Markets in every sector from agriculture to finance experienced major periods of change over the last four decades. Understanding industry norms and trends has long been held as the secret to success for budding entrepreneurs, but an onslaught of technology, rapid social change, and economic upheavals make experience less relevant by the day.
What kinds of businesses succeed in such dynamic environments? A new study published in the Strategic Entrepreneurship Journal suggests surviving and thriving in a market depends on the environment a business is born into.
Surviving in a Dynamic Market
Relying primarily on a survey of Stanford alumni, researchers examined business performance for more than 1,000 ventures founded from 1960 to 2011. The businesses operated in 19 industries ranging from software to energy and utilities. They used data from the Bureau of Economic Analysis to quantify dynamism within each industry over time and in each business’s founding year. They looked at longevity to measure a business’s survival ability and its likelihood of an IPO or acquisition as a measure of performance.
The businesses that fared best in ever-changing industries had two factors in common:
- Their industry was experiencing significant change the year they were founded.
- They were founded by teams with many distinct functional roles, from marketing and sales to finance and engineering.
Businesses founded in dynamic environments appear to favor slower, decentralized decision-making and increased creativity and flexibility. A founding team with many distinct functional roles compounds these behaviors — they have broader strategic focus and seek large amounts of information. These risk-averse structures and strategies help businesses persevere during environmental change, but the study also found that these businesses where less likely to gain IPOs or acquisitions if their market stabilized.
Thriving in a Stable Market
Businesses founded in stable environments appear to prioritize fast, centralized decision-making and increased automation. Those founded in stable environments can have more room to rely on unproven assumptions, and aggressive tactics win the field.
The difference between the two types of businesses follows a Thinking, Fast and Slow model:
- In chaotic environments, businesses benefit from slow, calculated, conscious decision-making.
- In predictable environments, fast action and automation win the day.
Researchers tested the effects of slow decision-making on business performance by looking at how businesses born into changing industries compared to businesses founded in stability in two key areas:
- Outcomes in industries where fast product development was a critical competitive advantage.
- How long it took to gain angel or venture capital funding.
The businesses that most often survived industry turmoil also fared worse on both these fronts.
Finding Balance for Long-term Success
Simply put, the study found businesses born into a dynamic environment are typically built to survive. Those founded during stability are often built to thrive. Both do best when their market matches their founding environment and struggle when it does not.
While the study relies on and further evidences the premise that founding processes become entrenched in business organization, strategy, and culture, its results suggest that the most successful entrepreneurs should do the opposite. Building in agility and an ability to shift between automated processes and risk mitigation depending on market conditions seems the key to long-term entrepreneurial success in the 21st century.
J Katherine Bahr is a Knoxville-based freelance writer and content marketer with an advanced degree in creative writing and a decade working in publishing and marketing.