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It wasn’t until recently, just before the pandemic, that it seemed like big business was on a roll. A few “superstar” companies dominated the software industries and reached their tentacles into multiple sectors. Market share was concentrated in much of the economy, the performance gap between big and small businesses was widening, and people were forming fewer new businesses. A Harvard Business Review article noted concerns that “a lack of competition was strangling the US economy”.
Many of those worries have started to fade. We are seeing a historic increase in the creation of new businesses and a narrowing of the performance gap between large and small businesses. The pandemic, with its “great quit” and “silent shutdown,” has been but a catalyst, accelerating inevitable change — inevitable because that’s the nature of great organizations. They cannot maintain their dominant position for long, and indeed the profitability and longevity of big business has been declining for decades. Superstar companies, now suffering from depressed stock prices, are laying off thousands of talented employees, making way for smaller companies still hiring.
Although this is a striking change of events, it follows a cycle that has existed since the beginnings of capitalism. By examining previous cycles of creative destruction, in which large companies grew only to fall to smaller competitors, entrepreneurs can learn many lessons applicable today.
Related: How Looking at History Can Make You a Better Entrepreneur and Leader
Lesson 1: Leverage complacency
The first lesson is that big companies tend to become complacent the more successful they are. This provides an opening for small businesses that are hungrier and more ambitious.
For example, the East India Company, established in 1600 and arguably the world’s first major corporation, once operated not only ships and warehouses, but also armies of soldiers to enforce colonial exploitation. Benefiting from a monopoly on imports of tea and other commodities, his power was so great that Adam Smith devoted much of his The Wealth of Nations to criticize his weight. Yet the company has become a victim of its own success, only to decline as its executives get rich, get embroiled in politics, and stop innovating.
The same lesson applies today. As soon as big companies think they are in a solid position, they relax and start taking advantage of their situation. This is the perfect time to enter the market with an innovation or a new way of thinking.
Lesson 2: Powerful connections aren’t everything
The second lesson is that entrepreneurs can still beat big business even if they don’t have the same connections to power. History shows that “just” can often beat “could”.
Take the example of wealthy Robert Livingston, who financed Robert Fulton’s successful invention of the steamboat in 1807. Livingston used his connections and wealth to gain a monopoly on the ferry trade between New York and New Jersey. But the rambling Cornelius Vanderbilt, with no social status or education, dared to challenge Livingston’s privilege and won a landmark Supreme Court case, Gibbons v. Ogden, nullifying interstate monopoly charters. Thanks to Vanderbilt’s relentless push for efficiency and cost-cutting – and the new country’s distaste for government-backed privileges, he won the capital to improve not just ferries, but ocean-going vessels, and then railways.
Vanderbilt has proven that companies that rely on personal relationships often become overconfident, believing themselves to be protected from competition. This makes them vulnerable to small competitors who are ready to denounce their unfair practices.
Lesson 3: Great companies prefer stability to innovation
By the end of the 19th century, steel had become fundamental to the economy and Andrew Carnegie owned the biggest and best factories. Like Vanderbilt, it had grown rapidly by keeping costs low and reinvesting profits. The remaining steelmakers were so concerned about its movements in their markets that they pressed JP Morgan to buy it out for the then incredible price of $480 million.
After Morgan did, creating US Steel, he failed to maintain Carnegie’s aggressiveness, allowing tiny rivals to develop. Fearing antitrust and preferring stability and dividends to risky growth, US Steel failed to innovate and eventually collapsed with foreign competition and the rise of mini-mills in the 1960s.
US Steel’s preoccupation with stability is common among large companies, and this is an opportunity for smaller competitors to rise up. Consider the many brick-and-mortar retailers who failed to invest in e-commerce until it was too late. They assumed they were safe due to their size, but their inability to innovate ultimately caused their downfall.
Innovation is key to creating and maintaining competitive advantage – and it gets harder to do as companies succeed and grow. Entrepreneurs, as guerrillas, can often find openings for attack against even the most powerful of gorilla corporations.
Related: 6 Ways Small Businesses Can Win With Big Business
We need big and small
The history of creative destruction shows us that the current struggles of Big Tech companies like Meta are nothing new. Great corporations 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 trump resource-rich rivals, as long as entrepreneurs choose their fights wisely. There are two reliable ways to spot opportunities to do this.
First, as companies grow, even well-run ones must leave opportunities on the table – market segments or product opportunities that are too small or too different for them to succeed or focus on. These often provide windows of opportunity for smaller players. Today’s small markets may become tomorrow’s large markets.
Second, new technologies and platform changes inevitably create openings for more agile businesses, whether in specialized areas such as digital marketing or in transformative areas such as blockchain. Big companies almost never move fast enough.
Finally, when evaluating today’s great companies, it’s important to remember that their success typically stems from basic entrepreneurial success combined with an organizational mindset. As entrepreneurs grow their business, they should be aware of the skills they have developed and remain committed to developing new ones over time. New skills, fueled by innovation, will likely increase their trajectory of growth and value.
A modern economy still needs large companies, which are essential for producing goods and services on a large scale at an affordable price. This is where they excel. But we also need entrepreneurs to challenge them where they fail – and eventually replace them as the new giants to drive the economy forward.
For experts and other desk-bound observers, greatness can seem inevitable. But greatness also inevitably corrupts. The vitality is not in the so-called “professional” management but in the rambling entrepreneurs.