Mega-firms create niches for little guys

07/13/03
Brigham Young University
By By Don Livingstone Printed in the Deseret News

"Super-size it!" isn't just for fast-food outlets, where for 39 cents or so you can upgrade to the mega-soft drink and the diet-bustin' bag of fries. For price tags up to $100 billion, companies all over the world are buying their competitors and super-sizing themselves. MCI WorldCom buys Sprint, Exxon buys Mobil, Ford buys both Volvo and Jaguar and so on.

Why?

By super-sizing, larger companies can increase market share, fill out product lines, cut overhead costs or enter new markets. With good planning and execution, they will achieve these goals. But is there room for the little guy in a super-sized world?

The answer is an emphatic: You bet! The move toward super-sized companies actually creates more opportunities for creative entrepreneurs.

For example, big companies speak of two "ROEs." The first is the traditional Return on Equity - the profits earned each year as a percent of invested capital. The second ROE is Return on Effort. Even though a segment of a company's operation is profitable, it is so small in relation to the whole entity that management does not want to dedicate the effort needed to supervise it.

Certain segments of a super-sized company may not meet one or both of the expected ROEs, and so the larger company may sell off a profitable segment, often at a bargain price.

Hundreds of successful entrepreneurial companies are spun-off or sold off from a larger firm. Newly energized owners and employees, freed from a sometimes suffocating corporate culture, find new customers, operate leaner and meaner, implement new ideas and take other actions that create a profitable, fast-growing company.

Several years ago, a national printing company decided to sell a portion of its printing operation in Utah Valley. Local managers purchased this segment for a little more than $100,000 cash down and financed the rest of the million-dollar-plus purchase price. Within two years, the highly motivated new owners had added enough business to pay off the acquisition loan. Within five years, they sold the company for many times the purchase price.

Super-sized companies also realize that they cannot provide certain service functions as efficiently as a smaller, more focused company that specializes in these activities. Larger companies outsource functions that aren't central to their operations or that others can do better. Many successful entrepreneurs supply outsourcing services. They have lower overhead, and their employees tend to be more creative and productive.

Successful outsourcing companies provide such diverse services as telephone marketing, janitorial services, data processing and order fulfillment. Outsourcing is growing at a phenomenal rate.

Another example: More than 10 years ago two young men decided they could do a better job of helping large companies manage their medical and benefits programs for their employees. They selected the 100 largest companies in the United States as their target customers, and they landed a significant number of these accounts, providing services to millions of employees.

They recently sold their company for tens of millions of dollars.

So the next time you hear "super-size it," think big!

author1 is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at Mr. Livingstone is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu. .