Societies thrive on the efforts of usurpers; Market leaders can always be forced to improve or even be ousted by small outsiders’ ingenuity

September 10, 2013 3:51 pm

Societies thrive on the efforts of usurpers

By Luke Johnson

Market leaders can always be forced to improve or even be ousted by small outsiders’ ingenuity

Superior innovation and service are two ways in which start-ups can gain advantage over bigger competitors. I was reminded of this last week when I served as a judge in the EY Entrepreneur of the Year awards. We debated the qualities of almost 50 finalists to decide who would be the champion in the British awards (for which the Financial Times is the media partner), and saw how focus and a different approach can pay off in business.An example of the power of innovation is Fever-Tree, which makes natural mixers for alcoholic drinks. Its most successful line is a high-quality tonic water made with fine quinine. The founders realised that drinkers paying higher prices for premium spirits would appreciate a better accompaniment. Fever-Tree’s principal rival is Schweppes, an enormous and long-established brand leader, which is hamstrung by complicated ownership structures across different territories. The entrepreneurs behind Fever-Tree told me how this allowed them to build a business in more than a dozen countries, all with modest resources.

Of course, the dominant incumbent sometimes proves tough to challenge, even with novel offerings. My friend Will King, founder of King of Shaves , has found it hard to dent Gillette’s dominance of the wet shaving market globally. The fat margins the big company enjoys should make it a juicy target for new entrants. But distribution clout, consumer apathy and the need for patient capital have made it difficult for other brands to make a serious impression on its huge market share in many places. But one day Mr King will manage to diminish its control, and so give the public more choice about which razor they buy.

Meanwhile, QubeGB in Scotland has proved a formidable new supplier to internet service providers – also battling against a virtual monopoly in Openreach, the engineering arm of BT, the technology group. QubeGB has 650 technicians installing and maintaining broadband and WiFi across the UK. The founders explained how they won contracts against a rival 50 times their size by being flexible, customer-oriented and having a unique IT system to organise employees in the field. It helps that staff are not unionised, unlike at BT, a legacy of its past as a government-owned asset.

Time and again entrepreneurs prove that, thanks to their enterprising efforts, societies as a whole are richer in countless ways. These bold individuals move heaven and earth – and risk their careers and homes – to try new ideas. The hegemonies they attack, with their vested interests and exorbitant returns to protect, inevitably resist.

Customers are invariably the winners from these contests, with more options and better value the result. Typically, job creation also springs from such initiatives, as does the adoption of new technologies. And sometimes the providers of capital to new ventures can do well too, although the path to each triumph is littered with failures.

A case study of such disruptive actions in markets dominated by behemoths is the fracking revolution. Horizontal drilling and hydraulic fracturing technology have transformed the energy industry in the US.

George Mitchell, who died this year, was a key pioneer. He was a Texas-based, qualified petroleum geologist from a humble background who left Big Oil to become a wildcatter, looking for oil in areas not already developed. He enjoyed considerable success as an independent oilman, but only in his 70s and 80s hit upon the extraction techniques that enabled him to sell his oil business for $3.5bn.

The shale gas industry he helped found has gone on to threaten the stranglehold that nations such as Russia and Saudi Arabia have over the world’s supply of hydrocarbons. The prospects for US manufacturing, and the American economy as a whole, have improved markedly thanks to the work and risks undertaken by entrepreneurs such as Mitchell.

It does not matter how powerful the leaders are in any industry: they can always be forced to improve and even be usurped by the ingenuity and efforts of small outsiders. Citizens of all free-market economies should be grateful for this remarkable mechanism of incessant invention – over time it unfailingly generates higher standards of living, more jobs, tax and innovation than central planning ever can.

lukej@riskcapitalpartners.co.uk

The writer runs Risk Capital Partners, a private equity firm, and is chairman of StartUp Britain

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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