February 18, 2016

Success in Niche Marketing - Foundation for Growth

This paper presents a success study of recently established startups that have grown to become some of the largest firms in the United States within 30 years or less through niche marketing. For this purpose, the Fortune 500 indexes for the years 1993 and 2003 are compared.  In 2003, there were 358 new Fortune 500 entrants, and among them, 240 firms were incorporated as startups. The initial entry types of 358 new Fortune 500 entrants are tracked through Standard & Poor's Corporate Descriptions plus News.

The study examines 16 niche market creators among 44 new entrant startups, particularly those
founded after 1975.

Many previous studies concluded that the performance of first movers is superior to late movers’
(Michael, 2003; Thomas, 1996; Golder & Tellis, 1993; Mascardenhas, 1992; Parry & Bass, 1990;
Carpenter & Nakamoto 1989; Liberman & Montgomery, 1988; Urban, et. al. 1986). McDougall and
Robinson (1990) argue that first mover advantage can fasten the growth of new startups. Even under hostile business environments, niche marketing leads to better performance, which implies that new startups with market initiatives are invulnerable to exogenous market shocks (Covin, et. al. 1999). Niche marketing accompanies first mover advantage and thus can provide a shortcut for startups to achieve rapid growth in a short time period through market leadership (Gilbert & Newsberry, 1982), strong brand image  (Vanderwerf & Mahon, 1997), learning by doing (Robinson & Fornell, 1985), and foreign penetration (Li, et. al. 2003). Nevertheless, the longevity and survival rate of first and second movers are not significantly different (Lilien & Yoon, 1990).

This paper adopts a market-based performance approach because pioneer rapid-growth startups have diverse industry backgrounds. More specifically, this paper tackles several critical questions regarding their exploration of niche markets. At the same time, the threat of hostile M&As must be carefully considered once niche markets are proven to be profitable markets. In other words, large enterprises have strong incentives to pursue M&As because they are able to circumvent sunk costs while acquiring know-hows and marketing channels. Therefore, protecting themselves from hostile M&A attempts becomes a sufficient condition for the survival of rapidly growing pioneer startups.

This paper focuses, in particular, on testing which shock between quality shock and market shock
contributes more to the remarkable performance of pioneer rapid-growth startups highlighting with their early competitors; adjusted total market capitalization, sales, gross profits, and net income are used as performance measures. Adjusted total market capitalization and sales represent stock market evaluation and firm growth, which are proxies for measuring size expansion. Gross profits and net income represent profitability.

Quality shocks, estimated by total factor productivity (TFP), can capture such information as quality improvements in both manufacturing startups and service startups while market shocks capture exogenous business fluctuations.

At the meanwhile, this paper does not aim to scrutinize how each pioneer rapid-growth startup has
explored its niche market because each pioneer has its own unique success story. Therefore, this paper adapts the discrete-choice racing models introduced by Yim (2008) and Filson & Gretz (2004). This is an effective way to understand how pioneer startups have achieved remarkable rapid growths through strategic investments in niche markets. For simplicity, four growth scenarios, named as scenarios 1, 2, 3, and 4 are prepared, using the combinations of the quality and market shocks: {high quality, high market}, {high quality, low market}, {low quality, high market}, and {low quality, low market}. They represent four possible business scenarios. Simulation results predict that pioneer startups are more likely to maintain market leadership as larger shocks occur and, among the two types of shocks, quality shocks enhance the startups’ likelihood of winning innovation races more than market shocks do. Alternatively speaking, the startups under interests are more likely to enjoy first mover advantages when they experience higher quality shocks.

The predictions of the racing model are verified through empirical frameworks. For this purpose,
some panel firm, industry, and time fixed effect models are constructed. According to empirical results, the contributions of quality shocks on pioneer startups’ performances are significantly greater to those of their
early competitors. However, no evidences are found if pioneer rapid-growth startups benefit more from market shocks compared to their early competitors. Among four business scenarios, scenarios 1 and 2 have positive and significant effects on the performance of pioneer rapid-growth startups, and thus it is evident that firm specific innovation capability is the key success factor for pioneer rapid-growth startups. They can grow more rapidly if favorable market lucks occur. Schmalensee (1985), Rumelt (1991), and McGahan (1999) conclude that firm effects can explain a larger part of the variations in firm values of the U.S. manufacturers, but the main result of this paper using the censored data from Fortune 500 archives can suggest a slightly different interpretation. In that, the impact of market lucks cannot be simply neglected as trivial because market shocks are still significant to the performance of early competitor group that is composed of the nation’s largest enterprises. However, firm-level innovation capability is obviously crucial for successful startups with the strategic shortcut of niche marketing.

A Strategic Pathway to the Rapid-Growth of New Startups: Niche Marketing and Strategic Investment

Yim, Hyung Rok
(Assistant professor)

School of International Studies
Kyung Hee University (Korea)

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