Large corporates often devour smaller firms to enter new markets. However, the temptation for incumbents to mimic these giant should be resisted, warns Professor Jaideep Prabhu
A study into the now familiar business landscape of corporate acquisitions, the route through which many large firms enter new markets, has prompted the creation of a strategy to help incumbents of that market to react positively.
Its suggestion is that those already in the market should not to go head-to-head with the incoming giant who is muscling its way into their sector.
According to Professor Jaideep Prabhu, Jawaharlal Nehru Professor of Indian Business & Enterprise at Cambridge Judge Business School and co-author of the paper Behemoths at the Gate, when large acquirers buy firms in new markets they prompt a range of emotions and concerns from the incumbents.
He and his colleagues are proposing a ‘theory of strategic aspirations’ that can be adopted by the incumbents to resolve various issues. These include the impact of the acquisitive entry on the strategies and performance of the incumbents and how those already in the market can reconfigure to compete.
The ‘received view’, says Professor Prabhu of Cambridge Judge Business School, is that competitors should try to differentiate themselves from the newcomer, offer different products and aim at a different customer profile to that chosen by the ‘behemoth’.
He adds that less rational consideration is taken onto account, hence the use of the word ‘aspiration’. The research examines sociological and psychological factors that might drive how managers respond, including the urge for managers to mimic the newcomer.
“If this happens, it changes the marketplace because potentially what you have is all the firms trying to target a particular type of customer and offer similar types of products rather than having a range of firms offering a range of products to a range of customers.”
It underscores the negative impact on businesses which elect to copy the new entrant.
“There are two aspects: what do the incumbents firms actually do and what should they do? The received view is that they’ll do what is good for them – that what they do, is what they should do.
“If you want to perform well as a competitor when a big firm enters your market you should try and be different because that’s good for you. If you try to be like them and take them on head-on, you’ll get killed.”
The reality is that some firms adopt a course of action that is not in their best interests because they are driven by more than rational considerations.
“There are two things: first, how do they actually respond? Do they become more or less like the entrant? How do they perform? Do they perform better by becoming more like the entrant or do they perform better by becoming less like the entrant. We find that they actually perform worse by trying to become more like the entrant. It actually backfires on them as they have done something that is against their best interests. The temptation to mimic the giant should be resisted.”