The ebb and flow of the business cycle creates a dynamic environment across many different industries. We often assume that certain types of trends are negative, when in reality, they provide us with an opportunity to change moving forward. Consolidation is one of these trends that can be troubling for many business owners, but shouldn’t be perceived as so. Many industries undergo consolidation as a response to the market, and to different events that have exerted a significant effect on the industry as a whole. Many small-business owners may balk at the idea of consolidation; thinking that only the major players in any given industry will be the ones that benefit. This perspective does not take into account, however, the many positive aspects that come with the maturation of an industry; of which consolidation is a key characteristic.
Consolidation takes place in many steps, and will be very different depending on the industry. Generally, the process is shaped by industry leaders; companies that set the bar high moving forward, and change the standards for all players within the industry. It tends to be these companies that get the ball rolling in the process of industry-wide consolidation. This, however, does not always mean doom and gloom for the smaller companies and industry players. When consolidation begins to take shape initially, mistakes are likely to be made.
During this first wave of consolidation, resistance from companies will occur. Instead of fastidiously joining in this resistance band, it is suggested that smaller companies understand the trends, and the way that the industry is moving. By gathering an understanding of the direction moving forward, these businesses can better prepare themselves for what is to come, solidifying their ability to take on challenges as they arrive.
During the next phase of industry consolidation, the high degree of resistance that was present during the initial wave regresses, and is replaced by eager willingness of business owners. Companies are now faced with the reality of the inevitable, and adapt a more willing mentality towards the process of change. At this point, any mistakes that were made during the first phase of consolidation will be neatly taken care of so that the process moves smoothly going forward. This learning aspect of the consolidation process is extremely important in order for the industry to properly adapt to changes.
Finally, the industry enters the last phase of consolidation. During this phase, the industry completes an entire structural change, characterized by changes in capitalization, dynamics, and market share mix (New Venture Lab.com). Examples of this include reduction in product costs, an increase in the variety and quality services associated with products in this industry, and the development of a more defined value proposition for business owners. The changes in the market share mix will be characterized by an increased level of power of the mid-large size competitors. It is during this phase that these bigger companies will become the industry leaders; setting the standards for performance and productivity moving forward.
So how can small businesses survive and thrive during what seems like a time of change for the worse? Consolidation can be viewed as a negative or positive process; pure acquisition may not be the most favorable outcome for small business owners, but this is potentially avoidable should business owners jump early during the consolidation process. It is more than possible for small businesses to survive and thrive, capitalizing on the efforts of the larger industry leaders in order to either a) establish themselves as a “niche” player within the industry, catering to a specific set of clients or b) accept the process of consolidation and work to align the business’ objectives and strategies with those of potential acquisition-oriented businesses. By carefully following the trends and processes that characterize the business cycle, small business owners can optimize their results by preparing themselves for the different phases of consolidation as they occur.