One hundred years ago, John Hartford and his brother George sat atop one of the largest empires in the world, and certainly the largest in the Eastern United States. The Great Atlantic and Pacific Tea Company (A&P), founded in 1859 and largely taken over by their father, George, in the late 1870s, had by 1919 become one of the five largest companies in the world, with sales topping an astounding $1 billion. With over 15,000 stores (the most of any company in history until 1990), its own manufacturing capacity, and private brands, the company dwarfed its competitors in the grocery business. Its largest competitors, West Coast–based Safeway and midwestern Kroger's, were less than half its size. And the Hartfords, who still controlled most of the company stock, were among the richest men in the world.

A&P had achieved its success with an aggressive strategy that emphasized increasing volume and reducing costs and prices, upsetting the norms and practices of the local provisions retailers. The company focused on high‐volume items, cut out expensive middlemen and wholesalers to source items directly, and developed its own in‐house brands in areas such as coffee and baked goods. A&P used its powerful distribution network to speed inventory turnover, add efficiency to the supply chain, and enhance its marketing clout by relying less on promotional trading stamps and expensive national brands. The company also capitalized on demographic trends – increasing numbers of immigrants were moving into the cities, where A&P had most of its stores – as well as the adoption of technologies such as “scientific management” and market research.

Not surprisingly, by the 1920s A&P confronted a backlash. The most obvious critics consisted of small independent grocers who simply could not compete with A&P's low prices. While the company had intentionally jettisoned industry practices by not providing service or offering credit, these benefits were not enough to dissuade consumers at a time when food costs were a large part of household budgets. But local grocery firms were not the only parties who deemed themselves victimized in the rise of A&P. Wholesalers had occupied a profitable position as intermediaries between suppliers and grocery retailers but they were largely cut out of the A&P supply chain and under increasing pressure from their remaining customers to cut costs. And companies like Coca‐Cola and Campbell's with national brands often found themselves at odds with A&P.

A&P's critics attempted to rally public support through the political process. The first salvos came at the state level, with various legislatures passing “anti–chain store” acts designed to limit the practices of A&P and other multistore chains to set prices below levels that could sustain small independent retailers; by 1937, there were at least 225 anti–chain store bills in effect or under consideration in 42 states, supported not just by the independent grocers but also their networks of local vendors, bankers, and other constituencies. At the federal level, the Robinson‐Patman Act (1936) restricted the ability of large firms to negotiate favorable prices and terms based on volume, and set limits to advertising and discounts. The local incumbents persisted, and by the mid‐1940s, the Federal Trade Commission brought an antitrust action under the Sherman Act, seeking to break up the company into several smaller retail groups and spin off its manufacturing operation. The case was eventually settled with A&P agreeing to divest its produce brokerage unit. The company also faced government pressure to accommodate worker unions. Despite the populist nature of the outcry, however, two‐thirds of the population supported A&P, and consumers in general voted with their feet. The company continued to thrive by offering low cost and value to its customer base.

But A&P soon faced a more potent rival, a new form of retailer dubbed the “supermarket.” Started by a few small entrepreneurs across several states in the early 1930s, larger‐format stores offering a range of national consumer brands and more convenience began to take off during World War II. As with A&P's growth decades earlier, supermarkets benefitted from changes in demographics, especially the growth of the suburbs, as well as new technologies – refrigeration, radio and television, even the shopping cart. The supermarket chains also began to offer a broader range of goods, allowing them to use some grocery products as loss leaders and providing concessions to third parties to sell additional goods in their stores. A&P, finding itself with many of its stores “in the wrong locations with the wrong format” and its proprietary brands and manufacturing capacity less important, was at a crossroads. Just as importantly, its new competitors (and even some traditional ones that were able to pivot into the new category more quickly) were fast developing know‐how and expertise in new areas such as customer segmentation.

To its credit, A&P took courageous action and pivoted sharply. First trying out supermarkets in 1938, it ultimately made the hard and painful decision to close its older and outdated stores. The company reduced the number of outlets from 15,000 smaller stores to 4,000 in the new format and laid off many long‐standing employees. The company was successful, at least in the short term. In 1950, A&P was still the second largest company in the United States (behind General Motors), with over $3.2 billion in revenue. But this apparent victory proved short‐lived. The Hartford brothers died in the 1950s, and after going public later in the decade the company began to pay out dividends and reinvest less. Under conservative leadership, the company moved less aggressively into the suburbs, often missing out on what proved to be choice locations, and it proved slow to adopt newer brands and merchandise. Meanwhile, the new supermarkets continued to leverage their strengths in those areas. By 1970 A&P's competitive advantages had disappeared, and in 1979 a German firm acquired controlling interest in A&P for $200 million.¹

It may seem counterintuitive, but the best way to understand entrepreneurship in the United States is by looking at the large incumbent companies that entrepreneurs often try to unseat, either directly or by creating new industries and ways of doing business that alter the playing field. While considering the behaviors and vulnerabilities of big incumbents may not be immediately relevant in the developing world, where so much of the economic challenge is related to basic building blocks and attracting investment, it is crucial to understanding how America developed into a nation that has sustained entrepreneurial innovation and energy for nearly 250 years. And it might also provide insights into how developing economies that have stagnated may need to evolve.

The story of A&P is both one of continued entrepreneurial growth and innovation, as well as one of almost inevitable decline. Understanding the strengths and weaknesses of large enterprises, including the natural limitations and the approaches they use to protect their positions throughout the “corporate life cycle,” highlights both the possibilities for entrepreneurship as well as the forces of resistance. And because the incumbents in the United States are so large, the possibilities for start‐ups are correspondingly greater.

Studying large incumbents also makes it easier to spot the openings that often exist for entrepreneurial innovation. Just as large incumbents have certain advantages, so too do start‐ups. We need to recognize and understand the strategies and behaviors of start‐ups and large corporations and the interplay between those two very different types of companies. Policymakers and regulators should also recognize how these competing interests work in the marketplace to facilitate harnessing their energy for long‐term economic and social benefit. With this context, we can see how the features of American entrepreneurial capitalism described in Chapter 1 serve to encourage innovation and productivity in both new enterprises and established ones.

Understanding Incumbents

Start‐up firms tend to garner the most attention and inspire the popular imagination, often positioning themselves as underdog Davids fighting against lumbering Goliaths. But incumbents are often underappreciated. Large companies contribute in many important ways to the economy as whole, and to the entrepreneurial ecosystem specifically. Most critically, these firms define the market and create the fundamental boundaries and traditional economic positions of customers, distributors, and suppliers in any industry. They establish the basic economic and financial parameters against which start‐ups innovate and compete.

Most successful large incumbents think a lot about continuing improvement of their operational performance, including incorporating “sustaining” innovation. Big, well‐run companies possess organizational competencies and managerial talents that become critical components of productivity, efficiency, and competitiveness. Global logistics, efficient manufacturing, brand marketing, distribution, and supplier management have evolved into sophisticated professional capacities, originally nurtured in large corporations and subsequently instrumental in capitalizing any number of upstart ventures. Many important innovations would not have reached scale and impact without the involvement of large incumbents, either as innovators or as prime supporters in some way or other. From society's point of view, moreover, these competencies in large‐scale management can be essential to global competitiveness and security – potential benefits demonstrated by the importance of large corporate firms in rationalizing railroads, assisting with two world wars, and commercializing science. Going forward, one can anticipate the role large corporate entities might play in areas such as climate change, data security, supply chain protection, and other key issues. The performance of companies such as Target, Walmart, Roche, and others during the COVID crisis, for instance, highlights this.²

Moreover, many incumbents are growth‐oriented, and they are often looking to expand into new markets or redefine the boundaries and definitions of their firms. This natural desire to grow also helps create a rich environment for would‐be entrepreneurs who can develop these adjacent markets and perhaps partner with larger companies. Incumbents are vitally important as “anchor” customers, particularly when a new venture needs large accounts to achieve scale and establish credibility in the market. Many consumer products companies, for instance, have located offices near Bentonville, Arkansas, simply to be near Walmart headquarters. For other companies, mastering the Google search process or selling on eBay or through Amazon can be a defining core competency. And, for many entrepreneurs, the goal is to sell their company to a bigger firm.

Large corporations are also underappreciated when it comes to innovation itself. While many like to point to the failings of corporate research and development efforts (R&D), the amount spent by large companies on an annual basis is substantial and, in many cases, effective and significant. Despite the headline gaffes and missed opportunities, large incumbents often serve as leading actors in the effective commercialization of innovation developed by themselves or others. The importance of standard‐setting and ubiquity is one such area.³ For example, IBM in the 1980s proved instrumental in the design of the personal computer platform (including Microsoft's operating system) as well as in its distribution to households and businesses around the world, much as the online platforms and “app stores” run by Google and Apple today remain essential in channeling start‐up apps and new innovations to market. And even when incumbents fail to turn their ideas into viable commercial endeavors, the work they do remains quite important and can lead to breakthroughs. Established companies, for example, may generate the initial research that supports later innovation – as Xerox famously did with graphical user interfaces and point‐and‐click computing. And large corporate R&D is still essential to the progress of a wide range of industries, even if departing employees or venture‐backed enterprises may prove more adept at commercializing the findings.⁴

But large incumbent firms also have significant shortcomings and limitations, some of them structural or fundamental in nature, however competent their management. It is hard for large firms to stay ahead of innovation or to chase numerous small opportunities in the hope of finding the one that will ultimately gain traction. Even when companies are on high alert for potential innovative threats and major technological platform shifts, it is no simple matter to identify and execute the required transformation in a timely manner. And sometimes seemingly innocuous upstarts find room to operate in small or otherwise apparently unattractive market segments, and from there grow into meaningful threats, either via a deliberate market entry and migration strategy or simply as a result of the natural tendency of successful new ventures to grow and become more profitable. In the technology field, the natural pace of improvement is a critical factor – early crude technologies often improve faster than the underlying market requirements. As a result, innovations that initially appear unappealing and unfit for mainstream use often move along trajectories that bring them into established markets over time, as Clay Christensen noted in his classic, The Innovator's Dilemma. Thus may intrinsic strategic shortcomings of incumbents open windows of opportunity for new entrants or industry disruptors.⁵

In many cases, it is precisely the prudent decision making and focused discipline of incumbent management that creates windows of opportunity for upstarts in the first place. Experts in corporate strategy have actively encouraged focus and discipline among incumbents. Large firms are advised to concentrate on core markets – a strategic imperative that usually generates excellent performance in a short or medium time period but that also leaves untended niches and voids in markets for other parties to fill.⁶ Focus is essential, of course, if big companies hope to harness resources and align their organizations, and financial discipline is also critical as firms grow, especially if they are public companies. In such situations, effective strategy becomes the art of choosing both what to do and what not to do. Nevertheless, a focused strategy cannot prevent disruptions that occur in spite of, or even as a direct result of, intelligent decisions by managers at larger companies that open entrepreneurial opportunities. The ability of entrepreneurial ventures to “fill in the blanks” left by larger rivals becomes critical within evolving industrial ecosystems.

As companies grow bigger, external constraints may also influence strategic options. Important but inherently short‐term requirements that banks or regulators impose, for example, may limit available choices for companies. Similarly, Wall Street expectations often influence the options open to corporate strategists. Institutional investors and analysts may assess a public company in ways that discourage risk‐taking or volatility, or preempt any investments beyond those that enhance the current core business or achieve particular financial hurdles in the near term. In recent years, pressure from shareholder activists has made these influences pronounced, even paramount. Likewise, companies “taken private” by private equity firms face the pressures of servicing substantially increased debt loads, often limiting the availability of resources for research and development, innovation, or other strategic options.

Firms also face a natural set of organizational challenges as they become bigger and older. The difficulties range from organizational and communications bottlenecks to the difficulties in developing new competencies, altering performance metrics, or recruiting new talent. This latter challenge makes itself felt acutely in the technology field, where modern work environments, new technologies (offering a chance to work with new tools rather than contend with the legacy systems and “technical debt” of older firms), and the potential financial rewards, especially stock options associated with fast‐growing companies, tend to drain talent from incumbents and shift it toward smaller upstart ventures. Organizational culture, compensation systems, and internal prestige all complicate this problem. Some companies also cope with the pitfall of past achievement and the natural tendency of successful enterprises to keep doing what they have been doing well, to a fault.⁷ Examples include the missteps companies take by focusing narrowly, venturing far afield, becoming disconnected from the market, or pursuing many priorities as they get bigger. In addition, incumbents often suffer the “curse of the installed base,” the inertia associated with a legacy business and the difficulty of trying something new that might somehow undercut it.

Finally, incumbents face the “normal” problems that plague even well‐run companies. These include downturns in the economy, strategic miscalculations, and the simple failure to respond well or in a timely fashion to adversity or threats.⁸ External economic factors, such as interest rates, currency fluctuations, or other forces outside an industry, can roil the business. Many of these factors also affect upstarts, but incumbents cope less easily, more awkwardly, or less quickly. They feel pressures more acutely, with greater repercussions, particularly if they carry debt (which most large well‐run firms do). Facing such pressures and failing to respond effectively opens doors to upstart challengers.

For all the negative headlines that have been generated about large, powerful incumbent companies over the past two centuries, the fact remains that many of them – from the British East India Company, Cornelius Vanderbilt's ocean liners and railroads, and A&P's chain stores to U.S. Steel, Pan American Airlines, RCA, Woolworth, and even Sears and GE – have either disappeared or become shadows of their former selves. This remarkable fact attests to both the natural life cycle of corporations and the sometimes life‐and‐death battle at the heart of American entrepreneurial capitalism.

Erecting Barriers to Entry

While established companies bring strengths and weaknesses to bear as they seek to capitalize on opportunities, they also possess valuable tools and resources to protect and even enhance their market position. How effectively they deploy these capabilities generally determines how they fare in contests against upstart challengers. Understanding the various tools and how they are deployed, as well as appreciating the contours of the battle between upstarts and incumbents, is important in determining the appropriate “rules of the game.”

Incumbents typically operate according to accepted principles of corporate and competitive strategy. In his classic study, Michael Porter emphasized “five forces” that determine how competitors – especially incumbents in established industries – can secure their market position. These are the strength of competitive rivalry in a particular market, barriers that keep potential new entrants from joining the fray, the potential for substitute offerings to take business away, and the relative bargaining power of a company's suppliers and customers. Such structural analysis explains why some industries are more profitable than others, as well as how particular competitors are advantaged or disadvantaged. The analysis also identifies how industry dynamics and corporate life cycle factor in and suggests where an incumbent may be vulnerable to upstart competition. In important respects, the core of competitive corporate strategy is to erect “barriers to entry” that obstruct easy market entry for start‐ups.⁹

Incumbents possess more weapons than competitive strategy. They may acquire emerging ventures, for example, especially as these become more successful or threatening. In most cases, the goal is not to kill a nascent competitor but to add new competencies to an organization. These can include bringing new skills or intellectual property into a company, helping to transition to a new technology platform, or reaching new geographic or demographic segments. Increasingly, policymakers and regulators are scrutinizing acquisitions of nascent competitors, especially if the acquirer's motivation is to dampen innovation. But in the majority of cases the goal of the incumbent is to stay competitive. Ironically, while acquisitions can be an important tool for growth, it often has the powerful side effect of encouraging even more venture capital into an industry, as entrepreneurs and investors see the opportunity for natural exits from strategic acquirers concerned about the upstarts’ innovations.

The most controversial problems arise when effective corporate strategy clashes with public policy goals. In their pursuit of commercial excellence, for instance, incumbents may strive to preserve competitive advantage by attempting to block innovations and defend against new entrants that leverage these. Common approaches include bolstering proprietary distribution channels and securing unique supply arrangements. Such approaches come with obvious political risks: as highlighted in several later chapters, antitrust policy focuses on actions that may create unusually high barriers to entry, such as vertical integration, illegal tying or bundling, price discrimination, or other schemes to impede market access. In many cases, legitimate business strategies that extend the bounds of property rights far into the market, such as enhancing installed software in ways that preempt the features of potential new competitors or requiring original manufacturer parts in order to maintain warranties, also test the limits of a market entrant's right to compete.¹⁰

Finally, incumbents large and small may resort to outright protectionist strategies involving legislation, courts, or the political process, as local grocers did with A&P. If an incumbent has long‐standing ties with regulators, for example, it may lead to “regulatory capture,” a time‐honored tactic to draw regulators to protect an incumbent's position, as occurred over many decades in the railroad and telephone industries, for example. Using the media to stoke the fears of consumers or employees is another common tactic.¹¹ Even historic adversaries such as unions or small businesses may be enlisted in the defense against innovative new market entrants. Understanding the tools incumbents use helps distinguish legitimate corporate efforts to compete from those that simply attempt to box out new competitors or postpone market access for innovation. It is crucial to helping policymakers to balance property rights – or at least the pursuit of proprietary advantage – and the right to compete.

Start‐ups and Market Entry

What opportunities do start‐ups pursue and what are they good at? How are entrepreneurs motivated and how do their strategies evolve? Answers to these and other questions are essential to fostering and harnessing entrepreneurial dynamism.

In many parts of the world, opportunities tend to be “greenfield” and the focus is on basic economic development. But in more advanced economies, new ventures reinvigorate the economy broadly. New firms are involved at many levels of the economy and have been responsible for countless innovations ranging from incremental or “sustaining” types to paradigm‐shifting “disruptive” breakthroughs that transform industries or create new ones entirely. Upstart ventures bring unique perspectives, distinctive strengths, and a clean slate to the field, raising the possibilities of breakthrough advances. Such ventures tend to be small, young, nimble, and able to address opportunities that bigger rivals either do not perceive or choose not to pursue. Unencumbered by legacy systems and processes, upstarts tend to leverage new tools, technologies, and platforms more readily and rapidly. They often start with a low‐cost infrastructure, enabling them to exploit early cost advantages in certain markets before economies of scale become important, or to serve niches that may be too small for larger firms to notice or serve effectively. In many cases, new ventures start with more intuitive understandings of emerging demand: they pick up on market shifts, for example, enabling them to reach new or untapped audiences or consumers. Finally, young firms with exciting promise often entice potential talent with equity stakes, such as stock options that, while risky, often prove extremely appealing. Such incentives preserve cash flows while offering huge upside rewards.

Entrepreneurs and young ventures competing or innovating in a given industry tend to follow similar “market entry” strategies, even if they may not be conscious of it. Many advice manuals for start‐ups begin with specific reference to existing markets, aligning value propositions within existing norms and economics. For example, one framework distinguishes “pioneering,” “imitative,” and “adaptive” categories in considering the nature of new ventures. With respect to market entry specifically, another defines four strategies including “intellectual property,” “disruptive,” “value chain,” and “architectural” approaches to the market, each reflecting the potential role of a new entrant vis‐à‐vis the established industry. Entrepreneurs, another advisor counsels, should choose which specific approach to pursue against incumbents, making either “frontal,” “side,” or “guerilla” attacks.¹² The list of potential strategies is long, but in many cases the path is simply to get started and get better.

Many good ideas simply present themselves to would‐be entrepreneurs based on their experience with established firms. Whether it is by rational intent or blind spots and organizational constraints, large companies often leave opportunities “on the table.” A study of entrepreneurs found that 70% of new businesses were started by people whose plans had taken shape during previous employment.¹³ This is more evidence of the symbiotic relationship between upstarts and incumbents and the role of new ventures in finding and creating opportunities to create value that might be ignored in larger entities.

What about small business? Whether it is Amazon challenging Walmart, or JetBlue and Tesla competing in mature industries, American business history teems with examples of the new supplanting or replacing the old, only to find themselves contending with another new upstart in the fray. Yet while fast‐growing disrupters garner most of the headlines, effective challenges to industry incumbents do not just arise from venture capital–funded start‐ups. Over the course of American history, most of the great companies started as small businesses, and that continues today. The Four Seasons Hotel chain, for example, began as a lower‐cost motel operator before evolving into a premier global luxury brand, while Comcast grew from an upstart cable operator into a multi‐industry behemoth. Starbucks began with a single coffee shop, and Dunkin Donuts with a truck. Many small businesses get traction through forward or backward integration, or by migrating into adjacent markets and sectors, or simply by grinding away. And, some argue, the future of opportunity may lie in the advantages of the small.¹⁴

Despite arguments that point to the inefficiency of small business, the potential for innovation in this segment is significant. Israel Kirzner, like Schumpeter an economist from the Austrian tradition, wrote extensively about how entrepreneurs push the bounds of established markets.¹⁵ Whereas economists from the supply‐meets‐demand “equilibrium” school might see markets and market structures as relatively fixed, he and like‐minded colleagues perceived how entrepreneurs’ decisions and actions can alter the definition of goods and services. In this view, the entrepreneur is the economic actor who, “alert” to opportunity, pushes to “get ahead” and so embodies an innately competitive force and acts as a nimble agent of disruption. As entrepreneurs compete, they change the marketplace itself, particularly when they find ways to differentiate their offerings from those of the competition by creating unique features or improving how they are sold. Even something as seemingly mundane as offering and promoting free parking can upset a marketplace, and these kinds of contributions energize the competitive and innovative process.

Many small businesses stay comfortably inside their niche. But the natural inclination of many small business owners is to grow. For some, this means expanding into new markets, while for others there is the chance to vertically integrate or offer new products and services to existing customers. Studies of successful high‐growth midsize companies show how even in mature or stable markets certain companies can outperform competitors by deploying “guerilla strategies” or by “edging out” into new areas. These include continually innovating, creating and serving niches, and building on core strengths to outmaneuver competition.¹⁶

Of course, start‐ups have challenges and weaknesses of their own. New teams might be inexperienced and have difficulty scaling up. The clean slate that new ventures enjoy often means they must start processes from scratch, thus missing years of institutional learning. And a chronic shortage of capital and other resources can plague young, unproven ventures. The high failure rate of venture‐backed start‐ups, even in this golden age of upstarts, shows the risks and uncertainties entrepreneurship entails. Many venture capital firms fail to generate an adequate return and even lose money, while small business failure rates are significant. For every Steve Jobs, as for every Thomas Edison in earlier times, as for every Benjamin Franklin in still earlier times, vast numbers of entrepreneurs fall short.

Upstarts, Incumbents, and Innovation in an Entrepreneurial Economy

The importance of innovation to productive economies has been recognized for a long time, extending back to early commentaries on modern capitalism. Adam Smith clearly articulated the concepts of specialization, and these have remained foundations of economic differentiation and business strategy ever since. As the economy grew and large corporations came to the fore throughout the 19th and 20th centuries, these concepts developed further, resulting in greater understanding for how such entities organize and operate, as well as an appreciation of upstarts as sources of innovation.

More recently, economists have studied why some societies foster technological innovation better than others. In many cases, it is relatively easy for countries to play catch up, simply by investing government resources into research or by promoting “national champions” to compete globally. Sustained innovation often requires more, especially if countries want to stay ahead over longer periods of time and operate at the “technological frontier.” Often, this requires strong “domestic rivalry” between firms, as well as the catalyst of new entrants forcing change. In fact, this dynamism is a key aspect of competitive advantage.¹⁷

Joseph Schumpeter is widely acknowledged as the first to identify the role of entrepreneurs in economic development: as catalysts of “creative destruction,” a force that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”¹⁸ While some of this dynamism could be attributable to external events such as wars or business cycles, innovators play a central role. He noted that “the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprises create.”¹⁹

Schumpeter grappled with the relative merits of large firms and upstarts in the process of innovation. In his “Mark I” view, he celebrated individual entrepreneurs as heroes or “wild spirits” (Unternehmergeist or “entrepreneurial spirit”). In this line of thinking, the inherent bias among established firms toward maintaining the status quo makes it hard for them to lead change. “It is not owners of stagecoaches who build railways,” he observed.²⁰ Schumpeter eventually expanded his views as he saw the potential for large corporations with sizeable research and development budgets and strong distribution networks to commercialize innovation from upstarts, his “Mark II.”²¹ Schumpeter also began to worry that large companies, coupled with government oversight, might dominate the economy in ways that could be problematic.²²

Corporate strategists have also seized on the strengths and weaknesses of large corporations compared with upstarts in helping to identify the best catalysts for innovation. Peter Drucker, viewed by many as the father of corporate strategy, recognized that established firms might neglect or be unable to exploit opportunities, creating windows for smaller or less entrenched firms. Writing a generation after Schumpeter, Drucker focused on the strengths and limitations of big companies, which seemed to him the most dynamic agents of research, development, and commercialization.²³ He understood that established companies might not always identify or seize significant opportunities.

Drucker classified the “sources” of opportunity that recurred regularly across time and industry as a way to define innovation prospects. Some of these might arise from external trends and events. Evolving demographics – increases in the number of retirees, changes in education levels and the growth of the professional workplace, migration patterns, and other factors – for example, could generate new opportunities for economic actors to pursue. “New knowledge” could spawn entirely new industries like computing and life sciences. Most often, Drucker observed, new industries emerged in response to multiple, often disparate developments. Air travel and transportation, for example, hinged on contemporaneous advances in both engine technology and aerodynamics.

The most interesting sources of opportunity Drucker identified involved those emerging “within” existing markets: “unexpected” occurrences, such as when appliances and white goods became available and a few mass retailers like Sears, Roebuck used them to build market share and increase consumer loyalty; “incongruities,” such as containerized shipping, which caught many traditional freight companies by surprise but massively benefitted a few early movers; and “process need,” opportunities to make significant productivity gains in operations through automation or the use of new materials. To Drucker, the opportunities “within” underscored the inherent potential for entrepreneurship even in established industries. But it raises the question as to whether (and under what circumstances) incumbents or upstarts are more effective in bringing them to fruition.

As the growth in start‐up activity and its impact on established industries became pronounced in the 1980s and 1990s, companies and management strategists grappled with how to respond. For some, the solution was the creation of in‐house venture capital firms, while others adopted aggressive strategies to acquire new firms before they became threats, or to spin out their own homegrown innovations so they could move more quickly. Most were on the lookout for the technology shifts that would redefine their industries, and companies made important and in some cases existential wagers as to what might come next. Some succeeded and others failed, but interplay between upstarts and incumbents was intense. Schumpeter's concept of “industrial mutation … from within,” Drucker's list of sources of opportunity, and the work of Christensen and others noted earlier indicate that innovation is inherent in developed economies. Both upstarts and incumbents play important roles in the process of developing and commercializing innovation. It is therefore vitally important to leverage the strengths and not protect the weaknesses of each to ensure that the dynamic tension between them is preserved and stimulates overall economic growth.²⁴

Corporate Strategy 2.0: Ecosystems, Platforms, and Networks

Marshalling, then, these strengths, weaknesses, strategies, and opportunities, incumbents and upstarts contend with each other in a complex, never‐ending tug‐of‐war. The playing field for this tug‐of‐war, however, can shift over time. In the first decades of the American republic, securing transportation routes, water access, or government charters was seen as the key source of competition advantage. Later, economic efficiency, “economies of scale,” and vertically integrated distribution and supply channels became important competitive factors. Moreover, the playing field can shift not just over historic time periods but within industry life cycles.

Consider vertical integration. As an enterprise achieves control over all facets of a product, from proprietary supply through to proprietary distribution, it can erect powerful barriers to new competitors. Many great companies, ranging from early merchants and railroads to chain stores and photography companies, have sought to secure these advantages. Yet this approach may lead to ossification. Developments such as interoperable parts in the 19th century and “outsourcing” and “open networks” in the present day have demonstrated offsetting advantages for firms that are adept at managing third‐party partners to reduce cost and speed innovation.

The most significant change over the last several decades has been the move beyond “economies of scale” to “network effects” as a potent and enduring source of competitive advantage. In the past, increasing size led to reduced costs and provided market leaders with an inherent advantage, particularly within the technology industry. Network effects confer a similar kind of scale advantage to firms that have the most users and high levels of engagement.²⁵ Part of this line of strategy stems from “path dependence,” which highlights the power of the past – for good or bad – as a constraint affecting future choices. The classic illustration is the QWERTY keyboard, developed in a context much different from its current use as an intermediary between humans and their electronic devices. The keyboard in the 1870s enabled fast typing on mechanical typewriters without jamming the key levers of common letter pairings like “s” and “t.” Yet the QWERTY keyboard remains dominant nearly 150 years later because so many people have learned to use it and the costs of switching them to another layout remains prohibitive. The past abides with us, shaping our options, and big companies understand that branching too far afield poses big challenges.

As a result of network effects and “open networks,” the nature of competitive advantage has been transformed, and with it the ways that incumbents seek to protect or enhance their market position. In the past, low costs, price discrimination, and proprietary service or distribution arrangements, as with A&P, were the competitive mechanisms of choice. More recently, effective competitive advantage is being generated by data gathering, analytics, customer engagement, as well as organizational speed and adaptability. With the emergence of new data sources and analytical tools, the competitive playing field is shifting even further in favor of firms that can best understand and anticipate consumer needs. Competitive “lock‐in” is being established both by developing holistic relationships with customers as well as by securing proprietary advantages with the supply chain. Recent scrutiny of the so‐called FAANG companies (the acronym of Facebook, Apple, Amazon, Netflix, and Google that is a proxy for dominant technology platform companies), for instance, reflects the concern that competition policy should address privacy and use of information and the unique advantages it creates for incumbents. The ability of customers to control their data and how it is used will become increasingly important in counteracting these new sources of competitive advantage.

Despite the recent outcry over “Big Tech” and the power of new platforms to dominate industries, several recent books have highlighted that not all these new enterprises are invincible. One recent book, for example, notes that, despite the outcry of the inevitable domination of digital platform companies, there are significant differences between network effects and more sustainable forces of competitive advantage.²⁶ Similarly, in looking back at failures of many new would‐be unicorns since the creation of the internet economy, one can see that companies with powerful network effects can quickly lose their audiences by failing to preserve their important roles in areas such as trust.²⁷ The recent controversies surrounding Facebook (now Meta), which some argue is starting to face declining engagement by younger audiences, and Apple, which recently loosened restrictions on third‐party billing in its App Store, highlight potential vulnerabilities. While government intervention may still be needed in this area – and indeed the threat of same has been a catalyst for change in the area of Big Tech – as in the case of A&P, the natural forces of creative destruction may ultimately prove to be the most effective way to curb incumbent power.

Finally, the dynamism between upstarts and incumbents in the modern era has benefitted from supporting networks of advisors and services. Incumbents, for example, rely on the advice of large law firms, accounting firms, and consultancies, not to mention big banks and providers of financial services. These actors have material interests in reinforcing an incumbent's position and defending it from threats. Similarly, upstarts benefit from specialized service providers – venture capitalists and law firms, marketing agencies, and consultancies focused on early‐stage ventures – that nurture and protect their interests. Often overlooked, the sophisticated services available to both sets of enterprises are an essential part of America's balancing act.

No country has enabled and empowered entrepreneurs as effectively as the United States, which has spawned world‐changing technologies, empowered the creation of market‐leading companies, and maintained long‐term, above‐average economic growth – all this despite a constantly changing world. For nearly 250 years, the United States has enabled the most vital and vibrant start‐up and entrepreneurial ecosystem in history, while also supporting both small businesses and the development of dominant global corporations. This is no accident, as entrepreneurship has roots that trace back to the beginnings of European colonization in North America. As the next several chapters reveal, American political and legal institutions formed and evolved in ways that encouraged and maintained the dynamism among these various types of enterprises, striking an imperfect yet essential balance that has proven critical to sustaining the nation's long‐term economic vitality.