In my work, I have met many good manufacturing and service companies whose first response, when discussing their plans for the future, has been that they need more sales. That is understandable. Sales keep a company running and create opportunities to invest. Yet the desire to sell more or open additional service locations tells us very little about the kind of company it wants to become.
Some time ago, I sat down with the managing director of a textile manufacturing company at his factory. He showed me new machinery, well organised production and the strong technical competence of his people. The company had the potential to produce more, and he wanted to find new customers in Germany. I asked him what kind of orders he actually wanted.
One off, price driven subcontracting work? Long term repeat orders? Development projects? Or a position in which the customer involves his company in developing the solution from the outset? All of these represent sales, but strategically they are very different kinds of sales. The first may fill production for a few months. The second creates predictability. The third develops the company’s competence. The fourth can transform its position within the entire value chain.
A similar example comes from the service sector. One company faced a choice whether to open more beauty service locations in the region and become the largest provider in its field, or concentrate on the quality, profitability and customer relationships of its existing locations?
At first sight, expansion appeared to be the natural next step. More locations would mean greater visibility and a larger market share. Yet every new location would also bring additional fixed costs, recruitment needs, a heavier management burden and the risk of service quality becoming inconsistent across locations.
The real question was not whether the company could open more locations. It was what advantage a larger network would create. A better market position and stronger customer relationships, or merely a higher cost base and a more complicated organisation?
In services, too, the largest company is not necessarily the strongest. One well run location that customers genuinely value can create more value than three locations that are difficult to operate profitably and to a consistent standard. The question, therefore, is not only how much a company grows. What matters is the purpose and structure of that growth.
I recently read Danny Fontaine’s book Pitch. It opens with the story of one of the most legendary pitches in British advertising history. The case comes from the advertising industry, but it is even more a story about strategy, customer understanding and the ability of a smaller company to defeat much larger competitors.
In the late 1970s, British Rail was looking for a new advertising agency. It was a large and prestigious client, and the competition included some of the industry’s heavyweights, among them Saatchi & Saatchi. One of the invited agencies was Allen, Brady & Marsh, or ABM, a considerably smaller company than its competitors.
ABM knew that it had little chance of winning with a conventional presentation. The larger agencies could point to bigger teams, better known clients, longer track records and larger campaigns. A small agency could not beat them on scale. It had to win through intelligence and originality.
When the British Rail management team, led by chairman Sir Peter Parker, arrived at ABM’s offices, there was no polished presentation or attentive reception waiting for them. The reception area was dirty. Ashtrays were full, coffee cups had been left lying around, and the receptionist treated the visitors with indifference and rudeness. The executives were kept waiting for a long time. Nobody apologised or offered an explanation.
Eventually, they had had enough. They stood up and prepared to leave. At that moment, the meeting room door opened. ABM director Peter Marsh welcomed them and explained that they had just experienced what British Rail’s customers experienced every day. Now the agency was ready to show them how it intended to change that experience.
ABM won the account. The story has endured for almost half a century because it is about more than one clever presentation. ABM did not try to prove that it was bigger than its competitors. It demonstrated that it understood the client’s real problem better. This ability to think differently is one of the most important strategic opportunities available to a smaller company.
Bigger Does Not Automatically Mean Stronger
A company can increase its sales revenue while becoming strategically weaker. It may win a large order that fills its production capacity, but generates very little profit. It may enter several new markets at once and spread management attention so thinly that it develops a strong position in none of them.
It may secure a major international customer and discover a few years later that it has become so dependent on that customer that it no longer determines the price, investment timetable or terms of cooperation. From the outside, the company has grown. From the inside, its freedom to make decisions may have narrowed.
Growth creates opportunities, but it also introduces complexity. Every new customer, product and market brings additional requirements, customised solutions, supply chains, contractual risks, communication needs and process demands. If the company’s management capabilities do not develop at the same pace as its sales, the organisation eventually begins to serve its own growth.
More work is being done, but the company is not necessarily becoming more valuable. This is why we need to distinguish between growth in volume and growth in capability.
Volume shows how much a company can do. Capability shows what it can do better than others. In the long term, capability determines whether the company is compared mainly on price or regarded as a strategic partner.
Being Small Is Neither a Weakness nor Automatically an Advantage
Smaller companies are often described as flexible, fast and personal. These words have become so common that, without real substance behind them, they no longer mean very much.
Being small does not automatically make a company flexible. A small company can be slow, poorly managed and distant from its customers. Nor is a large company necessarily bureaucratic or lacking in creativity. Scale creates one set of opportunities while smallness creates another. The purpose of strategy is to decide how to use them.
In a smaller company, the owner or senior management is often closer to the customer. Technical expertise can reach the negotiating table more quickly. Decisions can be made without a long chain of approvals. The company may notice a need that is too small, too new or too unconventional to attract the attention of a larger competitor.
ABM did not win the British Rail account simply because it was small. It won because it understood that it could not compete with the larger agencies on their strengths. Instead, it changed the entire logic of the competition.
It did not compete on the number of references, the size of its team or the polish of its presentation. It competed on its understanding of the customer. That is the smaller company’s opportunity: not to do the same thing slightly more cheaply, but to see the problem differently.
Position Matters in a Value Chain
Estonian companies often enter larger foreign markets with a familiar message: we have modern production, experienced people, available capacity and competitive prices. All of this may be true. But dozens or even hundreds of other companies can make exactly the same claims.
When a smaller company presents itself primarily as lower cost production capacity, it places itself in a price comparison. In that comparison, there is almost always someone cheaper. A more powerful question is what the company can do to make the customer’s work easier, faster or less risky.
One supplier manufactures a component according to the customer’s drawing and waits for the next request for quotation. Another participates in developing the solution, identifies a technical problem before production begins and uses its engineering expertise to help the customer avoid costs later.
Both may manufacture the same product. Their positions in the value chain are nevertheless entirely different. The first is easier to replace. The absence of the second is felt immediately because the customer is buying not only a product but also knowledge, attention and a partner who thinks alongside them.
One aspect of my doctoral research at Estonian Business School examines the formation and hierarchy of relationships between companies within value chains. A central question is the degree of dependence and substitutability: how easy is it for a new supplier to enter a relationship, and how easy is it for the customer, the so-called lead firm, to replace an established partner?
In a simple, price based relationship, both are relatively easy. The order moves to whichever supplier currently offers the more attractive price. A deeper relationship, however, requires supplier qualification, mutual learning, adaptation of processes and usually investment by both parties. In some industries, reaching this stage can take a year, eighteen months or even longer. Precisely because entry is difficult, an established partner is not casually replaced in response to one cheaper offer.
Estonian companies should aim for relationships of this kind. The objective is not to make it artificially difficult for the customer to leave. It is to build cooperation in which the accumulated knowledge, trust and shared processes have genuine value. The more deeply a company’s capabilities are integrated into the customer’s value creation, the less it is seen as replaceable production capacity and the more it is valued as a strategic partner.
Large companies participating in international value chains do not necessarily look for the largest possible partner. They look for a reliable partner whose role is easy to understand, whose capabilities can be assessed, in science we also cal it legibility, and whose involvement reduces risk. An Estonian company may be better at this than a much larger competitor. It may be able to respond more quickly, connect engineering expertise directly with management decisions and adapt a solution without a lengthy decision-making process. But these advantages matter only if the customer can see them and the company can turn them into repeatable capabilities. Only if these advantages are legible.
One strong performance can win an order. Strong capabilities create a position.
Does Growth Strengthen What Makes the Company Distinctive?
This brings us to the real question of growth. Does growth strengthen the reason the customer chose us in the first place, or does it destroy it? If a smaller company becomes slower, more distant and less attentive as it grows, it loses its original advantage. If it uses growth to develop knowledge, technology, quality systems and people, it becomes not only larger, but also stronger.
Good growth increases the company’s capabilities and negotiating power. It creates repeat business, reduces dependence on individual customers and moves the company closer to the level in the value chain, where solutions are shaped and decisions are made. Poor growth mainly increases workload and risk. Whenever a major growth opportunity appears, management should therefore ask four questions.
What will we be able to do better after this project or additional service location than we can today? What kind of position will this customer or market create for us? Will our bargaining power increase or decrease? Will this growth strengthen what makes us distinctive, or turn us into one ordinary supplier among many?
These questions are more important than a single revenue figure. Revenue shows how much the company sold. It does not yet show how much stronger the company became.
Ambition Can Be Measured Differently
Discussions of Germany’s competitiveness often focus on its large industrial groups. Yet much of its strength rests on specialised medium sized companies that have selected a narrow field and become exceptionally good at it. They do not try to be everything to everyone. Their ambition is to become so good in a particular role that customers find them difficult to replace. That, too, is a major ambition.
For an Estonian company, the smartest objective may not be to conquer the whole of Germany, Sweden or the United States. It may be far more valuable to become a recognised partner for one industry, region or customer group. One strong position can create more opportunities than a hundred random contacts.
I am not, of course, arguing against growth. Companies from a small domestic market such as Estonia must look beyond national borders. The question is not whether to grow, but how and for what purpose. A company can grow in order to become bigger. It can also grow in order to become better, smarter and more difficult to replace. ABM won the British Rail account not through scale, but through attention, courage and a precise understanding of the problem. It did not play a larger competitor’s game with fewer resources. It changed the game.
The strongest company is not necessarily the one that does the most. Often, it is the company whose role is clearly understood, whose work is trusted and whose absence would be felt throughout the value chain.
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