Most new and growing businesses start out by identifying and serving a niche market. This niche might be a market segment or a geographic area not well served by current offerings. By developing a structure and a process tailored to delivering value to this niche, companies can typically make higher margins and returns.
It is often not that difficult to find a niche. They often occupy market-sizes below the ‘meaningful money’ radar of large companies. Despite the adage ‘Think global, act local’ there is still typically a cut-off point of ‘locality’ below which a large company loses too many economies of scale to really compete with an SME.
The challenge for many SME’s though comes from success.You build a nice and successful business to a certain size and then either the niche becomes interesting to a large company, if you have developed a new market, or you come to dominate it and you struggle to find further growth from it.
Your choices then are either to just accept a low or no growth future (hard to maintain staff interest and career progression), find another niche (difficult to find synergies so complexities of management abound with little competitive advantage) or to grow with the niche into the mainstream marketplace and start to face competition from much large competitors.The challenge of this final option is that big competitors are often ‘inept’ because the scale of their business demands them to be so. ie the demands of large scale process inevitably conflict with flexibility, though there are some exceptions to this. Consequently, the hardest challenge for an SME is to maintain their original differentiator in the face of the economics and operational demands of scale.
McKinsey produced an interesting article on PE ratios and hence market returns. This tends to reflect the fact that companies of similar sizes tend to be structured in similar ways and to produce similar returns, over the long term. It is good for SME’s to be self aware, so that as they grow they resist the factors that will influence their decision-making in the same way as their larger peers for as long as possible. Resistance may be futile but it is vital not to pick a fight head on with a much bigger competitor in a commodity market-place, so work on developing those differentiators that can scale for as long as possible.As Michael Porter said and I paraphrase ‘Be cheap or be different.’
One of the issues facing U.K. growth businesses as opposed to similar businesses in the U.S.A., is the earlier stage at which they are confronted with the challenges of internationalisation. Scaling a business is always difficult, but because of its domestic market size, companies in the U.S. do not typically have to tackle internationalising their business until later in their existence. Consequently, they have already developed some economies of scale, have typically retained more profits and have a more mature infrastructure before taking their first international steps.
It is much harder to achieve those economies of scale in Europe, when you are faced with much smaller domestic markets. Selling to Europe you and are then faced with a huge diversity of languages, cultures and numerous regulatory, tax and currency issues in order to address a similar population size, despite the E.U.’s single market policy. This works against some of the benefits of scaling the business as onetraditionally replicates overhead to cope.
If you have a product that is capable of digital delivery however then you can expand more quickly internationally than when faced with the logistical challenges of physical product distribution. At Interactive Ideas, a software distributor, we are using London’s strength as an international hub for budget airlines, its multilingual talent pool and technologies like VoIP telephony, to emulate the U.S. growth experience of S.M.E.s
In the digital world, there is no need for ‘bricks and mortar’ around Europe and the additional costs that creates. Out of our London offices, we can have native-speaking talent working any market as seemlessly as if they were locally based. I experienced this in the financial services industry in London 25 years ago, when I provided account coverage to Scandinavian institutions from London, just with the aid of a phone, a fax and some ‘carry on’ baggage! It is amazing how long this has taken to catch on in other industries.
Local market knowledge remains important. However geographic location is becoming increasingly irrelevant. Businesses need to be constantly revising their options on how to think local and act global. I am not sure that ‘The world is flat.’ but Europe is certainly heading that way.
Relationships used to mean a lot in business. However, following the 1981 recession (the first white-collar recession) and the rationalisation of business structures to save cost throughout that decade, people began to accept that to progress they would need to change employer with some degree of regularity. This had the effect of severing the trust relationship between customer and supplier as both sides increasingly found that short-term measures were used evaluate performance. The history of trust that might exist between customer and supplier increasingly became replaced by Service Level Agreements (SLAs), Key Performance Indicators (KPIs) and lots of other acronyms.
Today, a loyal customer is one who ‘honestly’ tells you when you are too expensive and gives you the chance to compete, instead of just coldly switching the business. It is a natural consequence of flattened hierarchies and larger scale businesses that we are all run by metrics. In turn, business becomes increasingly transactional. In a company, your boss doesn’t care how much work the supplier may save you or the times when they have ‘helped you out’. Instead, all they are interested in is how your suppliers’ performance contributes to what they are measured by…..and so on up the ladder.
When you are ‘on the outside of a business relationship looking in’ then these kind of transparent, measured relationships are great. The implication is that the relationship is a commodity and you know exactly what you have to compete on to win your way in. However, when you are already ‘ on the inside’, the metrics take away a barrier to entry for your competition and the relationship is increasingly reduced to a commodity.
This is a very American style of business in which history counts for little. On the positive, It makes for competitive dynamism, ensuring maximum economic efficiency. On the negative, it removes much of the fun from business. In the age in which there were many more major owner-managed businesses there was more continuity of employment and decisions could be based on a wide variety of factors and understanding of value.
Still there is no use lamenting the past, the message today is ‘Make sure you understand exactly what is key to your partner giving you business.’ Make sure you give them the best possible deal on those key measures and do not worry too much about giving them anything on top.’ If they won’t pay for it, it’s not value. If you want a friend, get a dog!