Societies thrive on the efforts of usurpers

First published in the Financial Times on 10th September 2013.

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.