This article was published in the 11-September-2014 issue of Finweek Magazine
When small businesses take on their bigger competitors, the larger companies usually win, right? In many cases, yes, but there are important exceptions. New research reveals that sometimes it helps, rather than hurts, a smaller firm if consumers see that it is competing against a larger company. In this article, we unpack why and look at the positive implications for small businesses everywhere.
Many fledgling entrepreneurs spend an inordinate amount of time watching and worrying about their bigger competitors. And you can understand why: large enterprises have deeper pockets financially, greater market share, more manpower, infrastructure and other resources, greater reach and scale, and their brands and products are more well-known than those of smaller companies. They also use price discounting and their negotiating clout with suppliers to beat out financially weaker businesses. All of these factors make it that much harder for the new start-up on the block to compete head-on with its larger rivals. This is commonly known as the Walmart effect: with the rise of large supermarket chains like Walmart overseas, and Pick ‘n Pay here in South Africa, the ‘mom and pop’ corner cafés that many of us grew up with, have mostly disappeared because of unequal competition. Understanding these challenges, it’s not surprising that small businesses spend a lot of time pretending to be bigger and more established than they really are, and to have more customers and clients than they actually do, especially when selling their offerings to larger companies.
But small firms have one thing going for them that big corporations do not: we all love and rally for the underdog. Surprisingly, this translates into a much greater competitive advantage than you might expect.
The “framing the game” effect
In their article Positioning Brands Against Large Competitors to Increase Sales, researchers Anat Keinan and Jill Avery at Harvard Business School, and Neeru Paharia of Georgetown University USA, explored an interesting business scenario: what happens when a large market leader sets up shop very close to a smaller firm operating in the same industry? After carrying out six studies both in the lab and in the field, the research team saw something unexpected emerging: when the smaller firm made the rivalry public instead of hiding it, consumer support for the smaller brand climbed. This lead to more sales, as well as online reviews that were more positive. The researchers called this the “framing the game” effect. Why? Because the small company framed the game as a competition against its larger rival.
A fantastic example of this counter-intuitive phenomenon is J.P. Licks versus Cold Stone Creamery, in Newton, Massachusetts, USA. J.P.’s was the small, neighbourhood ice cream store, while Cold Stone was a massive ice cream chain with roughly 1400 outlets around the United States. So when Cold Stone set up shop just a stone’s throw away from J.P’s, many people thought J.P’s would not survive. But consumers stuck by J.P’s, their sales went up, and Cold Stone had no choice but to close their Newton store.
In Los Angeles a similar case happened, also in the food and drink industry. The owner of the coffee shop chain The Coffee Bean & Tea Leaf tried to prevent Starbucks from opening up down the road, but without success. Surprisingly, sales at The Coffee Bean & Tea Leaf climbed. Realising he had stumbled onto a winning formula, the owner masterfully set up more new stores next to Starbucks outlets in other locations.
These are not isolated cases. In later studies, the Harvard / Georgetown University research team tested the “framing the game” effect across a broad range of industries and products. Over and over again they saw the support for a big brand plummet when consumers realised it was competing against a smaller brand.
In all the researcher’s examples, both the smaller firm and its larger competitor were brick and mortar stores, and both sold their wares directly to consumers. The ‘framing the game’ effect wouldn’t make much sense without these two conditions.
So what is the important lesson for smaller companies with fledgling brands? If you have a brick and mortar store selling to consumers, don’t shy away from your bigger rivals. Instead, have the courage to set up shop right next door to them. Don’t be surprised if your sales shoot up as a result.
Colette Symanowitz is Founder/MD of www.MBAconnect.net, a social network exclusively for MBAs from all business schools in South Africa and worldwide. She is also MD of www.BeatingBullies.com, a ground-breaking online tool that enables kids to report bullying anonymously, to upload evidence, and to have safe, anonymous discussions with principals and school counsellors. Connect with Colette on her blog www.colettesymanowitz.com