I love small businesses - I advise them and have started a couple of them - but I have to admit, owning a business today is harder than ever before.
A successful business recipe used to consist of the following:
hard work + a fair price + good customer service = successful business
Now, that recipe is no longer enough.
The Problem For Small Businesses
I recently saw a friend of mine post on Facebook of his personal list “evil businesses” that he tries to never shop at. He is a great businessman, great with people, and has a great business model. But he understands that certain “evil businesses” (as he calls them) have changed the rules for small business owners. So out of his frustration of the day, he shared with us his list.
The top of the list? Walmart, Costco, and Dollar General.
Of course there were many people commenting on his post defending some of these businesses. Some find employment there, some claim local economic benefits, while others claim to save a lot of money each month because of these businesses.
But I agree with him. I understand that for every Walmart, Costco, or Dollar General, several local businesses - businesses that are part of the community and give back to the community - do not exist.
In fact, I remember being in a Walmart store several years ago and was shopping in the outdoor/garden section. I had quite a few questions about my several outdoor projects for the associate who was assisting me and was taken back by his knowledge. I never recall getting this kind of service at a Walmart before or since.
So I asked this associate how he knew so much about all of the equipment and tools we were discussing. His response? He used to own a small retail store that sold the same tools and equipment, but it went out of business. He didn’t know where else to work. Where else his skill set could be used. So he had found a new home in Walmart, no doubt working for nearly minimum wage.
I was really taken back by this.
I found it ironic -and sad- that it was extremely likely that he had found a new home with the same company that was likely one of the reasons he went out of business. And now he could barely get minimum wage for a lifetime of experience and knowledge.
Big Businesses Have Economies of Scale
Small businesses have trouble competing with large businesses for a number of reasons which are not going away any time soon. Most of these reasons have to do with economies of scale.
Economies of scale is a term to describe the advantages that large corporations get due to their size. This advantages can range from cost savings to employee skills to efficiencies in distribution channels. Basically, large corporations are able to benefit from their size.
The following examples illustrate a few of the advantages that larger businesses have over small businesses:
Big Businesses Have Buying Power
Large organizations have a greater buying power than small businesses. This happens because a big corporation is able to buy inventory in very large, bulk quantities where suppliers are willing to give huge price breaks that are far below what they would sell the item for in a smaller quantity.
To explain, I remember a friend of mine who used to operate a game store. His business model was built around finding unique and new games that were not available in the large retailers. His revenue stream was built on a few best sellers that were only available in his store.
The problem he would run into, however, was that as soon as one of his unique games was picked up by a major retailer, he often found that it cost him more to get the game from his supplier than it did to purchase it directly from the large retailer.
Basically, he found himself buying games at Walmart to stock the shelves of his small business.
As you can imagine, this isn’t a sustainable model as the price differences would soon adjust to the demand and he would no longer have a best selling game.
Big Businesses Have Specialized Expertise
Entrepreneurs excel because they are able to dive into anything and figure out everything. This has been how small business owners have operated for years.
If a cash register needed fixed or an outside lightbulb needed changed, the small business owner would take the bull by the horn and figure it out.
But today, a help desk in Green Bay can fix a computer in Miami in a tenth of the time it would have taken an entrepreneur to figure it out. Or, a campus maintenance technician can change out the light bulb on minimum wage so that the CEO can continue to focus on directing the finances of an organization.
The problem is that when an entrepreneur dives into “anything” to figure it out, they are automatically putting themselves behind the efficiency curve set by larger corporations; the lack of efficient, specialties makes it hard to compete.
Big Businesses Make Impartial Decisions
To further understand how big box stores Big box stores like Costco or Walmart make decisions that benefit their larger (often international) stake holders, not the local economy. Therefore, they are able to make decisions that benefit the bottom line.
For example, a large retailer may only carry a few name brand items they purchase at bulk prices rather than offer local products from local retailers where the bulk discounts really aren’t available.
Small businesses, on the other hand, are built around the local economy. Therefore, they tend to make their decisions based around the local economy rather than just the bottom line.
The result? Local businesses tend to offer and sell goods at higher prices than the cheaper national brands that can be purchased in bulk quantities by the large retailers.
There Is Hope
Now, before you give up in despair, there is hope. Yes, small businesses can compete with big box stores.
You see, most of the above advantages of a large business relate to what?
I know, I know - price IS a big factor for many people.
At least, in theory.
Many of my friends have told me they shop at Walmart to save money. Yet, how many of them are willing to purchase a bottle of water at a hotel or gas station for nearly $2 - an amount that would get them over a dozen bottles at Walmart or Kroger?
So why do they say that price is important, but yet are willing to pay outrageous prices from time to time?
Because there are more factors in the purchasing process than price alone. Things like convenience, customer service, and relationships all still play a factor in how and where people buy.
And this is exactly why innovation is so important in business.
The Importance of Innovation in Business
My point in this article up to now is that competing with a large cooperation on price is a loosing battle - the large “evil business” will win every time.
But price isn’t everything.
And this is the reason innovation is imperative to the survival of any small business. Innovation is the competitive advantage that allows small businesses to compete with the large, “evil businesses” of the world.
Three Reasons Innovation is Important to Small Business
I would like to share with you three reasons why innovation is absolutely vital to the success of any small business.
Innovation Fosters Flexibility
One of the ways a small business can compete with a larger business is that a small business has an ability to be flexible. While a large organization may trip over itself in bureaucracy and internal policies, a small business is able to quickly pivot to adapt to the needs of its customers.
This is important because a small business can test different methods of doing something and adapt and evolve to the most beneficial method. But in order to do this, a small business must be willing to innovate - to change the way things are done in order to find a better, more effective way.
The Riches are in the Niches
Over the last decade, many industries have become saturated like never before. In addition to severe saturation, large corporations have gained even greater economies of scale that take many small businesses out of the game, at least when it comes to being able to compete on price.
To combat these challenges, many of the great entrepreneurs have “niched down” into unique market segments rather than just serving the general market.
In order to discover many of these niche markets, businesses must be willing to change what they have done and look for innovative ways to serve their customers. Innovation is one of the best ways to create and discover niche markets with limited competition.
Innovation is Essential
In summary, innovation has become an essential component of keeping up with the competition and can no longer be viewed as a luxury.
The bottom line is that businesses that don’t innovate will be left behind. They won’t be able to compete on price alone, and without innovation, what is left to compete with?
And innovation isn’t just a matter of keeping up with the competition - customers expect innovation.
Customers Expect Innovation
In an economy where consumers are becoming accustomed to replacing their phones, computers, and televisions two or three times more frequently than they did just a few years ago, don’t be trapped thinking that they don’t expect improvements in your business.
If a competitor rolls out a new product or service, you should expect a number of your customers to jump ship due to the change.
Don’t believe me? Then why is it that every bank in the country offers essentially the same products and services? It is because bankers, while usually slow to innovate, understand how much consumers desire, no, demand innovation.
An example of this is remote check deposit.
Remote check deposit (or whatever your bank calls it) is a product where a customer can take a picture of a check on their smart phone and electronically deposit the check to their account without ever needing to be physically present in the bank.
When this product was first announced, most of the bankers in the country thought they would never offer this product because the risk associated with this product was too great (such as fraudulent or re-deposited checks). But in just a few short years, every bank in the country is either in the process of rolling out this service or highly considering it.
They aren’t rolling this service out because it is great for the banks who offer it. They are rolling it out because consumers are demanding innovation - if they don’t offer this product, consumers will go to a bank that does offer it.
And this is the importance of innovation in business. In small business.