a conditioning effect and this operates a
bit like vaccination is that there is immunisation effect so borrowing a
metaphor from the medical science I think people were abhorred and
resistant to the idea that you actually expose a person to a disease in order
to protect them from it but in effect I think in business the conditioning
effect operates like this so on one hand exposing a business to competition
in its early days has negative effects a bit like the inflammatory effect from
medicine but it also has a second effect which it really is the immunisation
effect so in other words the business responds to that competitive
environment it becomes much more efficiency driven, much more
innovation driven in terms of capturing market space and so on and these
cultural effects can affect the DNA of the organisation which can have long
lasting effects.
Steve Macaulay
So competitive immunisation is clearly good news for businesses. Say some
more about the lessons.
Well the general lesson is, is that if a business is exposed to safe levels of
competition that this can be a good thing for the organisation for the long
term, so there is a number of lessons that stem from this. The first thing is
that any executive should use a tough business environment for their
advantage so introduce changes, make the organisation more efficient, and
the tough competitive environment will make it easier to do that and
actually to generate a long term competitive culture within the organisation.
The other aspect is also to try to mimic a tough competitive environment,
there’s two ways in which a business typically can do this, one is in terms of
creating a competitive environment within the organisation so for example
benchmarking performance of the organisation against other firms even
though they might not be in direct competition, or benchmarking the
performance of teams and units within the organisation so get that
competitive environment moving and the third lesson is never to over fund a
venture. In weak competitive environments businesses can detach from the
market realities, in highly competitive markets they need to stay focussed
and generate cash so one of the key things here is that it might actually be a
good idea to slightly under fund a venture to actually keep it market
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Andrew Burke
How Competition Strengthens Start-Ups
focussed and to keep that competitive pressure.
Steve Macaulay
Some interesting new ideas and new thoughts, thank you very much Andrew
and Stephanie.
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