How Small Beats Large

How does a smaller company beat a large company with seemingly unlimited resources?

This is a problem I have been struggling with, and here are some thoughts (basically a synthesis of Porter and Christensen).

The problem has to be looked at from both sides, let's call them SmallCo and BigCo. The SmallCo's strengths alone are not going to be enough, nor the BigCo's weaknesses. It's only when the former's strengths match the latter's weaknesses that you have a David beats Goliath situation.

So let's look at it from both sides, starting with BigCo.

Just because a company has the resources to fight and win on any given single front, does not mean it can do so on all fronts, simultaneously. At some point every empire overextends itself. Where's the weak link?

A large company can have weak points where it lacks a) willingness/motivation, or b) ability to compete.

• Lacking willingness/motivation to compete. Perhaps because
• a) under the radar situation. The market in question is unattractive at the surface, or too small to move the needle for BigCo. 
• b) requires trade-offs. Examples would be if the market takes away resource from BigCo's favored customers, doesn’t match corporate value, or leads to cannibalization of opportunities. In his book "Seeing What's Next", Clay Christensen cited example of a firm that counts on post sale service agreement not being interested in an off-the-shelf /self-service product.
• Lacking ability.
• Perhaps because BigCo's activities and processes are not tailored to the value proposition offered by SmallCo.
• BigCo may have difficulty replicating SmallCo's value chain.

Moving on SmallCo's side. How does SmallCo take advantage of BigCo's weaknesses while avoiding its strengths?  

• Distinct customer segment and value proposition that does not match BigCo's. 
• SmallCo would target over-served customers, under-served customers, non-customers (creating new market)
• Tailored value chain supporting that value proposition. The value chain should show 1) uniqueness, 2) internal fit, 3) independence from BigCo.
• Uniqueness. It has to be different from BigCo's. Otherwise you will just be overwhelmed by brute force.
• Internal Fit (interdependency). The value chain should fit together in a way that’s hard to replicate. Ideally the parts are interdependent on each other. This way your competitive moat compounds and is hard to replicate.
• Independence. Separate value chain. If parts of the value chain overlap, then SmallCo could be forced to play by BigCo's rules.

Basically if your David, make sure you can afford to NOT play by Goliath's rules.

A Short Example with Elastic N.V and Chewy

These are two companies that compete with Amazon in two completely different industries. The differences provide them different strengths and weaknesses relative to Amazon.

Elastic ("ESTC"), which I have written about here, provides search functionalities that Amazon effectively copied. Chewy ("CHWY", as discussed here) is an online pet food/supplies provider. 

Which has a better chance against Amazon?

Amazon's Motivations

I would say Amazon is much more motivated to go after Elastic's search market, which competes with Amazon's AWS segment. This segment of Amazon not only provides more profitability than its e-commerce segment, but it is also growing much faster. A quick look at Amazon's earning releases shows tremendous focus on developing AWS's capabilities. Overall, Elastic's search/indexing market looks strategic to Amazon.

On the other hand, pet e-commerce is seen as a fairly steady, slower growth market. Pets are hardly ever mentioned in Amazon's earning calls. 

Verdict: Amazon is much more motivated to attack Elastic than Chewy.

SmallCo's Value Chain

Chewy has its own distribution facilities, call center, and service reps. These fit together in a way that reinforces Chewy's niche strategy (as discussed here). In terms of pet products, its suppliers does overlap with that of Amazon's, and that could be a problem.

Elastic though, actually deploys its hosted service on AWS! Talk about NOT having an independent value chain! Elastic belated realized Amazon meant harm and started diversifying to Microsoft Azure in addition to Google (GCP), but the damage has been done.

Verdict: Chewy's has a more distinct value chain from Amazon.

We can go further, but this is enough to show that Chewy will have much stronger defense against Amazon's invasion.