I believe that continuous innovation is the key to a vital firm. Yet in looking for areas to innovate, many business leaders steer clear of markets adjacent to large companies, worried that the big guys will crowd them out. In times of economic pressure, however, these markets can create very fertile ground for new growth opportunities. This post will give you some tips on finding your own spot to set up shop.
Why Bigger Isn’t Always Better for Growth
I have spent most of the last decade successfully finding new vertical markets for Fortune 100 companies to grow into. A lot of that success was a direct result of helping big companies act like they were small, nimble organizations. Today I want to flip it around and talk about the advantages of being an entrant, the new kid on the block. Because there are so many constraints a larger company has to deal with, it’s much more likely that a smaller company will actually seize a growth opportunity in an adjacent market sooner – if they know where to look.
Where the Big Guys get stuck:
- Optimizing the existing workflow instead of innovating. The product planning, marketing and manufacturing systems in a large company are often set up around a tightly bounded set of capabilities that fit a known customer need. Scores of people get paid to refine and tighten these boundaries to make the firm more efficient and leaner in delivering to the core customer requirement. These feed into rigid, long-term supply chain contracts that lock in components and assemblies. When the Big Guy comes under financial stress, the pressure for optimization only gets stronger and more intense. This condenses the organization around one value proposition, making it less entrepreneurial.
- Rigid financial benchmarks. Because the organizational structure of a large company is based on providing a financial return that allows high levels of investment and overhead, any opportunity that may not contribute to these returns is distasteful to management. They just see that all the internal measurements indicate they should keep investing in what they know best — it’s the “bird in the hand” problem. Organizations grow more rigid in these models over time, and these financial benchmarks become hurdles to offering a product, system or solution.
- Experimentation is systematically eliminated. It’s very hard to develop the perfect product specification the first time around — the customer is unsure what they want and the company is unsure what to provide. Big Guy’s first foray into the emerging market is almost certainly going to fall short of its target. Not only that, but all the systems inside a large organization are set up to quickly extinguish so-called failures and move the funding to activities that demonstrate greater profitability in the short term.
The Small Company Advantage
As a small firm, the weaknesses I listed above are your opportunity. With some strategic tools, you can identify where the most promising adjacent markets are and move in quickly to develop and deliver solutions.
So how does a smaller firm take advantage of these constraints?
- Use inertia to your advantage. When you carefully review competitive product offerings you can “connect the dots” from past products to current. Rarely will the next product deviate radically from the previous, because the customer will demand some type of backward compatibility, and any retooling of supplier and production capability is very expensive. If you stay on top of key platform changes — such as the drum beat of hardware, or the next big operating system release — you can ‘time the waves’ and grab a niche while the Big Guy scrambles to keep up.
- Mind the gaps. Talk to the industry press, go to trade shows and pay attention to who presents on panels. Listen and watch, engage in discussion and develop a feel for who has real unmet needs. Look hard at the big guys’ offerings that have not been refreshed in some time and you’ll soon spot markets full of customers hungry for change.
- Team up with a customer. While the Big Guy has to do unending testing across his legacy platforms, you can actually sub your testing to your customer – if you are open and honest in your beta agreements.
- Practice the Pivot. You have light inertia to your advantage. Once you have the feedback from your first offering, it’s crucial to quickly center your offering on the core of the customer demand. Plan for this to happen and build it into your schedules. You can do two iterations for every single offering by the bigger player in your niche — and learning faster is your key advantage.
- Once you have a lead, run like hell. Stand still and the competition will quickly be upon you. Now that you’ve established your edge, forward movement is key. You’ve just intercepted the ball and you need to hightail it into the end zone.
There is a reason that the concept of being a “fast follower” is a dominant Big Guy strategy: it is much easier to follow the trailblazer than to find the trail and clear it in the first place. Don’t be surprised if once you have validated the adjacent market that you receive offers of funding and perhaps acquisition — that’s what made all that hard work worth it.
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