Why David Always Beats Goliath

One of the most challenging conversations to have with management is explaining how past mergers have multiplied their problems instead of solving them. These conversations always start with basic definitions. Let's start with the only two ways to make money in business: increase sales or reduce costs.

Growth is the result of competitive advantages in the market place. A business building a better or cheaper mousetrap will experience demand for its product. Competitive advantages drive demand for products or services. David had a competitive edge in one-on-one combat, which he successfully exploited. Growth is the result of efforts to add production capacity before competitors adapt. Legal protections, such as patents and copyrights, have been implemented explicitly to foster growth by preventing imitation. Growth is the method for increasing revenues by increasing sales. There is no limit to growing sales, which is why David became king. 

Consolidation, while resulting in a Goliath organization, is essentially the opposite of growth. Mergers of competing companies typically occur due to a lack of competitive advantages. These former competitors consolidate to achieve economies of scale in the hopes of remaining viable against companies with competitive advantages. Consolidation is a method for cutting costs to increase revenues. There is a limit to how much you can cut costs. Consolidation is Goliath's attempt to survive against David's competitive advantage. While Goliath defeats smaller competitors who also lack any advantages, Goliath ultimately is defeated too. Goliath, no matter how big he gets, never becomes king.

If you examine growing companies, you quickly recognize they are systems facilitating success. The restaurant industry was always competitive, but McDonald's experienced explosive growth due to its systems. Its methods were copied by other restaurants, which is why you now see more franchise restaurants than mom-and-pop diners. Note that McDonald's did not consolidate restaurants; it created McDonalds University to train new owners on its systems. Adopting a company's successful system is a sign of a competitive advantage. 

Some of the most straightforward examples of failing slowly through consolidation are medical groups. Medical offices and hospitals have been consolidating over the past ten years at an ever-increasing pace. However, these consolidations rarely result in the adoption of competitive systems, let alone changes in the operations of the larger group. When companies consolidate but nothing changes, this is a sign of competitive disadvantages. Consolidation is the attempt to remain uncompetitive through economies of scale. However, the refusal to change usually results in also failing to adopt economies of scale, undermining the original intent. 

When helping management understand why their consolidated business is still failing, it's usually because instead of being a small company refusing to adapt, they have created a large company refusing to adapt. The problem is the same, but larger. No sensible person says "the way we do business is no longer working, so let's do more of it" or "let's find other failing companies, team up, and fail together." Instead, I get the response that there is more than one way to skin a cat... which is true but some methods are more profitable. When you skin cats for a living, it pays to figure out which way is best.

I recommend that consumers avoid consolidated companies because the quality of these businesses' goods, services, or both is typically inferior to what may be found elsewhere. Consumers miss out while the business dies slowly. Think about this when you decide where to spend your dollars, or more importantly, where you earn them. If you purchase from a company undergoing consolidations, you are suffering as a consumer. If you work for such a company, the clock is ticking on how long you have a job. David is coming for you, and it's hard for Goliath to hide.