I’ve been shocked by how many of my friends and colleagues are struggling to survive as SMEs in the current economic environment. One theme is very apparent and that’s that they cannot compete with the ‘big players’ in their respective industries.
We’re also seeing large companies now encroaching on the traditional market space of SMEs, devouring the entire value chain and saturating every market with their economies of scale and aggressive pricing. With this becoming more prevalent are SMEs running out of runway to trade?
My view is definitely not. As SMEs, we are smaller and more agile in the market place. We don’t have the huge overhead structures that large companies do and we can capitalise on new opportunities quickly.
You have to ask yourself why the big companies are all seeing the SME market as the new land of opportunity. The answer is that they are seeing SMEs as customers that have to pay a higher price than other larger companies for goods and services.
SMEs traditionally do not have the bargaining power and economies of scale to negotiate preferential rates to compete. It’s becoming a dangerous market out there and we urgently have to become skilled in how to navigate these dangerous waters.
Beware the double-edged sword
I call the environment that the SME and entrepreneur find themselves in the ‘double-edged sword’. On the one side you, as the SME, need to purchase your raw materials, trading stock and so on from a supplier. Due to the fact that you purchase smaller volumes than the larger players out there, you are at a price disadvantage from step one in the value chain.
Secondly, when it comes time to sell those products we all aim for that one big deal with a large retail outlet or financial institution that will guarantee a successful future. It never works out that way.
The double-edged sword is our reality as SMEs and it won’t go away. We cannot control it, but we can control how we react to it. The following filters and observations provide an overview of how to move forward and hold your own against the larger corporate suppliers or customers:
As an entrepreneur we have all been there. So desperate we will take anything that comes along, no matter what the terms. How many times have these worked out to be good deals? I can only comment from my own personal experience, and that is zero times! Always take a step back and work through the pros and cons before committing. Always go in ‘eyes wide open’!
Always spread your risk-beware the big fish and don’t ignore the little fish
If I counted the number of times that we hunted the big fish out there it would probably shock you. The amount of time invested in meeting after meeting with no decision was worth millions of Rand. The big deals and big companies are sexy, but they always come at a price.
They are time consuming and take a long time to bring to fruition. We often get caught up with landing that one great deal and don’t focus on the bread and butter deals. Always spread your risk and don’t be over reliant on one customer. If you are making profit and generating cash flow then look at the deal.
Always agree on your terms as well
Deal making and hunting customers is like going into a new relationship. You have to know what your non-negotiables are, in other words those areas that would put your business at risk. Everything else is a compromise. Long term, sustainable relationships have to take the needs of both parties into account.
Don’t let your eyes deceive you
You will always be at the coal-face when it comes to the deal. Always read the fine-print and truly understand the terms of any contract or agreement you sign. I like to draw a picture of the transactions and terms so that it makes logical sense.
It also helps to get someone else to cast an objective eye on these agreements and contracts. Often you are too close and may miss something.
Know your business
This sounds like a simple statement but it’s not. Know what impact every decision you make will have on your business. Can you absorb the terms offered at a cash flow level? What is the opportunity cost of inventory levels that need to be ‘on-hand’ as a contingency supply to the large customers?
Work through all of these in extreme detail. Once you are comfortable with this, track the actual results every month against what your assumptions and calculations were. You need to know early on if something isn’t right so that you can potentially re-negotiate in need.
This is your life
No matter what you do or how small your business is, you are one of the brave few that have backed yourself and started this new journey in your life. You and your business are one. Stand tall, and negotiate strong.