Some people have the erroneous idea that a small business cannot effectively compete against larger competitors. This concept is quite far from the truth.
For example, if someone were to ask you, “What is a major source of job formations in America today?,” what would you answer? If you said small business, you would be right.
How about this question: “What is the major source of newly formed individual wealth in this country today?” Again, the small business is the answer.
Why, then, is there such misinformation about the strength, versatility and wealth of small businesses? The answer is that usually large corporations garner the lion’s share of publicity.
We read about larger corporations, such as Microsoft, IBM and GE every day. That’s because, taken singly, each small business, in and of itself, doesn’t have a substantial impact on the national economy; whereas, the financial health of General Motors, for example, can have quite an influence on our nation’s economic health.
Chances are, we won’t read about your friend and neighbor who might be quietly accumulating substantial wealth through his/her small business. Yet, taken in the aggregate, small businesses make up a formidable force. The country simply cannot do without them.
However, we have to admit that one of the advantages that the big guys have over the small business is capital formation. Simply put, it is easier for them to raise money because most of the large businesses are publicly traded and have access to the public markets for funds.
For this reason, it is far easier for a publicly held company to raise money than a privately held one. Please read the article that I’ve written on the subject “Finding Dollars for Small-Cap Companies.” It goes into more detail on this subject.
However, you will find that the small business that is not publicly traded still has some options. Please read my article, “Searching for Capital: Small-Cap Options.” This article gives you some alternative sources of financing.
How Do We Compete?
Given the fact that the small business is critical to the functioning of the national economy, can it really compete against larger corporations? The answer is unequivocally yes! Let’s look at how this can be.
1. Creating a Niche
The small business can indeed compete, and compete quite effectively, if it differentiates itself from the competition. It does this by creating a niche.
A niche is a special quality or group of qualities that sets the small business apart from its larger competitors. It has also been described as a small, specialized business market.
Usually, one of the chief characteristics of a niche revolves around service. There is something special and personal in the service that a small business renders to its customers that sets it apart from its larger competitors.
Here’s an example. My wife and I both have luxury cars. However, we don’t always have them serviced at an authorized dealership. There is a wonderful neighborhood service station with a clean and comfortable waiting room where the employees know just about everyone on a first-name basis.
Their pricing is fair, their service is excellent and they invariably go the extra mile for their customers. It’s such a pleasure going there. Unless there is some particular reason (warranty, special expertise, etc.) that forces us to go to our authorized dealer, we invariable prefer our local service station.
Our neighborhood service station has differentiated itself from the competition by its personal service, convenience (they’re closer than our authorized dealer), and pricing (they are never higher than our dealer). These characteristics can be applied to any small business that has to compete against a larger competitor. For more information about niches, please read my article, “Is Your Company IPO Material?“
2. Employee Training
If a small business is going to act as though the customer is truly special, its employees must be trained accordingly. Also, they must work for managers whom they respect and who respect them. They must not be put on the “floor” to meet customers until they are thoroughly familiar with their product, be it food, auto services or any other product.
There have been so many times when I have encountered a disgruntled or incompetent employee. My first thought is that he/she was improperly trained. Usually, people want to do a good job and they want to be liked by their customers. They become frustrated when they aren’t given the tools to effectively and efficiently serve their customers.
3. Management Philosophy
I think that most of us are convinced that the philosophy and behavior of top management permeates an organization either to its benefit or detriment. The owners of a small business must know the goals (mission) of their business and how they intend to achieve these goals. They should be clear about what segment of the market is their target and how they intend to appeal to that segment. Therefore, management must know exactly how it will differentiate itself from its competition.
It never hurts to have a brief mission statement with which all of the employees are familiar. Ideally, in fact, everyone in the organization should have the mission statement memorized. That way, they are all focused on the same goal.
4. Good In-House Financial Management
It always saddens me when I see what is, in most respects, a wonderful niche business that has a nice slice of the market yet runs into financial troubles. Certainly, there are inevitable instances where even the seasoned businessperson (Donald Trump and his casinos come to mind — they recently filed for Chapter 11 bankruptcy) runs into serious financial trouble that at times forces the company to file for Chapter 11. For more information on this topic, see my article, “Bankruptcy Protections for Your Company.”
However, when I see an otherwise good, small business run into avoidable financial trouble, the cause is usually poor financial controls. Being on top of the financial health of your business is indispensable.
You must be particularly aware of your current and projected cash position. And, you should certainly create a realistic annual budget for your company that serves as a financial road map for the future. I discuss financial management in a previous article “Financial Controls for Small Business.”
So, how do we compete with the Big Boys? Well, keep in mind the Niche, Employee Training, Management Philosophy and Financial Management. It will certainly be to your benefit. And, of course, good luck!
Theodore F. di Stefano is a managing partner at Capital Source Partners and can be contacted at [email protected].