How Small Companies Can Go Global

MOST observers would agree that some truth lies behind today's faddish rhetoric about globalism and international markets. More than ever before in developing business strategies, companies must think in terms that cross national borders, because markets indeed are increasingly worldwide. But can small and medium-size firms really become global with any hope of success? The quick answer would seem to be a resounding ``no.'' In many markets, worldwide demand is served by a small number of huge corporations competing head-on with standardized products. Examples include bicycles, auto parts and tools, television sets, and heavy construction equipment. The alleged converging of global consumer tastes, the economies that larger companies can realize in production and marketing, and the gains of experience with longer production runs all seem to favor the giants.

So should smaller companies surrender the field? Absolutely not. By adhering to five basic principles of competitive strategy, small ones not only can survive, they can actually take advantage of their larger rivals' lack of flexibility and prosper.

Principle 1. Don't compete head-on with a globally competitive company. Look instead for particular market niches that only a smaller firm can fill.

To take full advantage of the economies of scale, scope, and experience that their large size affords, global companies must usually concentrate on producing goods of relatively average quality that are sold at average price to the average consumer - the broad middle of the market.

But this fact of life of global competition leaves open natural product niches for smaller businesses. Introducing products that are extremely high or low in quality, price, warranty coverage, durability, design, or any of a myriad of other attributes can often put a product out of reach of the competitive power of the global giants.

Principle 2. Choose markets and strategies to which the dominant companies will have trouble responding. If possible, tailor these so that the obvious competitive response by global rivals will boomerang against them.

When Bic first entered the low-priced pen market, Papermate, the market leader, hesitated in responding. Introducing a low-cost direct competitor to Bic seemed likely to cut into Papermate's profits. After several years of inaction and declining market share, Papermate did come after Bic with its Write Brothers line. But the response was too late.

The point is that new, agile entrants into markets hold a natural advantage over global giants, because any competitive responses by the latter would most likely cannibalize its own products.

Principle 3. Choose markets so as to minimize the advantages of the dominant global companies. This means to stay out of markets where the advantages of large-scale production are substantial, where size leads to synergy in production and in research and development, and where long production runs lead to much lower costs. Ever since the days of John D. Rockefeller at Standard Oil, these strategies have been the staples of the giants.

Focus on market niches that require sufficient technological research and development to slow the rate of entry of new companies, but not so much that global markets are needed. Look for markets in which technological advances are made at moderate cost by companies working directly on product development.

In terms of geography, think about segments far from the manufacturing sites of the global giants; they may not want to incur the transportation costs. Or try to take advantage of local governments' antipathy toward foreign global companies, even of the growing protectionism that seems to accompany the globalization of markets.

Principle 4. Choose markets and develop strategies that play to the strengths of smaller companies: flexibility and speed of reaction to changes in the marketplace. This holds in selecting markets when styles change often and especially in choosing distribution channels.

For example, Timex focuses on drugstores and department stores with its low-priced watches, channels that the dominant Swiss watchmakers find unavailable because of their longstanding relationships with jewelry stores. Lands' End Company avoids traditional wholesale and retail channels by selling its clothing through catalogs and toll-free telephone lines.

Principle 5. Stay fast and lean. Remember who the competition is. Always keep in mind that the global player will most certainly have a cost and price advantage. Keep options open, especially that of getting out of the market quickly. Lease or rent fixed assets, don't buy them. Try to use machinery that has multiple uses.

Can small or medium-size companies compete in global markets with the giants? Yes, as long as they consider their strengths and the dominant companies' weaknesses. By its inherent ability to respond quickly to changes in product tastes and demands, the smaller company can, in effect, compete with global corporations on its own terms rather than theirs.