Race to the Middle

There are new competitors emerging who can take advantage of new facilities, new technology and lean organizations. These organizations are competing with established organizations that have an established network of business relationships, an established infrastructure and associated overhead costs. What industry is this? it pertains to your business.

The Even Playing Field

Access to information and technology, ease of going to market and the simplicity to create an e-commerce sales channel have changed the playing field. Factories are being built in geographic regions that can sustain low labor costs and mass production. Programming and application development is being conducted with global access to negotiate low rates and take advantage of shared modules or common templates. Access to raw materials has been greatly simplified. Commercial and professional services can be accessed by email or phone just as effectively and efficiently as a face to face dialogue, but with more convenience. In all cases, the geographic location is continually adjusting based on market conditions and demand. With a little planning, organization and creativity these resources are equally available to everyone.

The Emerging Players

The new organizations and individuals entering the market have a distinct financial advantage of being lean, with limited overhead costs or infrastructure to support. The emerging players may take advantage of new equipment, new technology and the latest applications. There is no cost to migrate old processes, data or facilities to a new ones. Everything is new, and presumably state-of-the-art.

As a result of the lack of overhead or existing infrastructure, the new organization can offer products or services at a significantly lower price. This places extreme pressure on the established competitors to reduce price and compete. Quite often the lower prices of the emerging players are complimented by a new strategic feature, special offer or unique benefit. This creates even more pressure on the established competitors to respond with new features at lower prices.

The initial rush is exhilarating to the emerging players as they experience success and rapid economic growth. The newness of the offering and the compelling lower prices will gather an immediate fan base of curious customers. The sales increase, the market share grows and the future looks promising. If the emerging player can sustain this profitable growth long enough, this tide of enthusiasm leads to the inevitable consequence that infrastructure is required to support the growing install base of customers.

Without proper infrastructure, the emerging player will not be able to support customer demands and customer service. In the absence of customer support and operational infrastructure, the emerging player risks severe damage to brand reputation, loss of loyal customers and potentially severe government or legal intervention. The emerging player is eventually saddled with investing in the development and maintenance of overhead to support consumers. The emerging player must evolve by creating structure and internal support to manage external requirements for sustained success.

The Established Players

If an established organization has nurtured the satisfied customer base, it has the benefit of a potentially loyal consumer base. It is less expensive to maintain a satisfied customer and earn repeat business than it is to market to new customers or be forced to compete merely by adding features and dropping prices. Marketing to a loyal customer base can reduce support costs and generate new sales in advance of competitive intervention.

Established organizations have the benefit of leveraging installed infrastructure. When used properly, the installed infrastructure and experienced resources can expedite processes, reduce valuable time to expedite response and sustain repeatable processes. Equipment and associated administrative investments are amortized over time and use to provide a measurable return on investment.

Established organizations are more aware of regulatory and compliance issues, and should be more aware of customer requirements. This awareness reduces risk. Regulatory and compliance issues pose the obvious risk of costly government or legal intervention. Customer requirements can be a more subtle, but equally costly financial risk. Customer requirements are not limited to consumer protection, but also include consumer buying cycles, consumer return habits and costs to sustain customer support. It is important to know these costs at the time of the consumer purchase so appropriate reserves are established for future support.

Despite the advantages of speed and amortized investment associated with an established infrastructure, the established organizations must add features and reduce prices to compete with the emerging competition. The most common methods of achieving lower price points are associated with reducing internal costs, eliminating external costs and cutting overhead. Sometimes this is accomplished with investments that improve performance, drive out costs or expedite results. Quite often this is achieved by slashing infrastructure overhead in the form of reducing manpower. In this case, the remaining manpower is tasked with developing new lean processes to sustain the business and compete with streamlined or substantially reduced operational designs.

The Race to the Middle

Emerging players can enjoy lean organizations and lack of infrastructure for a measured period of time. If the emerging players are successful, they must eventually build an infrastructure to sustain the customer base and the growing business. To compete with these emerging players, the established organizations must continually shed layers of complexity, procedures and often people. As emerging players are forced to grow the infrastructure in proportion to success, so too the established players must shrink the overhead to compete and remain successful. From two ends of the spectrum it is a race to the middle.

So, where exactly is the middle? How did established organizations arise as emerging organizations, and what keeps them from collapsing? The secret to sustained success is the realization that the definition of the middle is always changing. Both emerging organizations and established organizations are creating new strategic features or benefits for customers. The economy and consumer demand have as much impact on pricing as the addition or success of new features. As the market drives demand for features, benefits, advancements or customer loyalty, then the middle ground requires greater infrastructure to sustain it. Sometimes the demand for greater infrastructure is the result of changes in regulatory, compliance or environmental protection requirements. Such demands and requirements impact the whole market and all players evenly, driving the demand for infrastructure overhead to manage these issues. Then the market will correct itself with emerging players, new solutions and lower prices, once again moving the middle as the definitions of either end of the spectrum are redefined.

Outsource Solutions

One of the most common methods of achieving a flexible and adjustable solution to win the race to the middle is outsourcing the solution. Emerging organizations can take advantage of outsourcing the appropriate portions of the business to established partners that specialize in that part of the business and can amortize the infrastructure over multiple clients. This enables the emerging player to immediately reduce risks associated with regulatory, compliance or environmental issues. It creates an immediate structure to sustain business growth and support a growing base of consumers, without risking internal investment on technology, people or processes that may become obsolete when other new emerging competitors enter the market.

For established organizations, outsourcing appropriate business solutions can reduce internal overhead and immediately create competitive flexibility. When transferred properly, the experience and internal process designs can be absorbed by the external resource to maintain strategic advantage while reducing internal overhead. Additional benefits are continually realized as the outsource partner invests to keep up with new technology, new processes and cost competitive enhancements while simultaneously meeting environmental, regulatory and compliance requirements.

Quite often, the outsource solution partner is the middle point between emerging and existing organizations. Adjusting as necessary, the outsource partner must adapt to changes in the marketplace and the needs of the emerging or established clients.

You do not need to look very far to see examples of outsource partners. Outsource partners exist in manufacturing, logistics, supply chain, returns, refurbishment, repair, call centers, distribution, sales, extended service plans, third party administrators, commercial and professional services. Virtually every business relies on an outsource solution or a hired expert for some portion of the competitive solution. Which industry does this pertain to? It pertains to yours. Do you use an outsource solution or a third party administrator, or should you? That depends on who is winning the race to the middle.

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Words of Wisdom

"Established organizations need to shed overhead to reduce cost. Emerging players need to invest in infrastructure to sustain the acquisition of consumers, manage increased volumes and meet environmental, regulatory and compliance requirements. It is a race to the middle."
- John Mehrmann

"You don't need to outdo the competition. It's expensive and defensive. Underdo your competition. We need more simplicity and clarity."
- Jason Fried

"The infrastructure of the industrialized world is increasingly based on software, experience and new ideas."
- John Mehrmann

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John Mehrmann is a freelance author and President of Executive Blueprints Inc., an organization devoted to improving business practices and developing human capital.