Startup and the economy
Technology is changing everything but with the proliferation of social media, mobility, cloud computing, it accelerates and more changes will happen. An industry analyst predicts that within the next five years, technology will become the key source that creates more new startups but also threaten many established businesses. He wrote: “Today technology has shifted from supporting function that helps company to reduce costs, improve quality, and automate activities to strategic function that integrates everything to increase competitiveness and profits as well as helps company to expand and grow. However many established companies are too slow to change because their managers do not understand the urgency; their executives cannot provide the necessary direction to sustain the business so it opens opportunities for startups to seize the market.”
According to U.S. government report, startup companies have created several million new jobs in past years much more than all existing established companies. An analyst explains: “Twenty years ago, Google and Amazon did not exist but today they have hundred thousands of employees, all get high paid and contribute to the economy. Ten years ago, Facebook and LinkedIn did not exist but now they are growing with thousands of employees and help improve the economy. As more startups are emerging, they create more jobs, hire more people, and challenge existing companies. Of course established companies are feeling the competition but they cannot compete. To survive in this changing time, established companies must integrate their traditional business processes with new technologies but most do not know how because they do not have the right leaderships and knowledgeable management.”
When Amazon's big data analytics software collected customer's behavior to personalize their offerings and increased business, traditional companies could not compete with this new approach so after few years, most gave up and filed for bankruptcy. By taking advantage of technology, Amazon is emerging as the largest online store in the world and keeps expanding its business to other countries. A Wall Street analyst wrote: “The application of information technology to business as a strategy for competition will completely overhaul the entire industry and the way people manage business. In the next five years, more than half of established companies will lose their market to technology startups. Technology incompetence will cause most managers to lose their job for new technology graduates who aggressively seize the opportunity. As established businesses collapse, new companies will rise, expanding, acquiring more customers and grow quickly in this global connected economy.”
The key challenge to established companies is having skilled leaders who understand technology innovation. Although most established companies have invested in technology and upgrade their current infrastructure but they do not have experienced managers to lead the change. Most established managers are afraid of change as it may threaten their positions. Many established leaders do not know how to shift their strategies and “Flatten” their management level since their view is based on traditional “hierarchy system.” Basically these companies were successful in the old way of managing business but fail in the new way of leveraging technologies to create competitive advantage. Most established companies waste a lot of money in purchasing more technologies but fail to manage them accordingly. Traditional business theory is focusing on managing from inside-out by having good products at low price. Startup theory views their business from the outside-in, through a customer's view rather than company's view. They use social networking and data analytics to predict what customers want to buy when shopping then provide a “personalized customer recommendations” to sell things. If you ever shop on Amazon, you understand what the company is doing when it recommends you things that you want as it can read your mind. If you look at the philosophy of Steve Jobs, you will find that he did not follow what business schools' teaching about reduce price for more sale but relied more on what customers want. He did not pay attention to business theories about market share but focused on creating products that surprise customers. Apple products are expensive but it exceeds customers' wishes and that is why Apple is the most successful company in the world.
The key advantage of startups is they operate in a “decentralized” or flat structure where decision can be made quickly. As workers collaborate, innovations can be created quickly as it does no longer have to go through many levels of management for decision. By moving fast and be flexible, startup companies thrive quickly in the fast changing market where established companies are too slow to react and often lose market to smaller and faster competitors. Although the need for change is obvious, but few established companies are willing to take the necessary steps to remain competitive because they cannot change their structure of multiple levels of bureaucracy. According to industry survey, more than 80% company executives admitted that technology is happening faster than they can adjust and most feel that they do not have the talent to meet this challenge.
The U.S. government study tracked the number of startups from 2000 to 2010 and found that existing companies are “job destroyers”, losing 1 million jobs per year as they lay off workers to reduce costs. By contrast, startups add an average of 3 million jobs per year as they are growing. The author recommended that to solve unemployment, government must focus on create startups rather than support established companies with tax incentives. The author explained: “Even during the financial crisis, job creation at startups remains stable, while job losses at existing companies are increasing due to the recession. The fact is technology jobs are mostly shielded from bad economic times so it is important to recognize that startups are the main drivers of job growth and must be given highest priority. Job-creation policies aimed at supporting established companies will fail because of old management style is not flexible enough to responds to changing time.
As the global economy begins to recover, startups dominate the job creation while established companies lose more jobs than they create. On average, one-year-old startups create thousands more jobs while ten-year-old established companies do not generate jobs but keep shedding workers to reduce costs. One analyst wrote: “To solve unemployment, startup is the best solution but the question is: “Is the education system ready to develop more startups for the economy?”
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
