When small firms succeed against larger companies

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When starting a new firm it is important to consider your strengths relative to existing incumbent firms. Incumbents typically have many major advantages relative to startups – from brand recognition through financing and established customer relationships. By considering what you bring to the table, and your relative strengths, you can potentially identify ways to successfully compete. This article explores some unique advantages that startups often have – potentially allowing you to craft a strategy that can effectively take on (or avoid) the competition of established companies.

David vs Goliath: Avoiding head to head competition and taking advantage of your strengths

The biblical story of David and Goliath – how David was able to defeat a much more powerful warrior resonates with entrepreneurs. You may have many more established companies that you are going up against, hoping to succeed despite their much more established presence and resources. 

Possibly the key takeaway though is that David succeeded not by playing the standard rule of the game, but rather by identifying a way that he could overcome the stronger opponent (using a rock and slingshot to attack Goliath).

The same is true with firms – if you are going head to head on standard dimensions, of which the established firm is stronger than you, then you are unlikely to succeed. If on the other hand, you are able to identify your unique strengths, that can help neutralize or sidestep your competitors’ strengths, then you may be able to successfully complete (or co-exist) despite the incumbent firm’s much more prominent position.

Possible advantages of startups

No legacy resources, customers, and brand expectations

Possibly one of the biggest advantages that startups have is that they do not have the legacy business and associations of the established companies. While an established brand and customer base can be a significant benefit to established firms, they also place constraints on the company, limiting their ability to adapt or pivot the firm to areas that may conflict with what their customers are expecting.

Lower cost structure and willingness to pursue smaller opportunities

One thing that can help protect startups is that the opportunities being pursued may not be sufficiently large to justify the attention of a big company. If we think of a large tech firm, for example, they may be reluctant to pursue markets where the total market size is modest – even if it can be exploited profitably by a small company.

While a market size of a hundred thousand or a million dollars in revenue would be deemed a big success for lots of small companies, it may not be sufficient to justify significant management time for established companies, or their existing cost structure may make the opportunity prohibitively expensive to enter.

In effect, the limited scope of a niche may help protect smaller companies, who are able to pursue the market without attracting the attention or interest of more established companies.

Fast decision making

Startups can have fast decision-making. Due to a very flat organizational structure, startups can recognize opportunities, and act upon them much quicker than larger organizations are potentially able to do. While large companies are often beset with bureaucracy, making changes difficult to implement, and especially difficult to do so quickly, smaller firms can potentially change course and make adjustments more rapidly.

Entrepreneurial spirit

Beyond being able to make decisions faster, a startup team can develop a unique culture, potentially quite different from larger firms. This spirit within startups can allow creativity and exploration to be fostered, in a way that is quite difficult for a large incumbent firm to replicate.

Incompatibility with the incumbents business positioning

An interesting barrier that can shield startups from incumbents is if the startup’s business model is inherently incompatible with the incumbents. A classic example of this is the craft brew movement. Being ‘craft’, means being small, local, unique – essentially by definition. It is in many ways incompatible to be a large brewer of standardized beer, and to be a ‘craft brew’. In turn, the craft brew market has been largely protected from the entrant of large breweries – although some larger firms have entered by buying up smaller craft breweries, some would no longer consider mass-produced ‘craft brew’ to be the authentic experience.

Unique experience or business connections

Another benefit that startup founders can bring is their unique experiences and business connections. While oftentimes large firms will already have much greater connections and experiences, it is possible within a specific niche a founder may have more detailed insight and relevant connections. This may allow smaller firms to actually commercialize a particular product easier than more established competitors would be able to do so.

Putting your strengths at the heart of your strategy

While it is important to recognize your strengths – areas where you have potential advantages compared to established companies – if you are not taking advantage of these within your strategy you are unlikely to realize the advantage. Just because you are able to quickly pivot does not mean that you will be well placed against a large firm, if for example there is little advantage gained from quickly changing course.

Just as in the story of David and Goliath – having a unique strength – the rock and slingshot – is not enough. It is also important that the firm is able to identify how to use this to generate an advantage and develop an approach that capitalizes on the advantage that the firm has.

Final thoughts

Even possessing unique strengths, success is by no means a guarantee for small firms: in fact, most small firms fail. However, by thinking through where your strengths are – and on what dimensions you are better placed than established firms – you can develop a strategy that is able to leverage your advantages to successfully compete in a market. 

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