The Australian Small Business Blog

Wednesday, February 22, 2006

How Business Davids can overcome Goliaths


In the story of David and Goliath, young David challenged the mighty Goliath. King Saul wanted David to wear his armour so that he could fight Goliath in the traditional way. But David chose to forgo the armour, used a weapon of his choosing, and relied on his own speed, and was ultimately successful in slaying the giant Goliath.

Small business owners viewing the Goliaths of their industry slugging it out using all the marketing weaponry in their well stocked armoury, can be daunted by the battles raging around them. And if they choose to fight them with the same weapons, they have much to fear. For large businesses, economies of scale is their most potent weapon. A very powerful weapon. But like Goliath, their strengths are also their weaknesses.

Relationships
The biggest point of vulnerability for business Goliaths is their need for volume, and their inability to react quickly to changes in the marketplace. For small business, this means that relationships are the key. It is the flexibility to do the little bit extra without having to go back to head office for approval. It is the continuity of the relationship between a business and its customer, and the ability to customise its service.

Using the banks as an example, we have seen a number of smaller banks flourish because of the relationships they have had with their customers. The response from the big banks was to acquire the smaller banks (and their customers). However, the efficiencies that the large businesses gain with their economies of scale create a negative impact on individual relationships with their customers. While local staff do their best to nurture their relationships, their authority is limited, and they do not stay as long as staff do in a small business. In the end, all their customer relationships, except with their very largest clients, become transactional. While computer systems can help ‘personalise’ these relationships, it is a relationship with a system rather than a person. When mistakes happen- and they are inevitable in all systems created by humans, they tend to be very difficult to rectify as any human relationship can be spread over many individuals. And it is impossible to talk to the boss to sort things out.

One Size Fits All
As Goliaths depend on volume, they must target as large a segment of the market as possible. Hence the need for one size to fit all. They are unable to survive in a niche as no niche is large enough to pay for the overheads. For a business David, finding the right niche and tailoring services for those customers in a way that is impossible for Goliaths, is a way to take their customers away from them.

Price
Small businesses in competition focus all too often on price, which is one of the Goliaths biggest weapons, through economies of scale. It is a mistake to fight on Goliath’s turf. And you should be aware that price is only the fifth reason people buy. A recent survey showed the top five reasons someone buys, are:

1. Confidence that your products and services will meet their needs
2. Quality of the product and service
3. The level of service that is provided
4. Selection or range of offers
5. Price

Just knowing this creates a massive advantage for any business.

Market Share
Market share is something that all Goliaths focus on. They study the movements of their share, and those of their Goliath competitors. But everyone else is in a group called ‘Others’ usually totalling around 10% of the market. THEY DON’T MONITOR MOVEMENTS IN THIS SECTOR. It is not important to them. This becomes another big opportunity for business Davids.

If you are a small business that has 2% of the market, and double your share to 4%, they don’t notice. You could double it again before they even are aware what you are doing. Therefore, a small business can build up great momentum before a Goliath notices and takes retaliatory action. Goliaths can’t double their share without coming to the attention of the competition regulator. Such a feat would normally only be possible with a takeover, or failure of a major competitor. Goliaths can only make small gains in their markets- because they are so big, although their strategy may be to grow the market with new products and services, which is great for everybody. Or to cut costs which may have a negative impact on quality and customer relationships.

This creates huge advantages for business Davids. With smart marketing initiatives, they can steal market share from all their competitors without them being aware what is happening until much later. The competitive response from Goliaths will be very slow and may not occur until you get above 10%. And is likely to be around price, which as you now know is only the fifth most important reason people buy from you.

Marketing
Goliaths rely heavily on advertising to reach their mass market to create volume. For Davids, advertising is too often the most expensive form of marketing. Fortunately, there are much cheaper forms that bring you much closer to your customers, such as a pro-active word-of-mouth strategy. Goliaths use these as well, but as these are less effective in mass marketing, it is not their area of focus. So business Davids should choose the marketing weapons that give them an advantage.

Business Systems
The one thing that businesses Goliaths do very well is to systematise their operations. This provides consistent quality and helps control costs. This is one thing that small business should copy from big businesses. As most small businesses have poor business systems, it is not difficult to out-deliver your competitors of similar size, just by having even a basic system in place. And you certainly need that when you are up against Goliaths.

Conclusions
Business Davids have an advantage over Goliaths in a number of key areas. They can make their service personal, and tailored for the individual. They can focus on a niche which has special needs unserviced by Goliaths. They can more easily compete in non-price areas, and can steal market share before they are noticed. And they can choose marketing strategies that place them at an advantage over Goliaths. But they must have systems in place or else they will be unable to deliver as their business grows.
Dr Greg Chapman is the Director of Empower Business Solutions

1 comment :

Stuart Evans said...

Greg, very informative and well written. Would be very interested to sit down with you and discuss further.

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