How do newcomers (startups) manage to surpass established companies?

Older company (generally?) have:

• more resources
• hire better talent (not sure about this though)
• are already popular - market share
• (guess more stuff can be added here that goes in favor of older company )

So, what is that because of which newcomers are able to surpass established companies in the same area. I'm hoping that there are more factors involved than just innovative idea(s).

However, as we all know, it's also true that startups surpassing older companies is not true in all cases and startups do fail at times, so one way to put this question can be what are the traits of a startup that help it grow more than more popular competitors.

Even though, I mean to ask this question in context of web startups (say providing a cloud based service) but perhaps it could also be applicable in general. Plz correct me if it doesn't.

Thanks in advance for your time and insights.

Newcomers are able to surpass established companies by picking the right established company to surpass, let me explain -

Usually, once a company get to a certain size it gets filled with politics, bureaucracy and incompetent middle management - at that point most of the work in the company is directed by political in-fighting between divisions and the company becomes downright hostile to the talent (and sometimes even to the customers).

When a company gets there the good talent has already left, customers are using the product because it's "the standard" but they don't like it and everyone in the company is so tied up with the in-fighting that they don't even notice the competitors - especially small one who are dismissed as "not serious".

If you find such a company it's easy to take away significant market share from them - they have lots of customers who want to leave them and they are completely incapable to adapt to new circumstances.

And when they finally do notice you it's already too late, they have to spent ton of money on all those incompetent managers and can't make any change to the product without months of meetings so they are completely unable to change direction while you listen to customers, improve your product and continue to take their market away from them.

Now, not all big companies get this brain damaged - but it takes a lot of hard work on the part of upper management to protect a company from this fate - so many big companies, after winning against early competitors and taking over the market sink into this state of incompetence where it's easy for a smaller company to beat them (and if that new company uses a new technology to nullify some of the advantages of the older company it's even easier).

So, the trait a startup need to win against an older company is: pick a market dominated by one huge company, make sure customers don't like the company and the company seems to be incapable of addressing new requests or adopting new technologies, find a new technology that let you take a short-cut and greatly reduce the work needed to create competing product and create a product that does at least one thing significantly better than the old company's product (after all you do have to give the customers a reason to switch).

Metaphor: Have you ever played the game snake? Big companies having long tails, changing direction takes a lot of fore-thought and requires substantial momentum.

Startups have no tail, your ability to adopt and change direction gives you the potential to strike markets faster than your bigger competitors.

Some of the reasons the newcomers win:

• ability to change/adapt quickly
• they appear fresh and new to the customer which can be seen as a "buzz"
• can attract talent that wants to be in at the ground floor, sometimes that can equate to talent that is more motivated and efficient

Unfortunately for every reason up there you can put the counter argument to why these can be bad and be the downfall of startup.

Atul,

By the fact that you are comparing the startup to established players, it is evident that you are competing in an existing market as opposed to creating a new market.

Startups (when they do succeed) can beat established companies because of one simple fact: They solve a problem, "BETTER" than other established companies.

What is BETTER?

• It can be a better product - superior in its value propositions
• It can be a better business model - that allows them to build cheaper or sell faster etc

Or some combination of the above. But the startup has to be BETTER at something compared to the established player or else they CANNOT succeed (this is called a me-too play).

Why CAN a startup be BETTER at it?

1. Innovative idea (sorry - this is a must) about how to be "BETTER" at it
2. Killer team
3. Execution agility (especially in software - speed is key)
4. Maniacal Focus, Focus, Focus...

Note that I said CAN and not WILL - because the recipe is not an easy one to follow even though it is easy to write down (as I did).

Hope this helps.

-Siva

PS: Your question is about Competitive Strategy. For an enlightening read, I suggest the HBR papers on this topic by Michael Porter and also Blue Ocean Strategy by Kim & Maugbourne.

There is a Chinese proverb that says that it doesn't really matter whether you think you can do something or you can't. Either way, you are right. Same applies here. If a group of people really believe they can do something better than another group, more than likely, they will.

It seems to me that you are looking for a magic recipe to "surpass established companies", whatever that means (making more money? achieving a larger market share? maybe both?). In any case, I am afraid that there isn't such a thing.

However, let me tell you what I think are the advantages of startups.

First and foremost, the people. If you are "crazy" enough to risk your capital, emotional well being, and your reputation, not to mention countless hours of hard work, to pursue something, then you have a set of powerful incentives and a tremendous advantage over an organization filled with people who... well... they are basically just waiting for another paycheck. Passion and commitment is the key.

Second, startups can adjust, tweak and refine their products and services way faster than big organizations. Think of it as driving a small car with 2 or three people vs driving a huge bus with 100 people. If you notice something is wrong, it will take little to realize what's wrong with the car. Maybe you took a wrong turn? Maybe it is one of the passengers? Maybe it is the car? On the other hand, the bus will take longer to realize that. Too many people involved driving the goddamn thing. The mechanics are more complex, and there are always a sense of invulnerability inside the bus that prevents you from seeing the naked truth.

Third, for startups is easier to offer better customer service than large organizations. The personal touch, that authenticity feeling that we all love to experience is easier to see on a startup. Capitalize on it. It works wonders.

There are also other things, some of which Nir and Lloyd S have already mentioned, so I won't repeat them here.

Finally, remember that success is a very poor teacher, and that working in a startup will expose you to invaluable experiences that will accompany you all throughout your professional life. Even if you don't achieve your goals, and even if you lose money, you will have plenty of time to recover (unless you are in your 50s or 60s). It is always better to try and fail, than to fail to try.