Kelli R. Levey, June 30th, 2011
Businesses competing with larger companies — particularly those that enter a market by acquiring an established business — will fare better if they differentiate themselves from the “behemoths” rather than imitate them or take them head-on, suggests research on the topic.
The researchers found that competitors who imitated the large newcomer had poorer performance, which was counter to prior research.
The phenomenon of acquiring a company to enter a marketplace — common in banking, pharmaceuticals and technology — hasn’t been studied as thoroughly as the path companies take to enter a market through other means, such as introducing a new product, says Alina Sorescu, an associate professor of marketing and Mays Research Fellow.
She and several other researchers tackled the topic in the paper “Behemoths at the Gate: How Incumbents Take On Acquisitive Entrants (And Why Some Do Better Than Others),” which has been accepted for publication in Journal of Marketing.
The research was centered on the banking industry because firms and the actions they take in this industry are well documented, Sorescu says. The researchers looked at 1995-2003 bank data from the FDIC, such as deposit summaries, and interviewed banking officials. The data covers 839 acquisitions in 583 Metropolitan Statistical Areas in the U.S. banking industry. The research specifically focuses on how banks modify their product mix when a large bank enters their market through an acquisition. In this context, the product mix of banks includes various types of loans such as, for instance, commercial and industrial loans and loans secured by real estate. Changes in product mix were assessed at the two-year and three-year marks after the acquisitions.
Results indicate that incumbents are more likely to align their product mix strategy with that of the behemoth if: (1) the incumbent is large; (2) the behemoth’s past performance has been strong; and (3) the market served by the incumbent is small. The size of the market tends to set the tone of the competition, Sorescu says. “The smaller the market, the more likely the incumbent is to imitate the acquirer,” she observes. “It’s like a big fish in a small pond making a big splash — they compete with the same small base of customers.”
Sorescu concludes it’s a bad idea to go head-on with the acquirer.
“It’s best to try to diverge from the acquiring company, even though it is a threatening presence and it is tempting to try to mimic what it is doing,” she says. “You assume the larger corporations have identified a strong path and an advisable product mix, but you must differentiate yourself from it in order to survive. The small firms that imitate the large firms may not be able to offer the same products and services as efficiently as large firms do, and they could suffer more harm than if they focused on what they already do well.”
For more information, contact Sorescu at firstname.lastname@example.org.
The research paper, “Behemoths at the Gate: How Incumbents Take On Acquisitive Entrants (And Why Some Do Better Than Others),” was in press in late 2011 at Journal of Marketing.
It is a collaboration among Alina Sorescu, Prokriti Mukherji, Jaideep Prabhu and Rajesh Chandy. Prokriti Mukherji is senior research associate at the Carlson School of Management, University of Minnesota. Jaideep Prabhu is Jawaharlal Nehru Professor of Indian Business at Judge Business School, University of Cambridge. Rajesh Chandy is Professor of Marketing and Tony and Maureen Wheeler Chair in Entrepreneurship at London Business School.
Categories: Research Notes