How Can Smaller Companies Compete and Win?
by Denise A. Harrison, Vice President
Smaller companies often feel dwarfed by the giants in their industry, especially during tough times. Often industry giants are better at weathering economic downturns with their wide array of resources. But Arena Resources’ strategy not only allowed the company to survive this economic downturn, but turn in exceptional performance – better than the industry leaders. Arena Resources, a small oil exploration and production company, has less than 2% of the revenue of the industry leaders (Shell, Exxon Mobil). In addition, very few industries have had to endure greater fluctuations than the oil industry with oil price highs of $147 per barrel in July 2008 and lows of $30 per barrel in December, 2008. How did Arena Resources make it onto the Fortune list of fastest growing companies (#8) in spite of this industry turbulence?
The Road Less Traveled
Arena Resources chose not to compete directly with the industry giants, instead it focused on oil production assets in the southwestern United States that were no longer attractive to the industry Goliaths. The cost of drilling and producing oil in this region exceeded what was acceptable in the larger companies’ financial models; these companies prefer to concentrate their resources on exploration of large oil fields with large potential. When Arena purchased land in this region (approximately 11,000 acres), the land produced 200 barrels of oil per day. Arena knew through its research and evolving technology, which through investment the land could be more productive. Through Arena Resources’ focused efforts this land is now producing 6000 barrels per day. The company does pay a high cost to produce a barrel of oil – almost $35 per barrel, so when oil prices decline significantly, profitability plummets; but when oil prices are over $60 per barrel the company makes a nice profit. Arena is betting that the price of oil will remain over $60 per barrel for the significant future. The high cost of production and the relatively small output is not attractive to its behemoth competitors, so this strategy to take the road less traveled allowed Arena Resources to grow profitably without going head-to-head with the major industry players.
What about Your Company’s Strategy?
Many companies decide to compete in markets that are attractive, even though larger competitors with greater resources are already firmly entrenched or aggressively pursing these markets. Going head to head with industry giants often drains the resources of a smaller player with little forward progress in their market position. Are you going after the attractive markets that set you in direct conflict with industry giants? Are there niches that you could pursue that are not interesting to the larger companies? As you develop strategy your team should consider:
1. Market segment attractiveness (including growth and profitability)
2. Your competitive position in a market segment – what is the competition’s market share? Are competitors already firmly entrenched?
a. What other companies compete in this segment? In this case companies like Exxon and Shell focus their resources on exploration, looking for the big prizes. Arena focuses on production, but the production increases that are attractive to Arena Resources are too small to concentrate on from a larger company’s perspective.
b. What are the competencies required to compete this market? Do we have them? Are there strategic competencies that give us significant differentiation? In Arena Resources’ case, its competency is secondary recovery from known oil and gas resources – little exploration risk but a requirement for execution excellence. Their competency comes from their knowledge of the geology in the basin in which they work, combined with their technical skills in secondary recovery.
In order to compete and win, you must consider both market attractiveness and the competitive landscape of all of your market segments before you select the ones on which you will focus. You will often find a segment that is smaller has less competition and will provide your company with significant growth and profitability. In strategic planning, selecting the road less traveled may be a key ingredient to your company’s success.
Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com.