To flourish among giants (part 1): how mid-size companies can beat the odds.

Author:Kuhn, Robert Lawrence
Position:UNCOMMON WISDOM
 
FREE EXCERPT

Picture Gulliver beset by both Brobdingnagians and Lilliputians, not sequentially on separate islands but simultaneously on the same island. It is a land of monsters and midgets and our traveling hero is trapped. Without respite, he is pursued by mighty giants and badgered by crafty dwarves; desperately he avoids the lumbering ferocity of the former and eludes the darting torments of the latter. The giants step with pulverizing weight; the dwarfs revel in piercing arrows. How to escape and how to survive? The task is daunting, the outlook grim. Now switch mental gears from 18th century literary fantasy to 21st century economic reality and you cut an image of the mid-size firm--a company class, experts say, that cannot prosper.

Caught in the middle, stuck in between--goes conventional wisdom--is no place to be. The business of modest dimensions is just too small to confront the market power of huge enterprises and too large to outwit the opportunistic flexibility and low overheads of tiny ventures. Medium-sized companies, mashed by multinational mammoths and nipped by entrepreneurial gnats, are an imperiled breed. How to hide and how to swat?

One of the most widely repeated strategic axioms--and it seems a mournful one for smaller companies--concerns the relationship between profitability and market share. Some years ago it was shown that a difference of 10 percentage points in market share was accompanied by a corresponding difference of about 5 percentage points in pretax profits. On both sides of the production-marketing coin, big companies simply wield more muscle: economies of scale in procurement, manufacturing and other cost components; and market power in bargaining, administering prices and selling more units. The combination is potent, the results inevitable. For any given product, revenues received go up and costs per unit go down; individual items are made for less and then sold for less, further increasing market share and accelerating market control. The feedback here is positive, literally and figuratively, for firms that have dominant market positions, and negative, exceedingly negative, for firms that do not. Large firms, in the end, simply obtain higher profits for any particular product. A simple success formula to be sure, and a pathway to oblivion for firms at the other end of the spectrum. Mid-sized firms, proclaim MBAs with statistics flowing and spreadsheets calculating, are being pinned to the economic mat.

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