When Businesses Square Off with “Superstar” Competitors

The once–Fortune 500 retailer, famous for its ceiling-high inventory and large-percent-off coupons, succumbed to bankruptcy in early 2023, partly due to its inability to compete with newer retailers like Amazon. (The brand has since been purchased by Overstock and revived as an online retailer.)

Alas, Bed Bath & Beyond’s fate is hardly an anomaly. Bankruptcy can often be tied to competition from “superstar” businesses, which dominate a market space due to their size, scale, innovation, and other factors.

“These are companies whose products we use every day, from Apple to Nvidia to Facebook,” says Wittenberg Moerman, a Kellogg professor of accounting and information management. “We can’t live without them.”

For a smaller, often less-tech-savvy competitor, the presence of a superstar business can be bad news. Yet superstars may also have positive effects, as the professor notes: “They promote innovation; they push everyone to do better.”

To understand the impact of a superstar business on other firms in the same sector, Wittenberg Moerman and collaborators Stephanie F. Cheng of Tulane, Dushyantkumar Vyas of University of Toronto, and Wuyang Zhao of McGill examined the bankruptcy patterns of thousands of publicly listed U.S. firms.

They found that, overall, businesses that faced the most competition from superstars were 42 percent more likely to go bankrupt than unexposed firms. But several factors, including firm innovation and access to credit, mitigated this negative effect.

“Businesses that don’t figure out how to adjust to superstars are likely to go into bankruptcy,” Wittenberg Moerman says. “But if you have or can find protective mechanisms, you may not be affected or may even do well.”

Studying the stars

To study the influence of superstars, the researchers looked at a sample of U.S. publicly listed firms from 1988 to 2018.

“The main challenge we had was how to measure the effect of superstar exposure at the firm level,” Wittenberg Moerman says. That’s because most previous economic studies measured the industry-level impact of these dominant businesses. To address that challenge, they combined several different models and approaches from multiple past studies.

For example, taking cues from past research, the researchers defined superstar firms as those that were in the top five percent of market power for their product—which they determined by multiplying a firm’s profit margin by its sales—and those that experienced an increase in their market power over time.

Another part of the challenge was that several of the businesses in their study were exposed to competition from multiple superstars simultaneously. To that end, the researchers measured how similar a business’s products were to those of its related superstar firms (again as grounded in past research studies). “The more similar your products are to those of a specific superstar, the more weight the superstar gets when we consider exposure,” Wittenberg Moerman says.

The researchers also performed cross-sectional analyses on the business records of smaller firms exposed to superstars. This allowed them to assess what factors either led to their bankruptcy or helped them withstand the potentially negative effects of exposure.

In all, they observed data spanning over 110,000 years’ worth of the collective businesses’ operations.

It’s not all bad news

The results suggest both good and bad news for businesses facing superstar rivals.

Overall, high exposure to superstars increases a business’s odds of bankruptcy. Businesses in the top 10 percent of superstar exposure were 42 percent more likely to go bankrupt than those without such exposure.

But a closer look at the data revealed that this strong negative effect doesn’t hold across all contexts. For one, the more innovative a business is, the more likely it is to survive.

“If you’re a firm that’s not technologically driven, competing with superstars will push you toward bankruptcy,” Wittenberg Moerman says. “But if you’re a business that’s investing in R&D and developing patents, you’re less likely to be affected.”

The same goes for businesses that are accustomed to competition. “If you’re in an industry with constant competition and product development, you’re more used to this competition and less likely to be affected by superstar exposure,” Wittenberg Moerman says.

Businesses that supply services or products to superstars were also less likely to crash, as were firms with better access to credit.

“Good access to capital enables you to invest in changes to your company, and that will allow you to have a stronger response to superstars,” Wittenberg Moerman says.

The superstars of tomorrow?

Businesses across sectors can use these findings to better understand their susceptibility to superstars—and consider how they might protect themselves.

For one, smaller players could assess their strengths and weaknesses in terms of technology capability, innovation, supplier status, and access to credit, and then take the necessary steps to fortify their business. If unable to improve in those areas, businesses should at least recognize they likely face an uphill battle.

Though bankruptcy can be detrimental to individual firms and their stakeholders, however, the findings do not necessarily point to the need for more policy to protect smaller businesses from superstar exposure.

“Some people may interpret our findings to say big firms put small firms into bankruptcy,” Wittenberg Moerman says. “But it could be that they put inefficient firms into bankruptcy. We didn’t explore welfare implications [that might drive the need for policy changes], but future research can explore whether superstar firms might also help small firms innovate.”

After all, every superstar firm was a “small startup at some point,” Wittenberg Moerman says. “And that’s where we get the superstars of tomorrow.”