How Can Smaller Companies Compete and Win?
Denise A. Harrison
Vice President

Smaller companies often feel dwarfed by the giants in their industry, especially during tough times. Often industry giants are better at weathering economic downturns with their wide array of resources. But Arena Resources’ strategy not only allowed the company to survive this economic downturn, but turn in exceptional performance – better than the industry leaders. Arena Resources, a small oil exploration and production company, has less than 2% of the revenue of the industry leaders (Shell, Exxon Mobil). In addition, very few industries have had to endure greater fluctuations than the oil industry with oil price highs of $147 per barrel in July, 2008 and lows of $30 per barrel in December, 2008. How did Arena Resources make it onto the Fortune list of fastest growing companies (#8) in spite of this industry turbulence?

The Road Less Traveled

Arena Resources chose not to compete directly with the industry giants, instead it focused on oil production assets in the southwestern United States that were no longer attractive to the industry Goliaths. The cost of drilling and producing oil in this region exceeded what was acceptable in the larger companies’ financial models; these companies prefer to concentrate their resources on exploration of large oil fields with large potential. When Arena purchased land in this region (approximately 11,000 acres), the land produced 200 barrels of oil per day. Arena knew through its research and evolving technology, which through investment the land could be more productive. Through Arena Resources’ focused efforts this land is now producing 6000 barrels per day. The company does pay a high cost to produce a barrel of oil - almost $35 per barrel, so when oil prices decline significantly, profitability plummets; but when oil prices are over $60 per barrel the company makes a nice profit. Arena is betting that the price of oil will remain over $60 per barrel for the significant future. The high cost of production and the relatively small output is not attractive to its behemoth competitors, so this strategy to take the road less traveled allowed Arena Resources to grow profitably without going head-to-head with the major industry players.

What about Your Company's Strategy?

Many companies decide to compete in markets that are attractive, even though larger competitors with greater resources are already firmly entrenched or aggressively pursing these markets. Going head-to-head with industry giants often drains the resources of a smaller player with little forward progress in their market position. Are you going after the attractive markets that set you in direct conflict with industry giants? Are there niches that you could pursue that are not interesting to the larger companies? As you develop strategy your team should consider:

1. Market segment attractiveness (including growth and profitability)
2. Your competitive position in a market segment - what is the competition’s market share? Are competitors already firmly entrenched?

a. What other companies compete in this segment? In this case companies like Exxon and Shell focus their resources on exploration, looking for the big prizes. Arena focuses on production, but the production increases that are attractive to Arena Resources are too small to concentrate on from a larger company’s perspective.

b. What are the competencies required to compete this market? Do we have them? Are there strategic competencies that give us significant differentiation? In Arena Resources’ case, its competency is secondary recovery from known oil and gas resources – little exploration risk but a requirement for execution excellence. Their competency comes from their knowledge of the geology in the basin in which they work, combined with their technical skills in secondary recovery.

In order to compete and win, you must consider both market attractiveness and the competitive landscape of all of your market segments before you select the ones on which you will focus. You will often find a segment that is smaller has less competition and will provide your company with significant growth and profitability. In strategic planning selecting the road less traveled may be a key ingredient to your company’s success.

Copyright 2009 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI -- Reprint permission granted with full attribution.

Denise Harrison is Vice President of Center for Simplified Strategic Planning, Inc. She can be reached by email at harrison@cssp.com

How Does Strategic Planning Deal with Seismic Changes in an Industry? By Denise A. Harrison
Vice President
Center for Simplified Strategic Planning, Inc.

It is often argued that strategic planning processes miss industry shifts due to a myopic focus on existing customers and market segments, as well as existing products and product lines - but is this correct? NO! While market analysis and customer segmentation are important to any strategic plan, it is paramount for the process to look outside the existing business for opportunities and changes that will have significant impact on your business. In addition, it is essential for your team to develop a scenario for your industry looking out beyond the planning horizon; looking at trends that will emerge 5-10 years in the future. This allows the team to identify industry shifts - disruptive drivers (e.g. technology, demographics, regulations, lifestyle changes) which might transform your industry. How does this work? Let's look how Wyeth Pharmaceuticals addressed a structural shift in the pharmaceuticals market. Next we will look at how Clorox used trends to identify new growth opportunities.

Wyeth: Traditional Pharma vs. Bio Tech¹

During the mid-1990s Wyeth developed a vision of the pharmaceutical industry. In their scenario they saw that traditional pharmaceutical development would be less fertile for growth opportunities than the emerging biotech approach. Understanding that this new technology would foster significant future growth, Wyeth faced the decision to build from scratch or buy. The Wyeth team decided that acquisition would be faster than building from scratch and they acquired two companies: Genetics Institute and American Cyanamid (now Wyeth Biotech) which had the intellectual capital that Wyeth did not have resident inside its own company. Wyeth did not hesitate; they jumped in with both feet with a significant investment to fund these acquisitions.

The Results

Wyeth correctly anticipated the benefit of the biotech approach to developing drugs and now WyethBiotech is 45% of their business. A decade later, Wyeth is still reaping the benefits of its investment decision - the biotech industry is blooming and profits at Wyeth (2008) are up 12%. Many other pharmaceutical companies dabbled in biotech but dabbling did not position their companies for success. Now, these companies are playing catch-up: Eli Lilly purchased ImClone in 2008 and Roche is purchasing the rest of Genetech. Recently, Pfizer made the decision to purchase Wyeth so that it, too, can get into the biotech and enhance its pipeline.

Clorox Capitalizes on Mega-trends² to Fuel Growth Strategy

Clorox identified to two key trends when it defined its growth strategy: consumer focus on health and wellness, and environmentally friendly products. The recognition of these trends resulted in the acquisition of Burt's Bees® natural personal care products, the launch of Green Works® natural cleaners, and repositioning the Brita® brand as an alternative to bottled water, thus positioning Clorox as a more environmentally friendly company. It took an acquisition and new product line launch along with product repositioning in order for Clorox to capitalize on these trends. Like Wyeth, Clorox made significant moves rather than taking a "wait and see" attitude.

Challenging the Status Quo

Is your strategic planning process allowing you to challenge the status quo? Do you look for opportunities outside of the box? Do you look out beyond your planning horizon to evaluate industry shifts or new competitors? If you are able to see trends before your competitors, you will leapfrog the competition by positioning yourself to meet the needs of emerging markets. Remember, what made you successful today may not be the key to success tomorrow - it is important to anticipate future industry shifts. It is essential to look five to ten years in the future and develop an Industry Scenario and Winner's Profile as part of your strategic planning process. These two steps will enable your team to identify shifts that will significantly impact your business and allow your team to develop a strategy to meet these changing industry conditions.


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¹"Wyeth's Multibillion-dollar Biotech Bet", by Elizabeth Svoboda, Fast Company, January 14, 2009

²"Clorox Updates Investment Community on Centennial Strategy to Drive Long-term Growth", Press Release, June 11, 2009.


© Copyright 2009 by Center for Simplified Strategic Planning, Inc. Ann Arbor, MI -- Reprint permission granted with full attribution.