Scale: Bigger is Better
Scale: Bigger is Better
In today’s economy, there is an increasingly common scenario where industries are dominated by a small number of firms. This trend most likely has some connections to the increasing wealth gap between the haves and have-nots in America. As Steven Dubner recently explored in one of his Freakonomics episodes where he interviewed the renowned Michael Porter, they explored several fields to gauge competitiveness.
Porters five factors he uses to measure competitiveness include the following:
- Threat of new market entrants
- Availability of substitute products
- Bargaining power of suppliers
- Bargaining power of buyers
- Rivalry between existing competitors
Their points during the interview were directed towards industries such as the Coke vs Pepsi rivalry, Automotive, Food production and ultimately politics. All interesting case studies and as always Mr Dubner put wonderful perspective on the entire discussion.
Listen here: America’s Hidden Duopoly from Freakonomics Radio in Podcasts. https://itunes.apple.com/us/podcast/freakonomics-radio/id354668519?mt=2&i=1000422968221
As one might guess I started drifting into franchising and how this discussion played a role in the field of franchise development. I think we knew and understood that bigger is better, but when you really analyze how important scale is for a companies long term success, it starts to become clear that without scale, mom and pop just doesn’t work very well.
First, a brands only real chance to limit other brands entrance into a market is to find ways to scale and achieve buying power on both the supply side and promotions side of the business. Franchising can help a business achieve both.
Second, the availability of substitute products again could only be controlled or influenced if a brand has the cash flow and market influence to move markets. This could be accomplished through acquisition of competitive brands, leveraging advantages of R&D through scale and aggressive marketing capacity. Again, all of which can be accomplished through franchising a business.
Third and fourth, bargaining power of suppliers and buyers play a role in a brands ability to dominate an industry segment. Both of which could only be affected favorably by a business with scale and leverage with the supplier and the buyer. Starbucks is probably the best food service example and Walmart might take the cake for what was once traditional retail in the ability to control buyers and suppliers in their favor.
Fifth, the rivalry amongst competitors only incorporates those competitors big enough to have a voice. This comes in the form of traditional consumer advertising and industry influence again which can only be accomplished through scale. Franchising once again proves to be a valid and effective vehicle to be used for achieving scale in a small business.
For more information on how to franchise your business, email Chris Conner: Chris.Conner@fmsfranchise.com
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