We are at a unique time in history. In the U.S., almost every major industry has become an oligopoly controlled by four or five large public companies. The consolidation of U.S. market power is both an opportunity and an existential threat to commerce as we know it.
Four carriers (American, Delta, Southwest and United) have a 67% share of domestic airline travel. Four companies have a 97% share of the cat food market. In wireless, T-Mobile and Sprint had no choice but to merge because Verizon and AT&T control 70% of the market. The larger the industry, the greater the consolidation of market power.
Since the dot-com bubble, the number of acquisitions annually in the U.S. has increased about 50%, while the value of those acquisitions has surged from $700 billion to $1.8 trillion. In other words, over the last decade, size has carried the day. For this reason, most CEOs view scale (and therefore growth) as a matter of survival.
When few companies dominate an industry, they take control of channels of distribution, thereby blocking entry by other providers. For example, in the beer industry, InBev has gobbled up craft brew brands including Modelo, 10 Barrel, Elysian, Golden Road and Shock Top.
InBev and Molson Coors maintain about 66% of industry share. The number of beer distributors has fallen from 4,595 in 1980 to around 3,000 today. In some major markets, there are two primary beer distributors: one controlled by InBev and the other by Molson Coors.
Here are seven ways small and midmarket companies can compete in a market with fewer customers and large competitors.
Attack on the edge and not in the middle.
When competing with larger companies, never go for the throat. When 5-hour Energy entered the energy drink market, it didn’t try to attack companies like Monster by selling into the largest addressable market. It developed a novel package and delivery system with shots as opposed to more traditional drinks in cans. It gained adoption at the checkout in convenience stores in lieu of waging a battle in the hotly contested refrigerated section.
Focus on niches.
It’s a universal truth that large providers attack large markets. That is the only way they can build volume and grow in any meaningful way. Smaller competitors should focus on small segments where they can win.
Optimize margins on the edge of the offer.
Ancillary services should provide more profit than your core offer. One of our clients, a printing supplies provider, decided to enter the market for selling printing presses. They were then able to extend into other ancillary services such as warranties and financing, which are much less commoditized, and thus much higher profit.
Leverage technology as the great equalizer.
Competitors are in an arms race to gain control of expensive technologies such as machine learning and artificial intelligence. Companies with unique technologies can outflank the competition, much in the way Square cornered the market for wireless payment technologies, making NCR and existing cash register technologies irrelevant.
Today, B2B suppliers are building integrated systems so they can provide powerful reporting and analytics tools to customers who are becoming more demanding about the data made available to them.
Provide white-glove service.
As part of attacking the edge, smaller companies can be nimbler than their larger competitors. Zappos takes on Amazon by making ordering and returns seamless.
Win with culture.
Your culture can be a tremendous point of differentiation. While competitors can copy your product, technology or channels of distribution, they can’t reproduce your people and culture. I came across a local law firm that had each of its attorneys create a video on why they became an attorney, fostering an emotional connection with their audience. Customers want to do business with best-in-class employers because of the people who serve them.
Be a buyer or seller.
Acquisition is the quickest way to grow, but acquisitions are also fraught with risk. Completing acquisitions just for the sake of growing is not a sound business strategy. Acquisitions based on cost savings rarely achieve the desired synergies. Focus on acquiring companies that will provide you access to new markets, customers or technologies.
If you don’t see a way to deliver more market value and want to get out, make sure you either have a proprietary product or technology, or three years of solid financial performance before you seek a transaction. Always use a qualified investment banker or other professional to ensure you extract the greatest market value.
In this age of market power, your brand and company can become irrelevant overnight. Make sure your team is committed to strategic planning and constantly evolving to fend off the threat of large competitors, or building capabilities to serve the growing needs of large customers.