Strategy & Leadership

Start-ups: a little respect for the established order

February 15, 2016

Traditional companies may be regularly trumped by newcomers, but established names are needed to provide legitimacy to new businesses.

We live in a world where the sharing economy and innovative start-ups poach market share from more traditional companies. Airbnb makes the hotel sector nervous as does Uber in the taxi industry. We tend to criticize the traditional sector: too slow, not innovative, and doomed to extinction.

Currently, we focus our attention on the financial sector: much too slow in embracing FinTech applications such as mobile payment. As far as I am concerned this is very easy criticism and jumping to conclusions. There are logical explanations.

Opportunistic start-up mentality

The optimal organization required for a large company, often simply clashes with the opportunist start-up mentality needed to effectively innovate in a disruptive manner. Additionally, there are at least two other explanations:

  • At a certain point in time, new businesses will absorb the market share of the old businesses. But it is uncertain when this turning point will happen. Which logically thinking and profit-oriented business is waiting impatiently for it? What is the right time to switch from bricks to clicks? And thus the time to abandon traditional distribution channels, with all its consequences?
  • Successful start-ups, such as Airbnb and Uber, explore the limits of legislation. And we as consumers welcome this in our quest for cheaper accommodation and taxi rides. But can we blame established businesses if they are reluctant to follow suit?

 For example, that banks do not embrace the bitcoin en masse?

Investing in start-ups

There are alternative routes an established company can take to innovate. Firstly, they can, for example, invest in external start-ups and thus acquire access to the latest knowledge and technologies in the long term. If success is not forthcoming, the participation in the start-up is reduced and the risk remains limited. Secondly, a business can create an incubator environment within its own walls where it can innovate and experiment, shielded from the corporate bureaucracy.

Old and new need each other

A third option is to work together. Hotel chain Accor has already carefully indicated that it certainly sees cooperation with Airbnb as a possibility. And in the financial sector, Rabobank believes in a collaborative model to keep up with developments in the financial sector. These companies recognize that old and new need each other.

Legitimacy through established names

A study by Lange, Boivie, and Henderson shows a catch-22 situation where traditional companies are regularly trumped by newcomers who still need the traditional companies' established names to give legitimacy to new businesses. If consumers do not accept a new product or service in large numbers, the target group may remain limited to pioneers and early adopters.

In the aviation industry, companies such as British Airways and KLM, for example, have struggled with the rise of low-cost carriers. Own initiatives to fight Ryanair and EasyJet were initially unsuccessful, but may have contributed to the widespread acceptance of the low-cost business model.

Renewal through struggle 

The fight between start-ups and traditional businesses stimulates innovation in the short term. Newcomers are often driven by a mission to overthrow the established order. At the same time, the established order gives all it has to try and come up with an answer.

The dust settles ... and then?

When the dust of the struggle has settled, it is time for a next phase. Actual renewal occurs when parties realize that they need each other in the long-term. Armed with more knowledge and mutual understanding, both sides will realize that collaboration can often lead to better results. Large-scale renovation requires combining the innovative power of the newcomer and the legitimacy of the established order. The love must obviously come from both sides.

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