The Bootstrapper's Bible (3 of 30)

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COPYRIGHT
The Bootstrapper's Bible by Seth Godin. Copyright 2004 by Seth Godin.
All Rights Reserved. Sharing not permitted.

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SECTION 1: The Joy of Small (CONT'D)

WHAT’S A BIG COMPANY GOT
THAT YOU HAVEN’T GOT?

Most of the companies you deal with every day, read about in the media, or learn about in school are companies with hundreds or thousands of employees. They have an ongoing cash flow and a proven business model. (I’ll explain what that is in the next chapter.)

Because this is the way you’ve always seen business done, it’s easy to imagine that the only way to run a business is with secretaries and annual reports and lawyers and fancy offices. Of course, this isn’t true, but it’s worth taking a look at the important distinctions between what they do and what you do.

Just as playing table tennis is very different from playing Wimbledon tennis, bootstrapping your own business is a world apart from running IBM. You need to understand the differences, and you need to understand how you can use your size to your advantage.

Traditional companies succeed for a number of reasons, but there are five key leverage points that many of them capitalize on.

1. DISTRIBUTION. How is it that Random House publishes so many best-selling books, or Warner Music so many hit records? Distribution is at the heart of how most businesses that sell to consumers succeed. In a nutshell, if you can’t get it in the store, it won’t sell.

Companies with a lot of different products can afford to hire a lot of salespeople. They can spread their advertising across numerous products and they can offer retailers an efficient way to fill their stores with goods.

Traditional retailers want the companies that sell them products to take risks. They want guarantees that the products will sell. They want national advertising to drive consumers into the store. They insist on co-op money, in which the manufacturer pays them to advertise the product locally.

That’s why Kellogg’s cereals are consistently at the top of the market share list. Lots of smaller companies can make a better cereal, and they can certainly sell it for less. But Kellogg’s is willing to pay a bribe (called a “shelving allowance”) to get plenty of space at the supermarket. Kellogg’s airs commercials during Saturday morning TV shows. And Kellogg’s has hundreds of sales reps wandering the aisles of grocery stores around the country.

Kellogg’s wins the market share battle in mass-market cereals because it succeeds at the last and most important step: getting the product in front of the consumer.

2. ACCESS TO CAPITAL. The big guys can borrow money. Lots of it. It’s no big deal for a car company to raise $200 million to pay for a new line of cars. In industries where the expenses for machinery, tooling, research and development, and marketing are high, big companies with cheap money often prevail.

Microsoft, for example, took six or more years to turn Windows from a lame excuse of a product into the market-busting operating system it is now. Year after year after year, it lost money marketing lousy versions of Windows. How could it afford to do this? By raising money from the stock market at very low cost and hanging in.

Big companies have access to capital that a little guy can’t hope to match. A hot company like Yahoo! is able to raise money from the stock market with no personal guarantees, no interest payments, no downside risk. And it can raise a lot. More established companies can issue bonds or get lines of credit for billions of dollars. The banks and investors that back these companies aren’t looking for a monthly or even a yearly return on their investment. Instead, they’re focusing on building profits a decade from now. A bootstrapper could never afford to compete with this approach.

If a market can be bought with cash, a big company will do it.

3. BRAND EQUITY. Why would you be more likely to try a new line of clothes from Nike than from Joe’s Sporting Goods Store? Because Nike has invested billions of dollars in building a brand name, and you’ve learned to trust that name. Nike can leverage its name when introducing new products.

Don’t underestimate the power of the brand! Financial World magazine estimates that the Marlboro name and logo are worth more than $2 billion. Any tobacco manufacturer can make a similar cigarette. But only Phillip Morris gets to extract the profit that comes from having more than 50 percent market share.

If the consumer of the product is likely to buy from an established brand name, the big company has a huge advantage.

4. CUSTOMER RELATIONSHIPS. Especially for companies that sell in the business-to-business world, access to customers is a tremendous advantage. Time Warner collects nearly one-third of all the advertising dollars spent on magazines in this country every year. When Time launches a new magazine, it has a tremendous advantage in selling the ad space. A fledgling competitor, on the other hand, has to start from scratch.

Last year, Costco sold more than $30 million worth of shrimp in its giant warehouse stores. The company can choose from hundreds of different shrimp suppliers (it all comes from the same ocean!), but it deals with only three firms. Why? Because the shrimp buyer at Costco doesn’t have time to sift through every possible supplier every time she makes a new purchase. So she works with companies she trusts, companies she’s worked with before.

In established markets, customer relationships are a huge advantage.

5. GREAT EMPLOYEES. Big companies are filled with turkeys, lifers, incompetents, and political operators. But there, among the bureaucrats, are some exceptional people. Great inventors, designers, marketers, salespeople, customer service wizards, and manufacturers. These great people are drawn to a company that has a great reputation, offers stability, and pays well. Smart companies like Disney leverage these people to the hilt.

During a meeting with someone at Disney, I saw a stack of paper on the corner of his desk. “What’s that?” I asked. He replied that they were resumes. More than 200 of them, all from extraordinarily qualified people, one with a gorgeous watercolor on it. All of them had come from one tiny classified ad in the LA paper. Big companies attract powerfully talented people.

What’s a bootstrapper to do? Big companies have better distribution, access to money whenever it’s needed, a brand that customers trust, access to the people who buy, and great employees. They’ve got lots of competition, big and small, and they’ve sharpened their axes for battle.

Do you have a chance to succeed?

No.

Not if you try to compete head to head in these five areas. Not if you try to be just like a big company, but smaller. If you try to steal the giant’s lunch, the giant is likely to eat you for lunch.

Inventing a new computer game and trying to sell it in retail outlets would be crazy—Electronic Arts and Brøderbund will cream you. Introducing a new line of sneakers to compete head to head with Nike at the core of its market would be suicidal.

You have to go where the other guys can’t. Take advantage of what you have so that you can beat the competition with what they don’t.

Many bootstrappers miss this lesson. They believe that great ideas and lots of energy will always triumph, so they waste countless dollars and years fighting the bad guys on their own turf.

That’s why the gourmet food business bugs me so much. Every year, another 2,000 gourmet items—jams, jellies, nuts, spreads, chips—are introduced. And every year, 1,900 of them fail. Why? Because the bootstrappers behind them are in love with an idea, not a business. Successful bootstrappers know that just because they can make a product doesn’t mean they should. Making kettle-fried potato chips from your grandmother’s recipe may sound appealing, but that doesn’t mean that you can grow the idea into a real business.

Given the choice between building a thriving, profitable business with a niche and a really boring product and putting your life savings into an intensely competitive business where you’re likely to fail but the product is cool, the experienced bootstrapper will pick the former every time. If you find an industry filled with wannabe entrepreneurs with a dollar and a dream, run away and look for something else!

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