Big may be beautiful but flexibility is better

There has been plenty of talk about the advantages of size in recent months.

The probability and timing of consolidation in the mortgage network, sub-prime lender and building society sectors have all been discussed.

The underlying presumption has been that big is beautiful or at least gives you an edge over the competition. Witness the talk about the merger between Nationwide and Portman for a classic example of people presuming that greater size will equal greater competitiveness.

And yet we have also seen a number of new entrants, particularly into the sub-prime lending market, which have started from scratch. Meanwhile, the long predicted round of consolidation seems to be a long time coming.

So how much does size really matter?

Clearly there are advantages to being large. The economies of scale suggest that there should be cost advantages, in particular through fixed costs being spread across more output units.

This includes inv-estment in elements such as computer systems and marketing. In many negotiating situations, size gives the power to demand better terms whether it be with suppliers, for funding or exclusive products, or distributors.

But size certainly isn’t everything. Producing the right inno-vations and being responsive and flexible are far more important in most situations.

This means understanding what your customers want and being able to deliver it better than the competition. Having investment funding is important in this respect, favouring large organisations, but the insight to invest the money wisely is more important. After all, innovation and responsiveness can be hindered by greater size, for example because of lack of coordination between departments.

It is often a question of timing. While a market is still maturing and developing, size is not all it’s cracked up to be. Getting the right innovation can allow a company to achieve growth quickly in such a situation.

But as a market becomes more settled, products and services be-come more standardised and margins get lower. Then size starts to matter a lot more.

That is why in any market’s life there comes a period of consolidation when innovation becomes less important and firms look to reap the cost advantages of size.

And, as a market settles, leaders tend to emerge that have the power to buy smaller firms or force them out of business.

This settling down has not happened yet either in the mortgage network or the sub-prime markets. These are still developing, with innovation being more important than price. The latest wave of sub-prime lenders have shown this by triggering a spurt in innovation.

And the market for networks is even more youthful, with the opportunity for any company to grab the initiative, particularly in terms of computer systems.

Both of these markets – but particularly networks – will benefit from development as their products and services deliver more value to their customers.

Meanwhile, those expecting immediate or rapid consolidation will be frustrated for a while longer.