Pervasive Competition
When we think about competition in business we have a pretty clear image in our minds. We’re thinking about rivals. People competing for the same customers as ourselves. People solving the same problem as ourselves. We differentiate our own business or product, by saying we do it better, more, faster, cheaper.
Coca Cola famously extended their definition of competition to include fresh, non-bottled water. Every time someone drank a glass of tap water, they weren’t consuming a Coca Cola product. Peter Thiel, in his fascinating book Zero To One, argues that we should avoid competition of any kind and seek to develop unique business opportunities with monopolistic characteristics. However, there’s one kind of competition that isn’t very often discussed. I’ll call it Pervasive Competition (hopefully an Economist will pop up and tell me its real name).
Think of animals in a very dry environment. What are they competing for? Water. Who are they competing with? Everybody. Likewise in business we’re all competing with everybody for a limited overall amount of cash. When you look at it in such general terms it’s not very informative — So let’s zoom in a bit again. Members of that “everybody” include our suppliers — and our customers.
So we’re in competition with our suppliers and our customers. And what we’re really competing with them for is Cashflow. For many small businesses this is actually the most brutal competition they will ever face. Many small business owners will never really get to grips with the reality of it — I know, since I was one and I didn’t.
A small web design company, for example, has potentially an almost infinite number of competitors, unbounded by geography, technology or any kind of globally consistent pricing. Still there’s enough demand and enough variety of requirements to supply a vast ecosystem of these types of companies. Most of them will not consider that other guy with the trendy T-shirt to be an existential threat. Instead, the biggest danger to the health of their business is a big customer paying them too slowly. Or not being able to meet their hosting bill.
In other words, many businesses are more likely to go out of business because of their customers or their suppliers, than for any other reason. This effect, as brutal as it is, is often subtle. That steady, old client who always only pays after 90 days? Well, you think, they always pay in the end. So I’m getting paid. You don’t focus on the way they’re competing with you. The way they’re holding back the lifeforce of your business: your cashflow. But they do understand, because they’re engaged — eyes wide open — in a larger struggle with their own customers. Meanwhile your suppliers are on a direct debit, the wages are non-negotiable and even the water cooler people have a simple way to keep you on 30 days credit.
One of the reasons we’re reluctant to think of our customers especially as competitors, is because we’re conditioned to try and please them. We think of ourselves as solving their problems and meeting their needs. We want to charm and delight them. And one easy, lazy way of doing that is by not kicking up a fuss over slow payments. “I know it’s a pain, but it’s our policy” — that’s a direct quote from an executive at a former customer of mine. What he’s really saying is:
So this competition between suppliers and customers everywhere has to be conducted with smiles and handshakes. The person who loses is the one who doesn’t know that it is a competition.
That’s not to say this is a zero sum game. It’s much closer to an Evolutionarily stable strategy, a concept which Richard Dawkins popularized in his book The Selfish Gene. The population of businesses competing with each other finds an equilibrium in which it makes sense to push things to a certain point and no further. Businesses can suffer reputational or legal damage if they don’t pay their bills. They can suffer inefficiencies if their suppliers are constantly going out of business. Still if your clients are persistently constricting your cashflow they’re controlling your potential for growth — and in a sense they’re keeping you exactly where they want you. Providing a stable service at an optimum size to service their needs — for example.
So what can we do to ensure we’re competitive in this sense? The best advice I was ever given on this topic was in two parts:
Make cashflow management a totally separate part of your business
It’s tempting to see collections holistically as part of the same handshakes and smiles process as sales. It isn’t. You think your good relationship with the client will help you get paid promptly. Well, maybe. But it’s just as likely to be used against you, in a kind of “hey we’re all friends here you know we’re good for it” way. You also worry that ill considered or aggressive collections will harm your relationship. Well, that’s also true. Just like sales, collections can require charm and persuasiveness. But it’s fundamentally different. Don’t allow the two to become entangled. Let the winged monkeys of credit control fly.
Positively monitor that part of your business
In other words look at it just like you would look at your sales division. When you create metrics (or as we humans call them “amounts of stuff”) to figure out how you’re doing, you probably think of them in two ways: positively and negatively. I’m not talking about whether the amount of stuff is more or less than it was last month. It’s not about whether the result is positive or negative. It’s about whether you view the thing measured as having a positive impact on your business. New Business Sales. Positive. Aged Debtors. Negative. You can turn that frown upside down just by calling that report oh I don’t know Payment Speed. Whatever. The point is, you should want to find yourself gloating over these reports, delighted to see how quickly your clients are paying you. Instead of reluctantly accepting it from a beancounter because he thinks you ought to have a look.
There are many excellent articles about cashflow management out there, but the key thing is to view this is a performing division of your business. Probably for many SMEs competing successfully with your own customers is going to pay more dividends than worrying about the jigs your rivals are dancing to try and steal them away from you.
