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Competing with giants

Competing with giants

This article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in July 2011 and is posted here by their kind permission.

Start ups must respond to aggressive and bullying tactics to survive
By Ed Hatton

The challenge
A small concrete pipe manufacturer with great customer service opened a factory in East London to support the local demand from local contractors and government. This reduced the cost and delays in transporting pipes and was an immediate success; turnover increased rapidly. The large and powerful manufacturers in this industry lost market share and reacted by slashing prices dramatically, absorbing reduced or negative margins with their substantial resources to attack the upstart. The new factory cannot match these prices and there is no product differentiation. Their question: how do they compete?

The Solution
Voltaire wrote that “God is on the side of the big battalions”, but I wonder if the Almighty would want to be associated with some competitive practices of large and predatory organisations. Entrepreneurs starting new ventures in competition with powerful organisation often face the kind of threats experienced by this questioner. The competition may be price based as in this case or it could be massive increases in marketing spend, cornering the raw materials supply, buying key staff from the start up and others. Many believe that free competition and entrepreneurship are the best routes to more employment, but sadly practices on the ground are often very different.

How can this entrepreneur compete? First off the entrepreneur needs to examine the competitive attack honestly. If it is free and fair competition the entrepreneur must compete on his merits. Business is a hard school and kindness to competitors is rare. But if the attack appears to contravene the Competition Act, which specifically prohibits abuse of a dominant position, then the Competition Commission should be called in.

Competing right now
Whether or not the Competition Commission is involved the entrepreneur needs to compete right now. He must examine the competitor for weaknesses. In this case the big brother has to deliver orders from another city. This leaves a gap for immediate deliveries, small quantities, just-in-time supply and similar customer services. There may be other weaknesses typical of large organisations; bureaucracy, slow response to complaints, reluctance to open accounts and long decision cycles. The entrepreneur must offer the opposite of these, and then make that fact known widely.

Customers are the key in this battle. In the face of a price war customers will always say that price matters, which is true, especially at the operational level where short term rewards are measured. But those same customers should be aware that if this entrepreneurial factory is forced to close prices are likely to go back to, or above, those reigning before because the large supplier may want to recover costs of the price war. The entrepreneur needs to keep reminding his prospective and current customers of this likelihood. Preference should be given to CEO to CEO discussions to promote strategic long term thinking, even if there are some short term disadvantages of supporting the local factory.

Multiple attacks
Another tactic the entrepreneur can use is author Tony Manning’s ‘flurry of blows’. The entrepreneur could involve the trade unions, the local councillors and the city business development office, because they should be concerned about the potential loss of local jobs. The company should use the advantage of local production to gain tender preferences for municipal work. It could do some creative bundling of prices, see if a local journalist will take up the cause, or ask for advice from the premier entrepreneurial magazine. It may be worthwhile to communicate with the CEOs or holding companies of the large competitors to ask if they are aware of, and approve the practices of their operation in the local region.

Clock is ticking
The entrepreneur will be acutely aware that the clock is ticking; he cannot forever fight off prices set below his costs. But he should also be aware that a clock may well also be ticking in the large company. Monthly and quarterly reporting will be showing reduced or absent profits, and someone will be asking how long this is likely to continue.

The more the entrepreneur can make this look like a long and uncomfortable battle for the large competitor the more likely a discrete return to normality becomes.

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