The Paradox of Scale
How big companies can innovate in a world that favors the underdog
When it comes to driving growth, one of the most pressing problems facing Fortune 500 companies is that they are Fortune 500 companies. For years, being big has mattered. Scale created advantage across all aspects of the business. Become the biggest — so the logic went — and you would have unrivaled access to capital, global reach, expansive networks, and a powerful ability to spend — on the best in R&D, technology, marketing, sales, facilities, and people.
Driving Forces
Today, the balance of power has irrevocably shifted from big companies in favor of both smaller, nimbler upstarts and consumers. This is being driven by competitive market changes as well as significant new dynamics in consumer preferences and behaviors. The following trends are tearing away at the traditional benefits of being big while also turning the tables to enable small companies to flourish.
Consumers are losing trust in big brands.
Across categories, consumers are turning their backs on the industry leaders. Campbell’s CEO, Denise Morrison, summed up the state of affairs recently when she told analysts of the “mounting distrust of so-called Big Food” and its impact on their bottom line. From 2009 to 2014, $18 billion in sales of consumer packaged goods have shifted from large to small companies.
As of 2014, only 29% of consumers said they believe that name brands are better quality products, down from 43% just two years prior.
Consumers place more value on being unique.
Today’s consumers are more willing to embrace the smaller, local, and unique products and services that are tailored to their tastes.
People desire more personalized interactions.
Digital services as varied as Google Now for intelligent recommendations, Flipboard for tailored news, and Glow for data-driven fertility advice all enable increased personalization. Consumers have come to expect the companies they interact with to know who they are and what they prefer. It’s a move back to the day of the local shopkeeper that knew your preferences, powered by digital and the troves of data available on us. In the age of what Forbes has coined “me-commerce,” companies capitalizing on personalization are poised to win. For the first time since Interbrand began issuing their Best Global Brands Report 15 years ago, the top retail brand on the list was a brand that mostly does not even sell its own products. Ranking above Louis Vuitton and H&M was Amazon, which has an entire team dedicated towards personalization and recommendations.
The ankle biters are becoming serious competition.
Technology has given small companies the ability to punch well above their weight. They can now conceptualize, fund, develop, market, and sell their goods/services at a pace and cost base the big companies simply can’t match.
One look at the Pebble Smartwatch reveals how the nature of competition has changed. After surpassing their Kickstarter fundraising goal of $500,000 in just 17 minutes, they went on to raise $20 million for their latest watch, Pebble Time.
“The Pebble Time project will show that the real power and utility of our platform is not in money; it’s in community and distribution.” — Yancey Strickler, CEO, Kickstarter
The truth is that Kickstarter, in addition to being a fundraising platform, has also become a mega marketing platform for product companies. Add to that the principles of lean and iterative product development that many small companies are able to integrate, the speed and agility at which today’s new competition can enter the market is faster than ever before.
Business strategies are rapidly evolving.
Across many industries, access has begun to supersede ownership. Companies ranging from Spotify to Lending Club to Task Rabbit have shown how businesses that enable the sharing, borrowing, and “renting” of goods and services can create major competitive advantage in markets where the established leaders are burdened by high fixed costs, legacy technology, and organizational structures designed for the traditional competitive dynamic.
A now classic example is Netflix. As late as 2008, former Blockbuster CEO Jim Keyes stated that Netflix was not “even on the radar screen in terms of competition.” And yet within 2 years Blockbuster was bankrupt and Netflix was on pace to acquire over 65 million global streaming subscribers.
Here it’s important to consider two points. First, consumer demand for videos didn’t fundamentally change. The movies people rented from Netflix were the same ones they bought from Blockbuster.
Second, streaming videos was not unique to Netflix; in fact, consumers could stream videos from Blockbuster in 2008. What changed was that Reed Hastings made a strategic decision to go all-in on streaming. He knew the decision would hurt Netflix badly (leading to a 77% drop in stock price the 4 months after spinning off the DVD service), but he was betting on the fact that it would crush Blockbuster because their traditional advantages — retail network, inventory, sales staff — would quickly become unsustainable liabilities. It was a brilliant move that shows how quickly small companies can make the size of big companies work against them.
Taking Action
Given this dynamic commercial and consumer environment, it is little surprise that big companies are facing a situation in which their scale has been transformed from a killer asset into a real liability. So the real question is: as a big company, how can you take action in a way that gives you a good chance of succeeding? More specifically, in a world that favors the underdog and where change is inevitable, how can you embrace a new, more nimble approach while still harnessing your inherent scale?
