This subject will be a major theme at the upcoming HARDI conference in Palm Desert in November 2006. Since there is widespread industry concern about competing with the big guys, it is worthwhile to dive a bit deeper into the questions behind the question.
Independent HVACR wholesalers where the owner is also the senior operating executive most often ask the question about competition and the big guys. The management style of these business owners is often described as entrepreneurial. Most share competitive characteristics that include winning business by selling service. They usually employ a quality staff of long-term, loyal employees. The term “big guys” most often refers to the large HVACR wholesaler that has a national footprint and a large number of locations. Many are publicly owned, and they leverage their purchasing power with suppliers to provide lower prices at the customer level. What they lack in a loyal dedicated staff, they make up for by providing lower prices.
The questions posed by independent wholesalers demonstrates concern. They are apprehensive about what will happen to their business when the big guy moves into their market and offers significantly lower prices to their existing customers. In many situations, the big guy will try to purchase the local independent. Some independents feel high pressure to sell because they are facing an uncertain future in a different competitive environment. The question for many is, “Should I sell now while I have something or take the risks to continue in a tougher environment?”
I think that this is actually the wrong question to ask first. Although the question is certainly on everyone's list, you should answer other questions before answering the “should I sell” question. The problem is not about small competing with big. The real issue is, “Can experience-driven management compete with a professionally driven management team?” The real difference may be sophistication, not capital. This is a more painful way of looking at the issue because there is a general view that big guys can beat up little guys. Most of us learned this as small children. Looking at it in terms of sophistication creates a situation where the small guy can get defensive because there is an implication that they are lacking in some way.
An entrepreneur is someone who makes a capital investment in an environment of risk to generate a financial return. Using this specific definition, both the small guys and the big guys fit the definition, as they are both for-profit firms. There is a key difference in who takes the risk, however. Most small guys took their risk starting a business with their own money. Many owners have said that their spouses would kill them if they really knew how large the risk was in the beginning. Nevertheless, once the business is established and growing, many of these executives become risk- averse. They feel a need to watch their expenses closely, react quickly to opportunities and threats, and really work on intimacy with their customers. Growth is important, but not at the risk of breaking the formula that created success in the first place. The key to success for these executives is to stay in the game over the long run. In the small hours of the morning, many of these individuals recognize how fragile their businesses are. This situation can also lead to unrefined, seat-of-the-pants management, and that describes the majority of independent businesses in the United States. They work well in stable markets but face serious challenges in times of change.
On the other hand, the executive working for the big guy must generate growth and financial returns for the shareholders. If they don't, they are simply replaced. Since they don't have a “next-best” alternative, they are often more entrepreneurial than their smaller counterparts. They will take larger risks and manage more disruptive change because they have to. They have nothing to lose except their jobs. They have everything to gain, for example, bonuses and promotions. They will be well-versed in professional management tools. They will have learned to use vision statements, strategic and business plans, and financial budgets. They will have formal training programs, and sales management systems and structures at their disposal.
The small guys may have a cursory knowledge of these tools as well, but most executives lack the experience of using them every day. In fact, in many cases, these managers don't see the importance of formal management systems. After all, they got to this point without any of that big-company bureaucratic stuff.
There are many examples where smaller, customer-intimacy-driven businesses compete very effectively with price-leadership-driven larger businesses. Unfortunately, there aren't many examples of unsophisticated management practices surviving, much less thriving, against professional and sophisticated management systems. Perhaps the three real questions behind the question for small independent HVACR houses are:
“Do I have the experience and skills necessary to take my business to the next level?”
“If I lack the skills, where can I get them, and am I willing to go through the personal pain of change to implement professional management systems?
“Am I willing to take some serious capital risks to change and take my business to the next level?”
It is probably easier to worry about the big guys than to ask hard personal questions.
Michael Marks, Indian River Consulting Group, is a current DREF Research Fellow who consults with distributors and suppliers to make the changes necessary to maintain competitive advantage. See Marks during his keynote presentation “Succeeding in Today's Distribution M&A, David & Goliath World” at HARDI's 2006 Conference in Palm Desert, CA. For details and to register, visit www.hardinet.org/conference.