WHO’S AFRAID of the Big Bad Wolf
May 1, 1999 12:00 PM,
Every night, I read a book to my youngest, Eric. His favorite book is aboutthe wolf and the three little pigs. He is fascinated by the fact that a bigand bad wolf can actually blow down a house. I am not sure whether it isthe wolf’s ability to blow down a house or the wolf’s name, Mr. Big Bad,that piques his interest. In either case, he is simultaneously fascinatedand scared.
The big bad wolf no longer scares us, right? I am not so sure. With all ofthe industry consolidation and acquisitions going on, one of the majorthemes I constantly hear is fear of the big and bad wolf (BBW). In thiscase, the BBW is a large, faceless public company that is gobbling upmarket share and competitors at the wave of a hand. With all of theindustry gossip surrounding this tidal wave, we all sit and wonder toourselves, “Will I be next? Can I compete? Or, will my company go the wayof the dinosaurs?”
Acknowledging the presence of a change in such market dynamics as the entryof a new competitor is one thing. Being consumed by this event, however, isan entirely different matter. With the fear of the unknown, like a BBW, youcan create a never-ending cycle that causes you to retreat instead ofattack or surrender instead of putting forth a Pattonesque advance.
You may be thinking that, as a writer, I know little about the threat ofconsolidation by the big boys. Well, not exactly. In 1994, our specificmarket, the security integration market, was under attack by a rovinggiant, a BBW. Trading at a P/E of 30, this company’s mission was to grow byacquisition. One of its leaders was rumored to have defined market share asfollows: “It is my market, and I do not want to share.” Its leadershipthought that it would crush anyone who did not surrender. No doubt aboutit, it sent shivers down our spines-the fear of the unknown can do that.
Combined with some other events that happened that year, this BBW made usan offer we could not refuse, and we sold our company to the impendingtidal wave. There were other reasons why we sold, including the timing ofthe offer, the multiple and the fact that I could spend more time with myfamily.
After we sold our company, I got my first close look inside a big publiccorporation. Although the company that purchased us was a good company andtreated us fairly, I discovered most of my fears were unfounded, and theincentive structure for many of these public conglomerates dooms them tofailure. Note, I said many, not all. For those large BBWs reading thisarticle, there are always exceptions to the rule.
The consolidation efforts of many of the BBWs are doomed to failure forseveral reasons. First, it is the incentive plan. In large companies,managers must adhere to a budget that is written in stone, and they areincentivized accordingly with stock options and annual bonuses. As aresult, all effort is focused on the short-term at the expense of long-termresults; good-quality service is only as important as how it effectsshort-term profitability and maintains the sanctity of the budget. If thereis no budget for additional service technicians, and more are needed toprovide high-quality service to the client, then chances are that they willnot be hired. Service, along with client relationships, declines.
The second impediment to success is their sheer size. Have you ever triedto place a service call with a large BBW? You usually end up going througha maze of operators and auto-attendants, which takes time and addssignificant frustration to your already-existing problems. Just imagine howa customer feels about this long process. Or, do you think a customer canactually call up the president of a BBW and express discontent? Not verylikely.
Although the original intention of a BBW is to be the best, the incentiveprograms and their size make it extremely difficult. Although it may havetons of money to throw around, it usually dries up within a year after theanticipated profits fail to appear, and managers are replaced. Then, in ayear or two, the acquisitions are spun off in a discreet manner so that thecompany can focus on the core business in its primary market. That isexactly what happened at my former company. It was sold in a low-key mannerfor a fraction of the original price. So much for fear of the BBW.
Taking actionBased upon my personal experience, never be scared of the BBW-look at it asan opportunity either to diversify or improve service. The best way tooutcompete a BBW is to focus on service, service and more service. The morevalue you can add into your service plan, such as providing fast,two-to-four-hour response or instant loaners, the more you can outmaneuverall of your competitors, including the BBWs.
Also, let your clients know that they can always pick up the phone and talkto the president directly. As with the owner of any privately held company,the buck stops with him or her. My previous clients all tell me that theirability to communicate with the chief cook and bottlewasher added a lot ofvalue to their business relationship.
People ask me if I regret selling my company, given the events thatoccurred. Although I miss the feel and the power, they become fond memorieswhen I participate in my kids’ field trips or tuck them into sleep. As Itell my son Eric, never be scared of the BBW. Just wait him out until hegoes away or dies, whichever comes first.