Outsiders often struggle to effect change.

Digital article by Freek Vermeulen and Amandine Ody-Brasier

Conventional wisdom holds that newcomers and outsiders are better than incumbents at disrupting mature industries, because they’re less hindered by conventions, vested interests, and other sources of inertia. A great deal of empirical evidence, however, suggests that in reality outsiders often struggle to effect change. We’re interested in understanding why they struggle.

The market for Champagne grapes

To investigate this question, we studied the Champagne industry in France. We conducted a total of 78 interviews with senior executives and industry experts and complemented that qualitative work with extensive quantitative data on all Champagne houses in the industry over a 10-year period.

The Champagne industry is interesting because it is very mature and has been operating according to well-known established patterns for a very long time. Yet, underneath the surface, structural change has been brewing, with various houses rethinking how things could be done differently. One of our interviewees compared the industry to the proverbial duck swimming in the lake: on the surface everything seems calm and steady, but underneath the water there is vigorous paddling.

Here’s how it operates: vineyard owners are responsible for growing the grapes, which are then sold to the Champagne houses, who turn them into the famous sparkling wine and take care of the branding, marketing, and distribution to retailers, who sell the wine to consumers.

In recent years, several houses have been trying to change this status quo; for example, some of them have been trying to vertically integrate by acquiring vineyards of their own; others have ceased doing the branding, marketing, and distribution by entering into arrangements with retailers who take care of these activities; yet others have set up subsidiaries in other wine regions, like California, using their expertise to create non-Champagne sparkling wines.

Our research showed, though, that the vineyard owners — on whom the houses are still critically dependent because only wine made from local grapes can be branded Champagne — often react fiercely to these attempted changes, which they see as major violations of the industry’s unwritten rules.

Wine growers told us about how they would punish some of the violators for undertaking actions that they viewed as inconsistent with the industry’s interests and status quo. For example, they might charge them higher prices for the grapes, deliver grapes of inferior quality, or cease working with them altogether. Some even told us stories of ostracizing and intimidating, including making threats of violence.

Our quantitative analysis showed that whereas the cost of the raw materials that go into a bottle of Champagne may run about 10 euros, growers punished Champagne houses that violated the unwritten rules in the industry by pushing it up to as much as 13 euros, putting them at a significant competitive disadvantage compared with other Champagne houses.

In our analysis, however, we encountered a surprising finding: The growers punished relative outsiders to the industry — new houses, houses located outside traditional Champagne villages, those who were not family businesses, or those who had been acquired by corporate groups (such as LVMH) — when they violated norms. However, they did not penalize the industry’s traditional houses when they engaged in the same actions.

Put differently, traditional industry insiders would be permitted to deviate from the industry’s established practices, but relative outsiders were not; they were punished severely by their suppliers if they challenged the status quo. This is an intriguing finding because it suggests one possible reason that relative outsiders often find it so difficult to initiate change: A new entrant is usually dependent for critical resources on the industry’s traditional suppliers, and these suppliers might not allow the firm to deviate from established practice.

As a newcomer, a firm may not be hindered by the usual inertia that afflicts traditional incumbents, but our research suggests that it may still be subject to “contextual inertia” — that is, factors external to the organization (such as its suppliers) that constrain its actions and compel it to abide by the industry’s traditional practices.

Insights for wannabe disruptors and incumbents

When industries mature, firms adopt habits and conventions that may not be cast in formal regulations, but that are nevertheless understood and followed by all parties. These conventions dictate what type of firms can operate in the industry, how payment for transactions takes place, how marketing is conducted, and even how people dress and talk.

Challenging these conventions is often difficult, yet it may be necessary when new technologies, changing customer preferences, and other types of disruption make the traditional ways of operating relatively inefficient.

Our research on the Champagne industry suggests that non-traditional players may find it difficult to act in non-traditional ways, because contextual inertia constrains them. Thus, outsiders should consider who they will likely be dependent on within the industry and how these players may prevent them from operating outside normal practice. Ignoring them may cause these wannabe disruptors to fail.

The research also carries a message for established firms in an industry: they may be in an especially advantageous position to initiate structural change. Their key partners in the industry will often allow them to move outside the boundaries of their traditional roles, thus enabling them to move ahead of the rest. This constitutes an opportunity for established firms that is not granted to others.