It can be difficult to compete with larger companies. To many, they seem to have all the advantages and no disadvantages. There are several reasons why larger competitors make tough competitors. This week, we’ll examine the advantages and disadvantages of the larger competitor, and how you can use them strategically to build more profitable business.
Why it is harder to compete with larger companies
First, from the competitive analyses we use in Simplified Strategic Planning, these are the most common advantages cited for larger competitors:
They aren’t just bigger – they have more of everything. Multiple locations, more people, more cash. This one can really feel tough sometimes.
Larger companies have more suppliers, more customers, more shareholders, and often a better developed network supporting their success.
If suppliers offer discounts for volume, the big competitor is more likely to get the best discounts, which leads to cost advantages. Most larger companies use cost advantages as a big stick to beat their smaller rivals.
If you are larger, you can have multiple locations and distribution centers that are strategically located to improve both cost and time performance.
Depth of skills
With more employees and greater size, these companies also have the ability to support very specific skills that smaller companies cannot afford.
With these advantages, it makes sense that competing with larger competitors can be a big challenge. It’s not unusual for a smaller competitor to have costs that are near or above the lowest prices offered by larger competitors, especially in heavily commoditized markets.
Advantages of being the smaller company
How can a smaller business hope to compete with all these advantages? As you might suspect, being smaller also brings several advantages.
The smaller company, with a smaller footprint, can change directions much more quickly.
Less need for volume to absorb overhead
Reaching your breakeven point can be a challenge when your overhead is higher. For smaller companies, it’s often easier because the small company isn’t supporting everything the larger competitor is trying to cover.
Closer to the customer
While economies of scale do come with size, size also can further separate the customer from key parts of a business. Routinely talking with customers is nearly universal in smaller companies, while their larger competitors may have layers of management between the customer and key decision makers.
A smaller company can do quite well with decent market share in a small market. The larger company needs to reach a higher gross revenue, and so needs more customers to sustain the business.
The best ways to compete with a larger company
For the smaller company, the good news is that there are plenty of examples of smaller companies holding their own that we can draw from. When taken as a whole, smaller companies tend to succeed when they pursue the following strategies:
Low volume can be very profitable if it comes at a higher price. While this means you may have to cater to more of the customers’ preferences, it also means you can be the best at the top level of quality, service, innovation or any other attribute your customers find valuable. A specialty strategy – targeting customers whose primary preference is not price – is the most common winning strategy for smaller companies.
Having an entire business built around a subset of the market may limit your size, but it also is much more likely to lead to strong market share, even when there is a large competitor who wants that business. The smaller company can succeed by orienting every part of the business to serving the segment of the market, while the large company needs to be able to serve multiple segments to reach their volume targets. Having a better, more focused market segmentation is a simple but successful way to beat the larger competitor.
Chasing changes in the market – or even pushing those changes – makes a lot of sense if your company is more nimble. This may mean focusing on innovation in products, service or even distribution. In a similar vein, the smaller company may have a greater ability to move in and out of markets as they change.
Real customer intimacy
Because the smaller company is usually closer to the customer – and is often more focused on a subset of the market – it’s possible to truly understand the customer better than larger competitors. This is not just true in sales – all parts of a smaller company can have more contact with customers. If you have a greater ability in this area, use customer intimacy and highlight it in your sales and marketing.
Finally, there is a general mindset that will usually lead to better competitive strategy for smaller companies: always be looking for ways to capitalize on the strengths of being smaller while avoiding the strengths that your larger competitors have.
If you’d like to learn how to use your strategic planning process to better compete with a larger company, we highly recommend you sign up for our 5-session Simplified Strategic Planning Seminar. This super-dense program tells you exactly how to apply the ideas in this article, and is full of tips to make your strategic planning work better than anything you’ve tries before.