3 Lessons Entrepreneurs Can Learn From The Rise and Fall of History’s Biggest Companies

Only recently, just before the pandemic, it seemed big companies were on a roll. A few “superstar” companies were dominating software industries and reaching their tentacles into multiple sectors. Market share was concentrated in much of the economy, the performance gap between large and small companies was widening and people were forming fewer new businesses. An article in Harvard Business Review reported concerns that “a lack of competition was strangling the U.S. economy.”

Many of those worries have begun to fade. We’re seeing a historic surge in new business creation and a shrinking performance gap between big and small businesses. The pandemic, with its “Great Resignation” and “Quiet Quitting,” was only a catalyst, accelerating an inevitable change — inevitable because that’s the nature of large organizations. They can’t sustain dominance for long, and indeed the profitability and longevity of big companies have been shrinking for decades. The superstar companies, now suffering from depressed stock prices, are laying off thousands of talented employees, giving way to smaller firms that are still hiring.

While this is a striking change of events, it follows a cycle that has existed since the beginnings of capitalism. By looking back at previous cycles of creative destruction, in which large firms have risen only to fall to scrappy smaller competitors, entrepreneurs can find many lessons that are applicable today.

Lesson 1: Take advantage of complacency

The first lesson is that large companies tend to grow complacent the more successful they become. This provides an opening to smaller companies that are hungrier and more ambitious.

For example, the East India Company, chartered in 1600 and arguably the world’s first big business, once operated not only ships and warehouses but armies of soldiers to enforce colonial exploitation. Enjoying a monopoly on imports of tea and other staples, its power was so great that Adam Smith devoted a large section of The Wealth of Nations to criticizing its heft. Yet the company became a victim of its own success, eventually declining as its leaders enriched themselves, got caught up in politics, and stopped innovating.

The same lesson applies today. As soon as large companies think they’re in a solid situation, they relax and start enjoying their position. That’s the perfect time to enter the market with an innovation or a fresh way of thinking.

Lesson 2: Powerful connections aren’t everything

The second lesson is that entrepreneurs can still beat out larger companies even if they lack the same connections to power. History shows that “right” can often beat “might.”

Consider the example of wealthy Robert Livingston, who funded Robert Fulton’s successful invention of the steamboat in 1807. Livingston used his connections and wealth to gain a monopoly of the ferry business between New York City and New Jersey. But scrappy Cornelius Vanderbilt, with no social standing or education, dared to challenge Livingston’s privilege and won a landmark Supreme Court case, Gibbons v. Ogden, striking down interstate monopoly charters. Thanks to Vanderbilt’s relentless push for efficiency and lower costs – and the new country’s distaste for government-backed privileges, he gained the capital to improve not only ferries but ocean-going ships and then railroads.

Vanderbilt proved that companies that rely on personal connections often become over-confident, believing themselves protected from competition. This makes them vulnerable to smaller competitors who are willing to call out their unfair practices.

Lesson 3: Big companies prefer stability to innovation

By the end of the 19th century, steel had become fundamental to the economy, and Andrew Carnegie had the biggest and best factories. Like Vanderbilt, he had rapidly expanded by keeping costs low and reinvesting profits. The remaining steelmakers were so concerned about his moves into their markets that they pressed J.P. Morgan to buy him out for the then incredible price of $480 million.

After Morgan did so, creating U.S. Steel, he failed to maintain Carnegie’s aggressiveness, allowing tiny rivals to expand. Fearing antitrust and preferring stability and dividends to risky growth, U.S. Steel failed to innovate and eventually fell apart with foreign competition and the rise of steel mini-mills in the 1960s.

U.S. Steel’s preoccupation with stability is common among large firms, and it’s an opportunity for smaller competitors to rise up. Consider the many brick-and-mortar retailers that failed to invest in e-commerce until it was too late. They assumed they were safe because of their size, but their failure to innovate ultimately caused their downfall.

Innovation is critical to building and maintaining a competitive advantage — and it gets harder to do as companies succeed and grow. Entrepreneurs, as guerillas, can often find openings of attack against even the mightiest of gorilla companies.

We need big and little

The history of creative destruction shows us that the current travails of Big Tech companies like Meta are nothing new. Large companies tend to fall prey to a combination of hubris and complacency, while ambitious entrepreneurs continue to find openings to take advantage of emerging technologies and market trends.

Energetic commitment and talent will beat resource-rich rivals, as long as entrepreneurs pick their fights wisely. There are two reliable ways of spotting opportunities to do so.

First, as companies get bigger, even well-managed ones must leave opportunities on the table — market segments or product opportunities too small or too different for them to do well in or focus on. These often provide windows of opportunity for small players. Today’s small markets can become tomorrow’s large markets.

Second, new technologies and platform shifts inevitably create openings for nimbler firms, whether in specialized areas such as digital marketing or in transformative areas such as blockchain. Big companies almost never move fast enough.

Finally, in assessing today’s large companies, it’s important to remember that their success usually came from a basic entrepreneurial achievement combined with an organizational mindset. As entrepreneurs grow their businesses, they should be mindful of the competencies they have developed and remain intent on building new ones over time. New competencies — fueled by innovation — will likely increase their trajectory in growth and value.

A modern economy still needs big companies, which are essential to producing goods and services at scale at an affordable price. That’s where they excel. But we also need entrepreneurs to challenge them wherever they fall short — and eventually, replace them as new giants to move the economy forward.

For pundits and other desk-bound observers, bigness might seem inevitable. But bigness also inevitably corrupts. The vitality is not in supposedly “professional” management but in scrappy entrepreneurs.

Source: entrepreneur.com

Cc: John Landrey