Traditional Firms Get More Room to Innovate 

The conventional wisdom is that new companies are more likely than established players to shake up an industry. Upstart firms are believed to be freer in their thinking, producing bolder ideas. And smaller, more agile companies don’t have to overcome as much inertia within their organizations to put ideas into practice.

But a new study of the Champagne market in France suggests that pattern may not always hold. This particular industry is strictly divided between growers, who sell grapes, and Champagne houses, which make the sparkling wine. Researchers found that when newer, less traditional houses adopted unconventional practices, growers tended to penalize those houses by charging higher prices. But when older, more traditional houses flouted the same industry rules, they weren’t punished as severely.

“It went against much of what we know in terms of innovation and who’s allowed to deviate,” says Amandine Ody-Brasier, an associate professor of organizational behavior at Yale SOM, who co-authored the study with Freek Vermeulen of London Business School. “We always think of outsiders as having the advantage.”

So in industries that fiercely protect the status quo, new companies may need to tread carefully. They might be able to dream up new ideas, but “your environment might not let you implement those visions,” Ody-Brasier says. “You may want to be careful, even if you are indeed an outsider and think of yourself as a potential maverick.” And, by the same token, established firms may find they have an advantage in launching new approaches.

The study emerged from interviews that Ody-Brasier conducted with 78 people in the champagne industry from 2008 to 2016. Those discussions made it clear that grape growers frowned upon certain behaviors by Champagne houses.

One such practice was purchasing vineyards to grow their own grapes. Growers saw this behavior as an attempt to undermine them.

Growers also objected to the practice of creating foreign subsidiaries to produce sparkling wines. Such wines couldn’t technically be called “Champagne” because they weren’t made with grapes grown in that region. But these tactics threatened the industry because sparkling wines competed with Champagne in the marketplace, growers argued.

Finally, some houses allowed their wine to be sold under a supermarket brand name. This practice was seen as devaluing the Champagne brand, which the industry markets as an elegant luxury good.

In an earlier study, Ody-Brasier and Vermeulen had found that grape growers charged higher prices to Champagne houses that adopted these strategies. But some houses seemed to be largely given a pass, and the researchers wondered why.

One hint was that growers described houses in very different terms. Some were called belles maisons (beautiful houses), which typically meant older, family-owned, independent houses in villages with a long history of producing Champagne. These were seen as traditional houses that had helped build the industry, and some growers spoke of them with “fondness, love, and even pride,” Ody-Brasier says.

But other houses were “clearly viewed as the pariah of the region,” Ody-Brasier says. Usually, they were newer, professionally managed, corporate, or located in villages without a long tradition. Some growers described such houses as “crooks” or “bottom of the barrel” and people involved in their operations as “a rat” and “a bandit.”

Ody-Brasier and Vermeulen wondered if growers retaliated differently depending on how traditional the houses were. For the new study, the team analyzed 64 Champagne houses and assigned each of them a “tradition” score from 0 to 4, based on its age, management, location, and whether it was independent.

The researchers then examined financial data, legal reports, and industry publications to determine which houses had engaged in the three “rule-breaking” behaviors. They determined the number of hectares of vineyards acquired and foreign subsidiaries established since 1998, as well as how many supermarket brands were supplied each year. Finally, the team looked up how much each house had spent annually on raw materials—which were mostly grapes—from 1998 to 2007.

On average, acquiring one hectare of vineyards was linked to a price increase of 0.06 euros per kilogram of grapes. Similarly, when a house opened a foreign subsidiary or sold to a supermarket brand, they were charged an average of 3.32 and 5.35 additional euros per kilogram, respectively. About 1.2 kilogram is required to produce one bottle of Champagne, so for a large Champagne house, those price hikes could add up to more than a million euros annually, Ody-Brasier says

But having one more point on the tradition score was linked to a price penalty reduction of 0.03 euros per kilo for vineyard acquisition. Penalties for a foreign subsidiary and supermarket brand also were 1.53 and 1.43 euros per kilo lower, respectively.

To figure out why, the researchers examined the transcripts of interviews with growers more closely. They found that when an untraditional house upset the status quo, growers often criticized their motivations—for instance, describing them as “ruthlessly ambitious,” trying to “game the system,” and caring only about their own brand.

But when discussing traditional houses that engaged in the same behaviors, growers seemed to believe that such practices were out of character and undertaken reluctantly. They would make excuses such as “it must be that they have no choice” or “there were a lot of extenuating circumstances.”

While the Champagne market is clearly unique, Ody-Brasier says it’s worth investigating whether similar patterns hold in other industries with strict norms. Established companies might worry that instigating change will be difficult, but “in some industries, you might be in an especially advantageous position,” she says.

Newcomers, on the other hand, might need to exercise caution. They should develop strong relationships with the organizations they depend on for critical resources, so that those people are less likely to assume their motives are nefarious, she says.

One way to establish trust is to adopt some traditional features. For example, a new nonprofit organization that aims to overturn its field’s conventions might signal legitimacy by getting funding from long-respected sources. By conforming in some ways to establish a traditional appearance, “you can get away with other types of deviations,” Ody-Brasier says.