Winner Takes Enough: Competing withGiants

Posted: 01/2000

Winner Takes Enough: Competing with Giants
By Karen Strouse

While it can seem an insurmountable task to take on the world's largest telecommunications companies, many small-to-medium-sized companies have done so successfully. Some of these small companies have become giants on their own, such as MCI (now MCI WorldCom Inc./Sprint Corp.) (www.wcom.com), Qwest Communications International Inc. (www.qwest.net) and Teleport Communi-cations Group (now owned by AT&T Corp.) (www.att.com). Other lesser-known enterprises have remained small and prospered. How do these companies avoid becoming casualties in the battle for telecommunications customers? Small companies, more than the superstars, need to keep their eyes on the ball. Here is how smaller companies can compete head-on with the industry leaders.

Create a Sustainable Business Model

Large corporations can afford to experiment with a variety of business models, knowing that some will fail. This luxury is not available to those small and medium-sized companies who need to use each investment dollar wisely. Price is an obvious but challenging differentiator. Companies that compete successfully based on price consistently maintain a very low cost profile. Below-cost promotions and giveaways to gain share are questionable approaches for those with deep pockets and suicide for startups (see table below). The business model must provide customers with long-range value above a price that covers costs. Williams Communications Inc. (www.wilcom.com) has positioned itself profitably as a carrier's carrier. Teligent Inc. (www.teligent.com) has committed to a local wireless technology to serve only a segment of the business market. Alternative models include excellent customer service, unique distribution strategies, packaging for a specific market segment or patented technology. Any of these alternatives can provide value to customers and profit to the provider.

It's Hard to Compete Against Free Service
Table 1

Define a Scope in Which To Excel

Even AT&T cannot serve the whole world by itself. Multinational telecommunications providers already are teaming or merging, knowing the scale required for serving a universe of users. Successful small and medium-sized companies often instead decide to serve market segments such as businesses rather than consumers, or customers in selected industries with similar needs, or a specific geographical area. These decisions enable the smaller service provider to tailor communications offerings to the target market, entice the customers from more generic providers, and enjoy more profit than those in the central marketplace.Table 2 on (click below) demonstrates a potential split between buyer segments.

Different Buyers Have Different Requirements
Table 2

To determine the right segment to serve, small providers need to look at their own strengths. The provider with an unsophisticated customer service organization will compete more successfully with the price-sensitive buyer. Small providers with a client base and custom software in a specific market such as education will be more successful selling to new customers in the same market.

Maintain Flexibility

Small companies are expected to be nimble, and the truth is they often have no choice. One would expect most providers to enter markets through resale rather than construction, and for the larger providers to build their own facilities in a short time. Not only is this strategy inappropriate for smaller providers, it might not be such a great idea for the giants, either. The demise of long distance resale was predicted for some time, but it did not happen. Instead, the evidence is that resale is growing faster than its facilities-based counterpart. Similarly, small resource-shy companies are forced to make management decisions that increase their market flexibility, such as outsourcing services, using indirect sales channels, and buying, not building. In a market that will move as quickly as telecommunications services, it can be an advantage not to make long-term commitments and long-range mistakes. Flexibility can be liberating, even if one is hamstrung into it.

Use Small Size as a Strength

It is true that size most often imparts strength. AT&T would not have been able to offer its Digital One Rate wireless and long distance solution if it did not already own most of a nationwide wireless footprint. Its ubiquitous network afforded an innovative pricing structure, with no long distance or roaming charges, Companies using purchased minutes simply could not match the plan. But AT&T has been burned already by a once-small company that hacked away at AT&T's market share with AT&T's own heft. The company was MCI, and the product was Friends and Family, a low long distance rate offered only when customers recruited other customers into its "calling circle." AT&T could not respond. It could not offer discounts for calling circles; everyone was already an AT&T customer.

Create a Brand

Telecommunications services still are largely a commodity. Nobody runs blind taste tests to see if customers can identify a Sprint call from an unbranded one. Still, brands, created largely through advertising, have created quality distinctions in the minds of consumers. Both Sprint and AT&T have benefited from branding their services on the quality of the technology; other telecommunications pro-viders have associated their own brands with other benefits. Brands are important because they command premium prices over equal unbranded products. The fact that AT&T can still command non-discounted prices for its long distance service (most AT&T customers still do not subscribe to a calling plan) attests to the enduring strength of a brand. While it is a challenge for any carrier to develop and nurture a brand, focused smaller providers can create solid and profitable brands within their own market segments. To create a successful yet limited brand, start with a defined market segment. Develop targeted programs to serve an industry (for business) or specific demographic group (for consumers), or serve overlooked markets or those that are non-strategic to the industry leaders (see table 3, below).

Targeting Underserved Markets
Table 3

Use the Web

Electronic commerce is the leveler between great and small. A well-defined and effective website does not depend on large investment or back office infrastructure. Furthermore, the largest communications providers ironically are among the poorest examples of web commerce. Whether the absence of exceptional telecommunications provider sites is due to lack of vision, poor execution or competing information requirements is unimportant; what matters is the opportunity it creates for leaner and more flexible competitors.

The difference between today's tele-communications behemoths and those that survive deregulation will be marketing, not deep pockets. Former monopolists will need to learn to retain enough business to grow even if their share is no longer all of it. If market growth of the last two decades of fading regulation is any indication, though, there will be plenty of growth for any company that knows how to market in a competitive arena.

Karen Strouse owns Management Solutions, a consulting firm specializing in telecommunications planning and marketing. Her book, "Marketing Telecommunications Services: New Approaches for a Changing Environment," was published by Artech House in 1999. She can be reached at kstrouse@msn.com