There are really only three ways that a company can compete: cost, innovation, or customer intimacy. Let’s examine what this means for the typical small business.
Cost – This may be the great mirage of the small business desert. “We’ll sell to customers for less because we don’t have the big company’s overhead.” This may make a great advertising gimmick but it doesn’t work out so well on the net profit side. There’s a reason companies strive to scale their operations. After the fixed expenses are covered, every dollar of sales adds net profit faster. Being small might have certain advantages but the reason businesses want to grow is that they can become more efficient financially. That “big company overhead” gets spread over more sales. In industries that are highly fragmented with lots of small operators, one often finds consolidation taking place as a big firm “rolls up” or acquires a number of smaller, profitable and well-managed but smaller players. This amounts to cost cutting as the duplication is wrung out of the newly-stitched, bigger cloth. Price-cutting — to consider the other notion of cost — by small companies is usually a sign of desperation that doesn’t have a happy ending.
Innovation – Brilliant ideas often take shape in environments like small companies where there are fewer cultural barriers to trying out new concepts, risk-taking and otherwise coloring outside the lines. The disadvantage comes when it is time to exploit that brilliant idea in the marketplace. Small companies often don’t have or can’t quickly raise the capital required to put a game-changing idea into action. Of course, there are plenty of stories of big companies that squandered a fortune hiding inside an innovation by not taking action because of the competing goals and objectives in the outfit. A famous example is how Steve Jobs plucked the idea of a computer graphical user interface developed at the Xerox research laboratory (a minor investor in Apple at the time) and commercialized it to history-making success as the Macintosh. Can you come up with an innovation your market wants by solving a problem – perhaps by combining the ideas of others – but then exploiting the solution?
Customer intimacy – This has nothing to do with underwear but everything to do with knowing everything else about your customer’s needs as it relates to your products or services. The winner in the market in the long-run is the player who can understand what customers want and deliver it efficiently at a competitive price. Your intimate customer knowledge logically should also allow you to create innovative solutions and maybe even scale to the point where you can boost profits by reducing costs.
Which track will you concentrate on to compete in your market?