Commodity Products

I can't count the number of times during my years working in large corporations that I heard a CEO, or some other senior executive, proclaim a market segment or niche to be "too small to be interesting".  Hell, I'm sure I said it plenty of times myself.

Corporate management is obsessed with growth.  As one of my mentors once quipped "Growth covers a multitude of sins".  And he was right, it does.  Sloppy practices, inefficiencies, bad decisions -- they all can be made to look small by rapid growth rates.

And shareholders love growth, too.  It is the most important factor in determining the value of a business after it's current earnings.  "How fast is it growing?" I often heard.  Faster growth begets higher multiples, which begets improved stock price, which begets executive rewards.

But when you're already really big, it takes BIG growth to move the needle.  And because of that, executives are usually focused on doing BIG deals in BIG markets, with the intentions of capturing BIG share.  And big markets tend to share a common characteristic -- there are lots of competitors in them, and those competitors inevitably pull prices down to the lowest common denominator.

Now this sin is by no means universal in big companies.  A few larger corporations seem to realize that the more attractive markets tend to be those where there are limited competitors and fewer price pressures.  They would rather do multiple small deals, placing many smaller bets, and hope to capitalize on these juicier opportunities.  But getting growth this way isn't easy.

Most large corporations believe they need to leverage their administrative costs .  And so it is a rare to find a large corporation properly staffed to pursue many smaller niche markets.  And ever rarer to find one that can consistently integrate those opportunities into their existing management framework.

Small companies, however, tend to live in such small spaces.  They develop unique skills and capabilities specifically to exploit niche markets.  They aren't as obsessed with growth, and are willing to be more patient, knowing their future is much more secure in a small corner of the market than buffeted about in the midst of commodity product price wars.

Once a large corporation has a commodity product mentality, they inevitably think of all their products in terms of ever lower production costs through scale, driven by customer demands for ever lower prices.  Should, by some stroke of luck, such a company end up with a niche business filled with opportunity for high profits and limited competition, they typically blunder about like a bull in a china shop, upsetting the delicate balance that allowed the niche to exist in the first place, and invariably causing pricing to collapse.  They feel they are winning a war, but are, in fact, destroying value by their commoditization of the market.