David and Goliath: Leveraging Economies of Scale in Innovation as a start-up against the big players.
In a market where big players dominate and small fish fight each other for the scraps, isn’t it time we started looking at new ways of playing the game?
In the story of David and Goliath, a man faces the task of fighting an unruly giant, offensively named Goliath. The expectation from the people is that David is about to be crushed by one of the giant sausage fingers. Instead, David fires a rock from a catapult hitting Goliath in precisely the right spot and brings him tumbling to the ground.
I have heard this tale told in numerous business conferences where the so-called keynote speaker talks about how speed, agility, and accuracy are essential as a small business and how we can beat our competition or become as big as them if we hold these qualities.
I am more of a realist. It is unlikely that an industry food giant will fall as quickly as Goliath. Even if they did, the blow of them hitting the ground might create an economic tsunami that could severely damage the industry. Anyway, the idea of destroying other companies, to me, is an outdated concept. In today’s market, an intelligent business leader must learn to live alongside other businesses and somehow compete with them simultaneously. The question is, how is such competition possible when the sheer balance of power falls in their direction?
Economies of Scale are taught in almost every microeconomics unit around the world. Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. (Investopedia). So, it is no wonder that business leaders can feel daunted by prominent players within their industry.
In economies of scale related to purchasing, a business receives a discount because they buy in bulk. This discount even happens at a retail level. Buy a crate of Coca-Cola from the supermarket, and the price per unit is significantly lower than if one is buying a single can. So, when it comes to large-scale business operations, the purchasing power is significant.
There are numerous advantages to this for the business in question as well as the end consumer. Generally, buying at a lower price per unit will enable price competitiveness and increased profits, allowing the company to grow rapidly.
As the company grows, it becomes less vulnerable to outside economic factors such as direct competition. In an ideal world, this can mean higher wages for employees. For the end-consumer, it can mean lower prices and more significant product improvement.
But economies of scale do not only apply to purchasing but also marketing, admin, and other areas. Research and Development is a slightly different story. These same theories may not apply since costs are a little more fixed. You can put more money and more time into researching an idea as a business, but this does not increase profits. Nor does growing a business reduce R&D costs.
Perhaps an external R&D company may give you a reduced rate. Maybe even the cost of materials within R&D could have some scaling advantage, but the difference is not as crude as in purchasing or other areas. Still, whilst the cost of R&D is not affected directly, it is included in economies of scale since overall, it reduces the total cost of production per unit.
In starting Tosla, I knew from the beginning that R&D was going to be a massive part of what we do. I also knew that we were entering an industry that several big players controlled. So, I had to ask myself:
How to kill two Goliaths with one stone?
One of my fundamental principles is that we need to remain in intense competition with our rivals whilst also working with them to maintain and grow our industry. This has always been the case to a certain degree, but what happened next really took my understanding of this principle to the next level.
At some point, I looked at our R&D costs and knew we needed to find ways to get those costs down. I got on the phone and began to set up meetings with other food start-ups at my level. At first, it felt like I was colluding with the enemy.
I realized that in my life and in my business education, I had been conditioned to view my competitors as enemies and nothing more. It seems like in business, there is still this mentality that you must destroy your competition.
I realized that my state of mind around dealing with my competitors had been unhealthy and old-fashioned. When we met, I was a little taken aback by the friendliness with which I was accepted, and it became clear that they felt the same way.
Some refused, but most took my meetings. I could feel the tangible sense of relief and positivity as we laughed about our previous detached behavior towards each other. There was a genuine sense of excitement at the possibility of a completely radical, disruptive new way of competing with big business.
I laid out my plan to split R&D costs across numerous businesses. It was a tremendously obvious idea. It was not like we all needed a separate report. As we were all developing the same products, we could do the R&D once, and we would all benefit by splitting the costs. We would work together, in the beginning, to get our products to market. Then, once we were in sales mode, we would work to outdo each other ruthlessly.
These meetings were the beginning of what I like to call our beautiful network. In the beginning, it was just us meeting with each competitor individually. Ultimately, we all began to work together, and the parts of the network began to merge. There became a genuine sense of being able to work together when needed and yet, still compete without any loss of respect for one another. Most importantly, it stimulated a question that now arises before we make any competitive decision:
“Is this our thing, or can we split the costs with our network?”
We realized that by creating a co-op, we could also increase our purchasing power. Why should we purchase our 60 units at $4.20 when we can join two of our competitors and purchase 180 units at $3.30?
The whole idea of economies of scale relies on the idea that businesses will always be aggressive toward each other. Our network is proving that start-ups can collectively increase their power by working together against the big players. Of course, there is usually a lot more secrecy and conflicts of interest in later stages such as sales and marketing, but there is no reason that our network cannot explore splitting costs in these areas too.
If we are a start-up, among other start-ups in an industry with big players, we must stop viewing other businesses as the enemy, at least in the beginning. Our isolation from other businesses means that we were stuck figuring things out on our own, taking on all the costs, and facing the big players alone.
Since we are selling similar products to others in our network, we share not only costs but also ideas. This sharing of ideas may seem counter-productive, but I like to think of it as more of a futuristic concept. Much has been said in recent times about how this sharing of ideas between businesses helps everyone. Because it increases innovation, it nurtures and grows the entire market rather than just growing one's share of a stagnant industry. Hence, everyone benefits from this crazy sharing of knowledge. It is very advanced business thinking.
As humans develop in intelligence, I feel like we become more aware of our connection to each other. Is it possible for us to embrace a new way of doing business that welcomes our competitors and works side-by-side with them? Doing so surely takes a courageous business leader to step out of their conditioning and look at the big picture.
I like to encourage this thinking at all levels of my company. There is no reason that just because you may have to fight your competition at some point down the track that you cannot work together right now.
Watch Game of Thrones or Survivor, and you will see this strategy in action. It is possible to treat each moment as its own moment. In doing so, we can take the emotion out of the equation and do what is necessary to compete with Goliath right here and now. Best of all, we might also make a few like-minded friends along the way.
My writing is based on true events and stories. It is as real as it gets. I changed parts of the stories and excluded real names as I don’t want people to get hurt. But most of the stuff I write is authentic and includes my thoughts and feelings.
Generalist that thinks broadly (not deeply).