Lead or follow: Which is the better midsize business strategy?
By Fawn Fitter
Being the leader in your market niche is a worthy goal, but coming in second place also has its advantages. This article discusses the pros and cons of being a leader or a follower.
In Summary:
| • | Being a market leader requires higher-than-average comfort with risk taking. |
| • | Entering an established market automatically makes your company a follower, So base your midsize business strategy on responding to the market leader quickly and nimbly with a unique value proposition. |
| • | Becoming a leader in a niche market can give your company opportunities it would never find by following a bigger company in a larger market. |
In 1987, a small Seattle coffee company named Starbucks opened stores in Chicago and Vancouver, B.C., beginning its quest to bring European-style coffee culture to North America. Competitors saw a growing opportunity to serve this new market, but none of them could shake Starbucks from its leadership position. Instead, other coffee retailers chose to compete in other ways: proprietary roasts, special drinks, local identity.
Today, Starbucks is the undisputed ruler of the premium coffee market, with more than 11,000 stores in 37 countries. But many of its rivals, such as Emeryville, Calif.-based Peet's Coffee and Japan's venerable Doutor chain, have found their own profitable niches among coffee lovers.
While a midsize company rarely has the opportunity to follow the Starbucks model of market dominance, the coffee giant and its competitors are fine examples of the choice between leading and following—and yes, it can be a choice. Not every company can or should try to be a market leader. In fact, you may discover it makes more sense to learn and earn by watching the leader's mistakes and oversights. There is no "right" way to run your company, only the midsize business strategy that best suits its unique capabilities and competencies.
Reaching for the top can, of course, deliver big rewards in the form of revenues, profits, public perception and, if you are a public company, stock price. Yet all leaders must consider the impact of the inevitable roller-coaster ride. Changes in the market, good and bad, affect a leading company disproportionately, says Michael Metelits, business development manager at Goldsmiths College, University of London. During good times, employees are buoyed by the notoriety and financial gains. During a downturn, how will you keep employees motivated?
You need a corporate culture that encourages employees to accept risk and seek new ways of doing things, as well as leaders who are willing to consider ideas from all sources, he says.
The potential—and the potential fallout—of striving for leadership
After several years of connecting growing companies in need of business advice with faculty members at Goldsmiths College, Metelits can spot certain traits that mark a business with leadership potential:
| • | Responsiveness to change |
| • | Openness to new ideas |
| • | A simple supply chain, which minimizes dependence on outside influences |
| • | Most important, a flat organizational structure that allows employees to act without seeking permission from several layers of management |
These traits can take companies in two different directions, Metelits says. Incremental leaders capture their market by innovating better, faster, or more cost-effectively than the competition, while disruptive leaders challenge the rules of the market.
In an industry such as high tech, where conditions change quickly and new players are constantly emerging, incremental leaders can gradually take over. In slower-changing industries, on the other hand, one player can more easily create a disruption. For example, consider the typically conservative hotel business. Most hotels focus on adding amenities or introducing better pricing. But what if one chose to offer something truly different — say, eliminating rigid checkout times in favor of charging guests in 24-hour increments? "You would have a huge opportunity to lead that market by taking business risks other players don't take," says Martin Börjesson, a management consultant in Göteborg, Sweden, who has developed strategy and scenarios for companies such as Volvo.
However, this unorthodox thinking can be costly if it makes your customers uncomfortable. If you create a new product with little connection to your previous product line, you may have to spin off a separate business in order to escape customers' preconceptions about your company and its offerings.
This does not mean your business should limit itself to projects that are similar to your current offerings. It may, however, mean evaluating your company's reputation and image to determine whether customers will support a dramatic change of direction.
Following closely can be the best path to leading the way
Most of the time, a midsize company is entering an existing market. In this situation, your concern is not whether to follow but how to succeed. Like an athlete, you should spend less time watching the competition and more time focusing on your own performance, Börjesson says. If you concentrate on defining and pursuing what your company does well, your company will be better able to respond to what the market leader does and improve on it in critical ways.
For example, reputation management can be a powerful strategy, Metelits says. If your company becomes known for consistently providing higher-quality products or more responsive customer service, you can nibble out a small but significant market share. Over time, this advantage may allow you to surpass the leader, if only in one product or service area.
Another tenet of fast following is to explore sales channels the market leader is ignoring or overlooking. Spotfire Inc., a midsize software company specializing in visual data analysis, began by promoting its software as a tool for almost any sector. However, it soon realized it could not compete against SAS, of Cary, N.C., a global leader in business analytics and the world's largest privately held software company.
In response, Spotfire, based in Somerville, Mass., chose to pursue a niche market: biotechnology, a rapidly growing field with unique data sets. It customized its software for the industry and added more tools as it learned about customer needs. Within a relatively short time, Spotfire dominated the market for data visualization in biotechnology. Today, the company has offices in the U.S., Sweden, and Japan.
"Your choice," Börjesson says, "is either to scale up as fast as possible and be a gorilla, or find a niche and focus on becoming a leader there."
Fawn Fitter is a freelance writer in San Francisco, specializing in business and technology. She has written for publications including Fortune Small Business, Worthwhile and Knowledge Management.
