Winner Take All or Winner Take Small? 5 Tips to Stay Ahead of the Competition

I’ve been thinking a lot about technology and technology adoption in our industry. Hardly a day goes by that I don’t see some article about Google, Facebook, Uber, Amazon, AirBnB or Microsoft, both in the general and the trade press.

The stories are so compelling. They represent everything core to the American psyche. Spunky startups that grew to dominate the landscape. Rags to riches stories for founders and funders. Epic battles pitched by larger-than-life personalities—Zuckerberg, Bezos, Kalanick have all become household names. In our real-life version of Game of Thrones, we build them up as heroes for the ideas they bring and the way they change our lives and then revel in tearing them down a notch (or three) when they blunder.

And so we naturally try to take lessons from all of this. How does it apply to our industry? What do we need to do to be innovative, aggressive and successful?

Before answering that question, let’s look a little bit at what drives those businesses. All those business are in “winner take all” verticals. While that may be slight exaggeration (they do each have competitors), it’s not far off.

• According to Search Engine Journal, Google had 79.9% of desktop search in August 2016 compared to Bing’s 9.9% and Yahoo’s 8.3%. In mobile search, Google had a staggering 94.5% share to Yahoo’s 4% and Bing’s 1%
  
  
• According to Business Insider, Amazon has a 43% share of all online retail purchases in the U.S.
  
  
• Even with Uber’s recent troubles, Business Insider reports they have a 77% market share for May 2017 (down from 84% at the beginning of the year)

Contrast with this the fact that the NMHC Top 50 owners total just over 2.8 million units. That’s less than 20% of all multifamily units (5+ units per building) and just over 5% of all U.S. renter households.

The fact of the matter is that most of the press goes to these “winner take all” industries because the very nature of the size and risk involved creates fascinating drama. Why does the general press largely not report on our industry? Because deep down, we are a “winner take small” industry. There’s very little existential risk in our daily lives. Sure, there are winners and losers. But very few losses are fatal. It’s more like “gold medalists,” “silver medalists” and everyone at least gets a participation award.

I don’t mean that sarcastically or as a criticism. It’s the truth. Look at the top 50 NMHC companies over the past decade. Did any of them ever go bankrupt? In fact, the only ones that ever stopped operating as a business were bought out at a premium with executives being very well compensated on the way out. In the public arena, many have been criticized by analysts but there’s simply rarely the drama as our business is more workhorse than thoroughbred.

I think this is something we should applaud. In today’s crazy, fast-paced world, it’s nice to be in an industry that affords some time for thought. I’m grateful that every question isn’t potentially a life or death situation for the company, that every question doesn’t need an immediate answer and that we have time to think before we react to a competitor’s move.

Here’s a few tips we have for executives to leverage the strengths of this position:

• Steady, modular improvements in technology and process will win. There’s little incentive to “swing for the fences” since the rewards are small compared to the risk. That doesn’t mean there’s no room for innovation, but it does mean that there’s almost never justification to “bet the farm” on a massive project.
  
  
• Embrace the concept of “good enough.” In “winner take all” markets; bigger, better and more sophisticated almost always wins. In contrast, “winner take small” markets are usually characterized by a “Goldilocks Zone” approach. Set the capability and standards too low, and performance will suffer; however, set the bar too high and it’s more likely that time and money will be wasted rather than performance improved. Finding this “just right” zone can be very challenging, but it’s where optimal performance lives.
  
  
• Decide where things can make a difference. I’m a firm believer that investing customer-facing technology pays off much more than back office technology. The former can be a differentiator and support higher rents while the latter tends more towards cost control and thus limited “one time” benefits. Thus, I generally advocate that we make our business fit the off-the-shelf software for back office functions while we invest more in making our customer-facing software fit exactly to our business (and what customers want).
  
  
• Understand the implications for recruiting. When I ran marketing, I remember challenging my team to recognize that marketing just wasn’t high on the list of our CEO’s concerns. If anyone on the team wanted to be regularly in the spotlight, then they needed to go to an industry that was marketing driven. Rather than be demoralized by this, I encouraged them to figure out how to make a difference with the limited resources we had. I opined that it was easy to do marketing with virtually unlimited resources. The real challenge was making a difference without spending a ton of money. We need to recruit people excited by that.
  
  
• Understand the cap multiplier. It’s easy to be trapped by a pessimistic view that we can’t move the dial much in a “winner take small” vertical. This misreads the situation. The key characteristic difference between WTA and WTS markets is not that you can’t get outsized return in the latter; rather, it’s just that the difference between #1 and #2 isn’t that great. There’s still a big difference between top 10% and bottom 10%. And in our industry, small differences in operating performance translate to large differences in wealth creation. At a 6% cap rate, a single dollar of incremental NOI is more than $16 of value creation. So the moral of this story isn’t that we shouldn’t invest in innovation, it’s that we should be comfortable with the slow, steady investment progress that pays us rather than flashy outlays that get more press than performance.

What do you think? Does this resonate (or not)? We’d love to hear from you!