November 13, 2005

How Can David Beat Goliath?- Strategy #1: Create an Information Advantage!

Posted in David vs. Goliath, management at 12:10 pm by scottmaxwell

When I invest in emerging growth companies, I spend a lot of time understanding what the large companies are doing and to determine how the emerging growth (read “small and growing”) technology company will win against the large companies.

Well-run large companies have several advantages relative to emerging growth companies. These advantages can include a brand name, significant customer relationships, a “platform” of some kind in place that customers are using that they can “extend,” a significant set of functional experts in many different specialties, great senior management, and superior financial resources.

Better from the perspective of the small company, there are several advantages that the emerging growth companies have over the large companies. If emerging growth companies exploit these advantages while taking steps to minimize the large company advantages, the emerging growth companies are at a net advantage to the larger companies!

This series is intended to point out the opportunities and how emerging growth companies can take actions that allow them to win against their large competitors (note: while I put numbers against them, the priority order will depend on the particular product market of the specific emerging growth company).

The first Strategy is to create an information advantage:

 

The large company has a natural disadvantage…

What melts more slowly, a small snowball or a large snowball? All else being equal, the large snowball melts more slowly. Why? The outer layer of snow on the large snowball insulates the inner snow. The snow in the small snowball is better exposed to the outside world than the snow in the large snowball and, therefore, reacts to the outside environment more quickly.

A large company has the same basic geometry as the large snowball. Most of the company has much more difficulty getting a true feel for its “outside world” (for example, customers, the market, or the competition) than a small company. This has nothing to do with the quality of the people or the company. It is just a natural disadvantage that large companies have relative to small companies.

Small companies can benefit by exploiting this natural advantage…

Small companies could benefit if you execute to create and then exploit this advantage. The two major tactics that you need to execute against are:

  1. Create the advantage by maximizing the information you generate from the outside world, which includes all the information that you can get from customers, non-customers, competitors, suppliers, and others that are outside the company “walls.” (Note that I say information, not data. The key is to maximize the true useful information without overwhelming amounts of extra data!)
  2. Exploit the advantage by using this information to make adjustments to ALL aspects of your business. The information is important for all aspects of your business, including product feature/function, pricing approaches, specific technologies that you are using, your customer service process, your marketing messages, your distributions approaches, and every other “impression? that your company makes on your customers or prospects.

Below, I discuss some ideas for addressing the first tactic, which is all about creating the information advantage. Later posts will describe some of the ways to use the information advantage to exploit the information advantage.

…But they need to start by creating the information advantage

Emerging growth companies tend to be relatively customer centric by nature, as they need to understand the customer in order to get the first customer purchases (they also have the basic geometric features of the small snowball, which is helpful). Unfortunately, as companies evolve, they naturally lose touch with their customers, very similarly to the larger snowball. EVERY company has the opportunity to improve the information flowing into the company, and if you address the issue early in the company’s life, you will have a HUGE advantage against the larger companies as well as your smaller competitors. I list some ideas below, but all of the ideas should be tuned to the specific situation that you, as an emerging growth company, finds yourself in:

  1. Expose all employees to the customer! This is probably the most important activity that you can employ. The basic fact is that all your employees walk around with “mental models” of your customers, including their needs, the technology that will best meet their needs, how they interact with your product, the best approaches to helping them resolve issues, and the marketing messages that will best resonate with them. Your employees use this “mental model” in order to help them make ALL of their decisions including product feature/function, customer service approaches, and sales and marketing approaches. It should be pretty clear that the better their “mental model” aligns with the reality of the customer situations, the better their decision-making! It is HIGHLY important that all of your key decision-makers get the opportunity to interact with customers. If you are too large for all employees to interact directly, you should build some tools (written summaries, videos, audio interviews, etc.) that will give the remaining employees the exposure, as all employees need to walk around with the right understanding of your customer!
  2. Ask your salespeople. To the extent that you have salespeople in your company, “asking the salesforce” is a great vehicle for gathering information from their prospect and customer interactions. Good salespeople are talking and meeting with prospects and customers all day, and generally have a very good view on how the prospects and customers perceive your company, its products, messages, position in the market, customer service, management team, and etc. (note: you will need to put some filters on the feedback from the salesforce, as I have never met a good salesperson that does not want more feature/function, lower price, better customer service, or more resources to help them sell. That said, the salespeople can generally give you a laundry list of feedback and generally rank the feedback in level of importance. You will need to speak to several of them to help separate the overarching themes from the “one-off” situations.) The best activities are pipeline reviews, where you can get a very good understanding of each prospect situation and the outside-in views on your company (as well as where you stand in the process) and, even more importantly, Loss Reviews (essentially calling or visiting the prospect and nicely asking for feedback on “why did you choose the company you chose?” and “Can you give us feedback on what we can do better?” I would ask as in-depth questions as they are willing to answer!). Most loss reviews come from the eyes of the salesperson. My view is that loss reviews should be done by someone else, probably the CEO until the company outgrows the CEOs available time, as the loss reviews are probably the single best activity for getting feedback from the market.
  3. Utilize your customer service interactions. The other area that you can easily get a lot of data is by using your customer service interactions. Even if the interaction is highly automated, trouble tickets tracking is one of the best ways to determine how your customers are doing with your product and how you are servicing them. If you have customer service reps, listen to the phone calls, ask them about their interaction, and give them a small number of questions to ask your customers (and then gather the feedback). Also, once a trouble ticket is closed, ask your customer for some feedback on the process (Rackspace does this very well via e-mail).
  4. Monitor the Internet forums, message boards, blogs, and other sites. There is a tremendous amount of information available online these days. Most people reading this post already know what to do (if you don’t, start by entering your company then product name into Google and start reading!). The key is to do it!
  5. Ask your customers. Once customers have “purchased” your product (btw, I consider the ongoing use of a website with advertising as the payment method a “purchase”), you will find that most are more that willing to do what they can to give you as much information as you want, as they want you to continue getting better. User conferences, user advisory board, and user surveys can be great vehicles for getting great data. Another easy, short-term approach is to sit down with the customers periodically (and for an extended period of time) and really get to know them in depth. While it takes time and resource, there is nothing better to gather really useful customer information!
  6. Ask the industry analysts. Some product markets will have industry analysts (for example, Gartner, Jupiter, AMR) covering the industry, including the providers, the customers, and the prospects. The good analysts tend to have a good pulse on the perceptions in the market. (Note: you need to be careful here, however, as the industry analysts tend to have a large company bias.)
  7. Utilize your website. Another great vehicle for gathering information is incorporating data gathering, called web analytics, into your website and then mining the data for useful information. Beyond building better usability and conversion into your website, the web data can be very useful for improving various functions. For example, visitor interaction with your product pages can tell you a lot about their interests and interaction with your customer self service pages can tell you a lot about their issues with your products. Much has been written about how to go about executing web analytics, and I continue to be surprised how few emerging growth companies are making use of this information!
  8. Utilize your product. Another great vehicle for gathering information is incorporating data gathering into the product and then mining that data for useful information. When the product is browser-based, this is a pretty straightforward process of instrumenting you web interactions with the customer through the use of web analytic systems. When the product is on the customer site, the issues become somewhat trickier because privacy issues are more amplified and many customers do not want information flowing out of their computer systems. That said, many customers will still allow the information sharing if you ask them, if you have policies to restrict the actual information flow, and if you are legally and ethically “squeaky clean” with the approach (these concepts should be part of a browser-based approach as well). Two large examples of this approach are Google’s systems for browser-based information gathering and Microsoft’s Watson system for installed software (these are probably two of the largest product/customer information gathering systems in the world).
  9. Find out what the competitors are doing. Write down the list of things that you would like to know about your competitors and then get creative about how you are going to (legally and ethically) get the information. Some of the activities above can help you get started. You can also study their websites, visit their booths at conferences (if they market this way), and use Hitwise to determine where their Internet traffic is coming from (full disclosure, my VC firm is an investor in Hitwise).
  10. Find out what related companies are doing. Understanding the best practices of related companies can also help you. Do the same activities as if they are a competitor, but also call the person that is functionally similar to your position in that company and invite them to lunch to “share ideas.” You can probably get some good ideas and give some good ideas, as both sides will be more open given you are not competitors.
  11. Work the activities and results into your management systems. You probably have some level of formal management approaches at your company (if not, you should). Work this feedback into the management meetings, your company wiki, your e-mail, your management reports, your employee feedback systems, and all the other vehicles that you have to manage, monitor progress and communicate internally. You are gathering valuable information. You need to get better at it every day as well as share it!
  12. Finally, DO NOT DO EVERYTHING ON THIS LIST AT ONCE! This list is intended to be an idea generator, not a list of things that you need to do. If you try to do too much, you will actually be watering down your efforts and will actually get less useful information (remember it is the information, NOT the data, that you are looking for. Also, you need to spend the vast majority of your time building great product and then selling and servicing it! Start with the easy steps, and increase the activities as you grow!

 

A natural question is “why can’t large companies execute against the same tactics?” The answer is that they can, and some do. But, even if they do, they still have the natural disadvantage of the large snowball. If the large company and the small company execute these tactics equally well, the small company will have the edge!

Some companies may read the above ideas and either believe that they are already doing the activities or, perhaps, even go through the motions of performing a number of activities. The companies that truly execute against this strategy will really push to understand the customer and market issues and how they are changing and then do something extremely useful with the information (by adapting their product, customer service, sales, marketing, to exploit the information)!

My next post: Strategy #2: Create the Time Advantage!

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13 Comments »

  1. Scott, your advice superceeds all expectations. Have you tried publishing a manifesto at http://www.changethis.com/ I think your enumerative style is well suited for the format.

    Can’t wait for Strategy #2

  2. scottmaxwell said,

    Daniel, thanks for the thoughts. I checked out Change This (hadn’t seen it before). Great idea!
    Scott

  3. […] I used the concept of large companies being like a large snowball in my last post, when I was writing about the insulation that large companies have with the outside world. Another angle using the same snowball concept is from an internal perspective. Imagine that each of the people in the company is a snowflake in the snowball. If you have perfect communication in the company, each snowflake should get to know and share ideas with every other snowflake. So, what happens when the snowball grows? […]

  4. […] Create an Information Advantage! Most employees at large companies are completely insulated from their customers, simply as a consequence of their size. Small companies can use their size to their advantage by ensuring that all their employees have contact with customers. […]

  5. […] Make sure that you train the energy of the entire company on your chosen niche. Once you choose your niche, you need to get the efforts of everyone in the company focused on delivering to that niche (and only that niche). The magnifying glass needs to be placed at just the right point and angle to create the burn in the target point of the wood and, likewise, the staff of the company needs to be extremely focused on delivering against the specific needs of the niche (the information advantage will help as well). The activities that you need to get focused include product activities, marketing activities, distribution activities, and customer service activities. […]

  6. […] I try not to re-post other people’s thoughts, but this post by Scott Maxwell is too good to pass up.  I don’t care what your field of study, this post has something to offer those looking to do more than succeed as entrepreneurs. » Permalink […]

  7. […] While large companies in total have large networks, the staff of the new small unit generally lacks the “ecosystem? that develops around the best small companies. In fact, most large companies don’t even recognize that the ecosystem is available. This ecosystem includes quite a few individuals and professional groups that enjoy helping to build something great (strong personal satisfaction and economic incentives!), such as former and existing large company managers, accountants, lawyers, third party marketing, sales, development firms, and of course venture capitalists. These networks allow the small companies to tap into expertise and advice (for innovation) that the small units of the large companies have more difficulty tapping into. This is partly due to the information disadvantage and partly due to the scale disadvantage of the larger companies. […]

  8. […] At the senior manager level, it is true that some of the best senior managers are at the well-run large companies (I have not met anyone more impressive than Steve Ballmer, CEO of Microsoft, for example), but the amount of time the senior managers can spend on a given product market is very small as they have too much to do (see my prior posts on the information advantage and the time advantage, for example); therefore, the senior manager advantage is more perceived than real for an emerging growth company in a given product market (As you become large and gain more of the senior manager’s focus, this will become more of an issue…it will also be a great “problem” to have!). […]

  9. […] Create an Information Advantage […]

  10. […] Create an Information Advantage. The emerging growth company has the natural advantage of being closer to the customer that the large company. You can truly capitalize on this advantage by taking steps to increase the information flow into your company even more. […]

  11. […] Create an Information Advantage. The emerging growth company has the natural advantage of being closer to the customer that the large company. You can truly capitalize on this advantage by taking steps to increase the information flow into your company even more. […]

  12. Exactly what we believe. Before you do anything gain the Information advantage. Part of this is decision specific MR (Market Research), the rest and where many companies fail is to also invest in ongoing trend watching, some of this falls to BI (Business Intelligence).

    Our company believes that MR & BI needs to be combined, and we advocate “Gaining the Information Advantage” through combining VOC from survey data with client data bases and blog/text mining for a more wholistic picture.

    This idea was also touched upon in the most recent issue of the McKinsey Quarterly.

    Anderson Analytics, LLC
    http://www.andersonanalytics.com

  13. […] Scott Maxwell has a good post containing some good advice for startups. I think he’s more fully describing the “startup is more tightly coupled to their […]


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