This may seem like a dumb question – “What Is An Established Firm in Today’s World? I used the word “Established” in 2004 in the title of my first (and only) book The New Science of Strategy Execution: How The Established Firm Becomes a Fast, Sleek Wealth Creator. I had an idea then about what Established meant but have refined my thinking on this recently. Some writers have referred to them as “ongoing” firms, as opposed to I guess firms who come into being for a very limited purpose and time frame. But we need more meat in a useful view of what Established means.
In 2004, I had the view that an Established firm was one of three different size classes and was distinguished from a new venture startup. We all know the definitions of certain size breakdowns of established firms in terms of the number of employees and revenues. Note different governmental agencies and banking entities have different cutoffs so do not let this bother you for the purposes of this article:
Large Established Firms – over 1000 employees and over $1 billion in revenue
Mid-sized Established Firms – 101-999 employees and from $10 million to $1 billion in revenue
Small Firms – 1 to 100 employees and from $5 to $10 million in revenue
The reason for this breakdown is varied: First, economists use it to see what the frequency distribution is as to where the economy is focused, where jobs are being created and maintained, etc. In 2012, small businesses had 54% of total revenue and large firms had 52% of the employment. These size distributions might help in setting tax policy and provide some kind of benefits for job creation. Second, banks use these size distribution breakdown for targeting loan origination and IT technology firms use the breakdown to tailor their sales pitch around comprehensiveness of eventual IT recommendations and at what price points.
So all of this is fine and dandy and to be counted as an “established” firm the firm must have been around for a while. However, due to bankruptcy or outright liquidation, a firm can disappear from any of the above lists the year after it ceases to exist. But from a strategic point of view, those firms do not go away just yet. Warranties and spare parts for current customers will still have to be honored in some form. So what really is an established firm?
As I have written in other articles here, the established firm can be distinguished from two kinds of brand new businesses: major new venture startups and lifestyle businesses. The major new venture is an entity that has a bold strategy that envisions the business to scale quickly. It almost always raises a lot of external capital. This comes first from angel investors, then bridge investors followed by rounds of major investment through various “funds” from venture capitalists. Think Amazon, Tesla and hundreds of other such businesses. Here the venture is expected eventually to earn venture capital rates of return for investors, usually having an Initial Public Offering (IPO) for investors or a “strategic sale” to a larger firm to “cash-out”. The “lifestyle” business sees beauty in small scale where the founders are content in owning and managing a business they love that matches their lifestyle and passion. If these businesses breakeven, that is good enough for these owners to be content usually. Indeed many lifestyle businesses are marginally profitable throughout their entire existence. This can happen to the major new venture startup as well. “Losing money on schedule” is a phrase you hear often in this space. As we know, Amazon was not profitable for the first seven to eight years of its existence and Tesla and Uber are still not profitable as of 2019.
What does the established firm have that the major new venture or lifestyle business at its beginning and early years does not have? Answer: loyal customers and other attributes we will discuss below. When I say loyal customers, this can be from a somewhat loyal customer to rabid fans, like the ones Harley Motorcycle Company enjoyed for many years. A base of loyal customers allows the established firm this luxury: to co-create with those customers new products and services. This lowers the cost of new product and service development and increases the probability those customers will pay for the new offerings. The major new venture startup and lifestyle business do not have loyal customers yet. They are fighting to gain some traction with customers and secure an initial position in the market place. This capability to co-create with customers is in my view a key element that distinguishes the established firm from the not established firm.
Established firms also have these attributes that the two kinds of new businesses usually do not have:
- A slate of mapped Executive, Operating and Support processes that are “engineered” for speed and little rework. Executive processes include strategic planning and resource allocation processes. Operating processes include manufacturing, sales, supply chain to after-sales-service processes. And Support processes include legal, human resources, and technology processes. A side note: process disciplines seem to be fading in general in all kinds of businesses. This is a topic of another article perhaps.
- A clear articulation of the key activities required to add value for customers, depicted in the flow from inbound logistics to after-sales customer service.
- A clear approach to organizational structure with clear reporting relationships and appropriately distributed “decision rights”.
- A strong culture, reinforcing #s 1, 2 and 3 is the touchstone glue that guides daily behaviors that are healthy for the firm and has “sticking power”. In other words, the firm does not exhibit the “fad of the month” syndrome that can plague firms.
If the firm does not enjoy a group of at least somewhat loyal customers and these five attributes, the firm is not “established” in my view. The implications for this view are profound I think. A firm that has been around for a while and has a certain size of revenue and number of employees may not be established according to these criteria. Thus, they are in a perpetual state of infancy. How many times has a strategy professional (either in business or a consultant) gotten to know a business that seems established by size criteria, but they leave that business shaking their heads as to how this business can continue to exist?
I think then governmental and banking firms could add to their criteria list for an established firm these five aspects of attributes (loyal customers plus the four other attributes) to those of size criteria. I know some will say this smacks of “big brother” trying to influence views, but these added criteria could aid investors doing their due diligence on firms for their possible investment in them. By these criteria, are Tesla, Uber and other such firms “established”? Only partially from these criteria in my view.
What would you add to my five criteria other than size?
This article is part of a series on what causes a firm’s value to increase.
Dr. William Bigler is the founder and CEO of Bill Bigler Associates. He is a former Associate Professor of Strategy and the former MBA Program Director at Louisiana State University at Shreveport. He was the President of the Board of the Association for Strategic Planning in 2012 and served on the Board of Advisors for Nitro Security Inc. from 2003-2005. He is the author of the 2004 book “The New Science of Strategy Execution: How Established Firms Become Fast, Sleek Wealth Creators”. He has worked in the strategy departments of PricewaterhouseCoopers, the Hay Group, Ernst & Young and the Thomas Group. He can be reached at email@example.com or www.billbigler.com.