Back in the 1990s, when I was involved in telecoms, there was a thing called “First Mover Advantage”. The popular belief among VCs and entrepreneurs was that it was important to be first into the market with a new product or business model, so you could take the lion’s share of the market before anybody else had noticed that you were there.
This sounds great in theory, but since the 1990s a lot more data has been collected on the reasons why businesses thrive or fail. And what does this data show? Well, rather surprisingly, being first to market turns out not to be such a big advantage after all.
This was one of the findings highlighted by Jim Collins in his latest business study Great by Choice, which looked for common factors among a number of companies which had prospered in tough economic times and compared them with a set of comparison companies ie companies which faced similar circumstances but hadn’t done so well. Jim Collins and his team found no correlation between the successful companies and high levels of innovation. In fact, in most cases, the unsuccessful “comparison” companies had shown a greater level of innovation by creating more new products, registering more patents, introducing more new business practices and so on.
Jim Collins and his team are not the only researchers to have made such findings. In Will and Vision published in 2002 Gerard Tellis and Peter Golder systematically examined the relationship between being the innovative pioneer and achieving long-term market leadership across 66 different market sectors. They found that only 9% of pioneers ended up as market leaders in their chosen space. And 64% of pioneers failed outright. In most cases, it’s actually the second or third company to market which is the one that makes a success out of the new business idea.
The latest thinking in this space has come from Thomas Thurston. His team has spent the last seven years collecting data on why companies thrive or fail and built algorithms around the commonalities in their findings. And what they found is pretty interesting. It’s common knowledge that around 80% of new businesses fail within the first five years. This applies across all sectors, whether they are in biotechnology or hairdressing, e-commerce or manufacturing. What Thurston has discovered is that if you’re a brand-new start-up with the best widget on the market, your probability of failure actually increases from 80% to 90%. The popular perception is that what you need to start a successful business is a great new idea. Yet you’d be better off opening a chain of hairdressing salons, even if you didn’t know the first thing about hairdressing!
There are a several reasons for this. The first is down to the impact that the arrival of the young upstart has on the marketplace. If the product or service they’re offering is actually better, they start taking profitable customers away from their bigger competitors. It doesn’t take long for their competitors to realise this and start to develop their own similar products or services to see off the threat. In Thurston’s words they “squash the start-up like a bug”. If you take the best customers off big companies, they have to respond.
Another reason is that, as the Jim Collins study shows, success in business is mainly about good execution rather than innovation. Collins found that with every business sector there is a threshold for innovation: in some sectors, such as airlines, it’s relatively low; in others, such as biotech, it’s relatively high. In order to be a contender in the game, ie to have any chance of competing successfully, a business needs to meet the innovation threshold. But once you’re above the threshold being more innovative doesn’t seem to matter.
Of course, these latest discoveries will not stop entrepreneurs coming up with ever more ingenious business models. That’s what entrepreneurs do. After all, what did Thomas Thurston do with his seven years of research. He founded a company called Growth Science to commercialise his ideas. He did very well at first and then it began to attract the attention of some of its larger competitors in the consulting space and guess what happened next??? Fortunately, Growth Science was able to apply its own methodology to itself and thereby survive. They now have an algorithm which Thurston claims can accurately predict the success of startups.
In a few months I’m going to try it out on one of my own start-ups. I’ll let you know how I get on…