To Survive

Upscale or Downscale Business to Survive

by Jun 15, 2020Growth

The middle of the market is collapsing.

Now is the time to find your company’s place.

When it comes to positioning your product or service in the marketplace, you will find yourself in one of three positions: You will either compete on the high-end, the low-end, or in the middle. In other words, you either offer a high-end product or service, a low-cost solution, or you try to straddle the middle and be all things to all people. What we’re seeing today, however, is that the middle market is increasingly going away as it gets chewed up from either end.

Take food shopping. For years, most grocery stores were middle-of-the-road offerings. But there’s been a shift in recent years. People now shop at either low-cost bulk suppliers like Sam’s Club or Costco, or high-end retailers like Whole Foods for more specialized and expensive food items. That shift in buying habits has squeezed the traditional grocery store in the middle. If you have been operating a normal vanilla grocery store, you’ve seen a decrease in revenue as these competitors have become either upscale or downscale business positions. Worse, they have focused on the most profitable products in the store.

Another example is in the field of government contracting. There are set asides for small businesses and they are protected for only small businesses to win, and then there are large, sophisticated contracts that only large billion-dollar businesses can really compete for. The trouble comes for the companies in the middle, something like $100 million in revenue, which find it difficult if not impossible to compete. They get squeezed because they’re not small or big enough to compete for the best contracts. The middle has collapsed. This has driven a ton of acquisition activity in the government contracting space.

The key, if your business finds itself stuck in the middle, is that you need to shift. If not, you’ll likely find yourself out of business in short order. Fortunately, there are a couple of strategies you can put into action.

1. Niche out, up, or down

One way you can move out of the middle is by finding a niche you can serve extremely well. If we return to our grocery store example, the company in the middle could shift to providing a more gourmet or specialized offering, like freshly baked artisan bread, an amazing butcher, or unique fresh fish.

But when you play in a niche, you also need to be able to pivot if the big guys get interested in your space. In the government contracting world, I worked with a company that supplied specialized traffic-control software to the FAA. It was the only expert in that field, so it won every contract that came up. But then the FAA recently made the shift to a new technology based on GPS navigation, which allows for more density of planes in the air space. This was a multibillion-dollar contract, really designed for a larger firm to execute, and it wiped out the niche for this business. That forced it to shift to a new niche where it could compete better than anyone else.

2. Dominate the middle.

If you don’t see moving into a niche as viable, a different strategy is to dominate the middle by buying up your competitors. If you can’t get smaller, get bigger through acquisition and make your dog of a business a dog kennel. If you can scale up your business by taking over your competitors in the middle, you could then begin to compete for those larger pieces of business.

Consider a grocery store that dominates the middle and buys up enough competitors to become dominant in some geographical area, or gain significant supply chain leverage, perhaps creating in-house, high-margin products. Or, a government contractor could acquire multiple other $100 million businesses that, when combined, create the scale needed to bid on the largest federal contracts.

The point is that you can’t afford to stay in the middle of the road anymore. If you do, you’ll get squashed. To survive and thrive, you’ll need to either scale down into a niche you can defend–or dominate the middle and scale up and compete at the top of the market with bigger competitors.