August 14, 2015
When preparing an exit strategy, many business owners focus on operations and profitability, certainly two key areas.
But in many industries, external factors can pose a threat to business value that the best-run company may not be able to overcome. In a rapidly changing, volatile marketplace, it is critical to understand and proactively respond to the competitive environment before value is eroded.
Competitive forces facing most small companies can be characterized as consolidation, economies of scale, market reach, and technological advantages.
Consolidation – or the scenario of large fish swallowing small fish – is a symptom of the cycle of innovation, adoption and maturity. When a new technology is introduced, small companies spring up with their unique approach to the opportunity. Often there is geographic dispersion of efforts.
As the industry matures, larger players take control. It has happened in banking, beer brewing, agriculture and software. Even independent motels and hotels are being purchased by chains. Trends in your industry will reveal where you are in this cycle and if the best strategy is to sell to a larger competitor.
Economies of scale enjoyed by larger companies can influence access to vendors and distribution as well as pricing. This can pose a serious threat to the growth and success of small businesses unless they are savvy enough to differentiate themselves.
While price is a powerful motivator for customers, quality also plays a role. After customers purchase the cheaper, foreign-made product three times, they are more open to a slightly higher price for better quality. Are price pressures affecting your position in the marketplace, and what are the trends?
Market reach is often a function of advertising and branding. Certain industries are dominated by relentless advertising and a promise by companies that their price is the best. This is not necessarily true, however. Independent companies in the security and insurance fields, for example, are quietly fighting big company market share. Marketing and advertising are expensive, which does affect price, offsetting economies of scale, in some instances.
Technology is an area where small companies can either lead or be shut out. In addition to technology inherent in a product or service, operating systems, sales channels and payment methods are all affected. In fields where use of technology has transformed sales – lodging or books, for example – it is critical to implement the services customers have come to expect.
When larger companies raise the bar, small businesses must scramble to keep up, but this challenge has also opened the door to new opportunities. The Internet has leveled the playing field in a lot of ways, allowing small companies to sell right alongside national corporations.
In tandem with scanning the marketplace for competitive threats, it is essential for you to recognize your competitive advantages. These influence business value and can elevate your company into a leadership position in your market.
Competitive advantages include proprietary intellectual property or processes, vendor and customer relationships, and reputation and goodwill. Location might be an advantage in addition to longevity in business and connection to the community. Holding a market niche with a high barrier to entry is a value-driver if that niche is profitable and has a positive future outlook.
Awareness of threats and advantages can help you determine where your company stands regarding competition and how it affects business valuation.
This article was originally posted on August 14, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.