November 19, 2005

How Can David Beat Goliath- Strategy #4: Create a Scale Advantage!

Posted in David vs. Goliath, management at 8:46 am by scottmaxwell


Last summer I was walking across my front porch when I was stung by a yellow jacket. When I looked around there was a large number of yellow jackets circling around a hive attached to my house…then, I ran like hell until I got far enough away! I circled around the house, went in the back door, went to the front of the house, and looked out the window to see what was going on. There was a hive about 10 feet off the ground and 8-10 inches diameter with a stream of yellow jackets going in and out…

How did this happen? Where did the yellow jackets come from? How did the hive get so large with so many yellow jackets without my noticing?

The answers are that I did not see them come, I did not see them grow the hive, and I did not see the stream of them going in and out until one stung me. The hive and the yellow jacket movement were both away from my center of attention and was too small a scale for me to notice. Meanwhile, they methodically built out their hive…

(As a side note, it turns out that some hives get very large before they are discovered!)

Just to push the point a little further, I clearly am comfortable in my house and would not be interested in occupying the space that the yellow jackets claimed (too small, exposed to elements, etc.). Also, if a neighbor came along and started building a house on my front lawn, I would take notice (and issue) very quickly. The opportunity that the yellow jackets had came from the fact that they were building up at a small scale (relative to me) in an out-of-the-way place combined with the fact that I missed the signs (the yellow jackets flying in and out) that they were there and building there presence.

The Large Company Disadvantage…

My situation with the yellow jackets is very similar to the big company issue with small markets. Small markets and/or small competitors emerge that are away from their center of attention, too small and/or out of the way to notice until the market (or the now noticeable competitor) stings them (or perhaps doesn’t sting them if they know about the market and have decided not to enter it). Big companies don’t see (or are too large to care about) small, out-of-the-way markets nearly as well as emerging growth companies.

The emerging growth company opportunity…

Your opportunity is to pick a product market that is relatively small or latent to start and probably is “tucked out of the way? (like the yellow jacket hive). The small market most likely has special needs that you can uniquely meet and the latent market (that is, a market that has not been “discovered?) is even better (although more difficult to find), as you will have no competitors, large or small.

This niche approach has been around forever, but continues to be important. It is very difficult for large companies to attack or even be interested in small, special need, markets, which effectively gives you an opportunity to grow relatively undisturbed until you are notices. (And when you are noticed, you will still have the time advantage!).
This idea is easier said than done, but here are several ideas to help your thinking:

  1. Find a product market that looks interesting to the large companies, and then look for related markets that might be too small or out of their center of attention of the large companies, such as:
    • Focusing on a different geography, culture, and/or language
    • Focusing on a different scale point (for example, bringing enterprise software to the small business market or bringing consumer ideas to the business market for B2B companies)
    • Extending the product into a vertical market that has specific needs which current competitors may not be meeting.
  2. Find a product market that the large companies do not find interesting, but believe someone should serve. These types of situations are relatively straightforward if you ask the employees at the large companies about them. (This really happens…larger companies are really open when they are not addressing a market now or in the near term!)
  3. Find a small product market or latent market that one or more emerging growth companies are attacking, and study those. A great place to look for interesting new approaches are via Venture Capitalist websites (most list current portfolio companies) as well as the social tagging sites and blogs (I have found some really interesting ideas from all these locations!)
  4. (This is more difficult) Find the latent markets that look interesting that no competitor is going after. By definition, there will be no competitors, large or small. But, the market is more difficult to discover, as it does not currently exist. The best approach is to talk to a lot of people that have a propensity to purchase and/or use products that you have the ability to create and ask them questions about what their pain points are and what they wish that they had. If you hear the same answer several times from similar types of people, you might have found a good starting point to explore (be careful, however, as many possible buyers can’t conceptualize their true needs or may give you answers that are nice to have but they might not really pay for or even use…on the other hand, some buyers may have already innovated themselves and you can learn a lot from them).

This strategy may seem similar to creating the scope advantage, but it is very different. The scope advantage is about focus; the scale advantage is about what market you should focus on.
Interestingly, large companies will discuss having economies of scale, which can be an economic advantage. However, small scale can be a strategic advantage, especially for the emerging growth companies!

Next time: Strategy 5: Create the Innovation Advantage!

Advertisements

5 Comments »

  1. […] Create a Scale Advantage! 2005-11-19 Just as wasps can build a nest in your back yard, evading detection until there is an angry swarm ready to sting any passerby, small companies can set up in their big competitors’ markets without ever being noticed until they’ve won. […]

  2. Even when they notice you, they can’t do much about it in a short period of time asdie from FUD…

  3. scottmaxwell said,

    Great point Charlie!
    Scott

  4. […] 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. […]

  5. […] In a recent post, I described being stung by a yellow jacket that was part of a hive that had been built on my house. I discussed how it is possible for emerging growth companies to grow without being discovered (like the yellow-jacket hive). Ultimately, once the large company gets stung by you (or otherwise discovers you or your market niche), the large company may respond and try to take its “fair share” of your market (if it is aggressive, the large company will try to take more than its “fair share” of the market). […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: