Thursday, September 2, 2010

How SME’s and Startups can beat MNC?

This question is often asked by SME’s, by VC’s evaluating companies and by startups discussing their survival plans.

In our family SME business of manufacturing equipments, my uncle often asks me how can he compete with big players? So far he has been successful with similar functionality product but with half the price than biggies. But how else can he compete and scale up his business?

I remember answering similar question when we developed and won Business Plan competitions for a niche software product startup while in B school. VC’s and evaluators were asking about how we would compete with MNC’s in that space and we were answering about product competitiveness. Our assumption was that rest will follow…How na├»ve we were!!

Now after few years of consulting experience and having seen working of both big and small companies first hand and also discussing with my peers across industries working in big firms, I am of firm view that small companies (SME and startups) can compete and beat Big Companies.
Though it looks counter intuitive, big companies have large scale for volume purchasing, R&D, product development, market reach, marketing spend, brand name but so do they have their own share of problems which comes with scale and quarterly stock market demands...

So how can SME’s beat Big companies?

1. Price:

Yes Price …Big companies are always in pressure to deliver profits and measured on percentage profitability (rather than overall profit). They have the limit to which they can lower their prices… They have large cost overheads which negates to large extent the advantage they get in scale driven lower production cost.

Big companies are run on profitability metrics for different products, customers and regions. Thanks to all these softwares and spreadsheets of business analysis that product line and regional managers can get profitability analysis by products, regions, customers in real time.

Big companies have different product lines. Earlier some companies, while bundling, used to reduce the price of one product line to make it up in other but as real time analysis is improving, these bundling decisions will get more complicated and might lead to internal fights across product lines…

Earlier if a particular account was very important to the Big Company, they sometimes used to penetrate this account with very low price even with negative margin. But this is become increasingly difficult as now with information about prices spreading very fast across regions and customers, a price discount to one customer can lead to lowering of prices across customers…

So bundling across product lines and selective price reduction in different regions or to customers are becoming increasingly difficult for big companies.

Small companies can simply lower the price and get big companies’ share.

2. Service – Profitability

Customer service is one of the most important areas, where Small companies can beat Big companies. The reason is that in most Big companies, Service group is a separate organization run with different metrics and profitability requirements. Keeping the Organization’s existing customers happy and increasing product sales is not the direct metrics of service organization. Service response from big companies has been a major frustrating point for most customers and small companies can leverage this strategically to beat big companies...

I have seen many SME’s providing free and quick service to customers and even keeping their service staff in and around customer premises. That can be the major differentiators for SME’s.

3. Silo – Regions and Products

Big companies have different silos, some companies have product level silos, and some have regional level silos. The different silos of product groups and regions are run by different profit divisions. Frequent M&A’s add to these silos.

There is very little collaboration (instead competition sometimes to chase same customers) across these divisions.

If the solutions demand the offering of customer solutions in different locations say India, Dubai and South Africa and these locations are part of different profit centers then I bet, big company will have hard time developing a good proposition and small companies can take advantage of this...

Similarly if customer wants solution combining different products and these products are run by different divisions then big companies will again have hard time.

I have heard instances where divisions even offer competitors product as part of their solution instead of sourcing it from other divisions. Their logic is that company’s other internal divisions are not flexible and are not giving competitive deal. Small companies can take advantage of this and deliver better solution.


On this collaboration note, in one of my consulting assignments I have seen CEO of a big European company desperately trying to have collaboration among groups and reduce overall company SG&A. Major areas identified were real estate (duplication of office buildings), travel savings thru bulk deal with airlines and hotels, communication savings with company wide plans and office supplies etc. Group CEOs of these divisions agree in principle but in practice their staff was non-cooperative and daily argued against this collaboration. If that is the situation of CEO driven initiative, one can imagine the situation across daily local sales decisions…

4. Response Time & Flexibility

With size, big companies can become very rigid and inflexible and anything which is not in their routine will be met with resistance, will require large response time and probably result in inaction.

Big companies are run by processes, guidelines and metrics and whenever there is deviation, there is problem. A typical employee in a big company is generally risk averse and instead of sticking his neck out and making decision, he will follow usual process and escalate to others, others will also do the same and ask for detailed business case/justification. This chain goes on till somebody takes the decision and if risk is more reward is less, it will be inaction...

This creates long response time and not appropriate action

Some of the examples of deviation can be pricing, payment terms, currency, warranty, inventory, delivery time, service level agreements, customizations, upgrades

Reasons can be analyzed from game theory and collective decision making, reward for right decision is little and personal risk of punishment from wrong decision is large which creates strong bias for inaction and risk averse behavior.

Smart small companies take note of some of the above inflexibilities on part of big companies and can turn them in advantage for themselves.

5. New Accounts vs. Existing Accounts


Conventional wisdom says that chances of success with new customer are better than chances of getting share from existing customers from competitors.

I have seen small companies focusing their energy on new customer accounts. These small companies face strong competition from big companies in new accounts.

I believe small companies will be better off, if they pay more focus on existing accounts of big companies. This is counter intuitive but true...

Why?

How many new customers you have got this quarter? A popular Wall Street metrics for gauging big companies performance

That creates strong bias for growth and business development in big companies focusing on penetrating new customers

Nothing wrong with that, but with limited resources this comes at the cost of existing customers.

Call it post purchase dissonance effect or inability of big companies to treat existing customers with same attention as new customers, the disgruntlement starts in existing customers. Some of the reason for this disgruntlement can be points discussed earlier i.e. poor service and inflexibility on part of big companies.

Existing customer’s perspective becomes that their existing suppliers are taking them for granted. If a small company comes with a better value proposition to these customers, the small company can replace the existing supplier (big company)

In one of my consulting assignment, CEO wanted sourcing of new vendors primarily because his existing vendors were not paying attention to his account. His existing vendors were not proposing any new innovation in pricing or in business model. In another instance, I saw a reverse auction being done for identifying new vendors only and existing vendors were asked not to participate in it.


6. New Products: Sustaining Innovation vs. Disruptive Innovation

This last point is about products. Why? Because most of the small companies in early phase deal with product issues more than other issues. As written in Clayton Christensen books, Innovators Dilemma and Innovators Solution, existing big companies are good at sustaining innovation.

There is no point for Small companies to develop a better featured product unless matched by lower price.

What big companies are not good at is disruptive innovation. Game changing innovations for a simple reason of fear on cannibalization of their existing product lines.

Often when disrupting innovation comes into the market, big companies purchase small companies and often run them as separate division till the market develops for these innovations.

There are many examples across industries where big companies missed disruptive innovation in their industry e.g. Kodak’s late entry into digital camera market, Nokia’s late entry into touch phone market.

During this time frame small companies can develop disruptive new products and can beat big companies in their own game...

Understand Big Companies

Apart from the above points, small companies need to understand psychological profile of MNC’s and Big Companies.

Till entrepreneur is running big firms, things are bit different (though run by whims and fancies of entrepreneur with less professionalism, firm does not have above disadvantages).

Later when a company is run by professionals, they run the company by

• Processes …not initiatives
• Review by metrics...
• Dividing and Managing divisions

This in turn creates
• Non risk taking behavior...and resistance to sticking neck out
• Expectation of sustaining existing venture vs. new risk taking approach
• Individual behavior for fighting for his silo and focusing on his review metrics
• Non confronting reality in market and competitive analysis…Bottom line is we are doing good

Reasons can be analyzed from game theory and collective decision making, reward for right decision is little and personal risk of punishment from wrong decision is large which creates strong bias for inaction, following process and risk averse behavior

So becomes difficult to identify problems for top management and CEO’s till it’s too late

Small Companies can overcome Quality Bottleneck

Often Big companies have advantage over small companies in Quality of Products. The product quality is improvised by following process approach over the time and here Big companies have advantage.

Quality Challenge small companies face is that they
• don’t have testing resources and facilities,
• enough customers in early phase to identify all problems
• specialized resources to identify and rectify problems

Here small companies can use outsourcing for rigorous testing to improve quality of their products.

There are already specialized software testing firms. For hardware and equipments testing third party companies are also coming up. Hence, they can help small firms to improve their quality


Inference

Small companies can understand challenges of big companies and take advantage of them. Many small companies have successfully done so, but we hear about them only when they become successful and large. I have seen small companies overcoming Big MNC’s in every industry with entrepreneurial zeal, focused efforts and good luck …

Latest one in Telecom Industry is Huawei… (Why Huawei is successful is for later post…)


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