You Decide: Is Small the New Big?
Date posted: June 20, 2014
Dr. Mike Walden
North Carolina Cooperative Extension
As a culture, we have often celebrated bigness. The biggest fish caught, the biggest skyscraper built or even the biggest ball of twine wound (I think it’s around 12 feet in diameter) will all get our attention. It’s probably related to an attitude that more is better than less.
The triumph of big over small has – for a long time – also prevailed in the business community, and for good reasons. Being a large company offered several pluses. Larger companies could take advantage of “economies of scale.” Instead of hiring a few people to do many tasks, bigger companies could hire many people, each of whom would do one or a few tasks. This allowed the old adage of “practice makes perfect” to kick in. The more someone did a task, the better he became at it, which translated into lower costs for the business.
Bigger companies could also afford to purchase more specialized and complex machinery that, again, made them more efficient, productive and profitable. Such machinery often had too high of a price tag for the “little guy” and so gave a competitive edge to “big” over “small.”
Last, with size came a larger share of the market and an ability to use that size to the disadvantage of smaller competitors. Bigger companies can pay for a larger advertising budget, can sometimes offer “deals” the little guy can’t afford and also have the resources to survive the periodic “downs” in the economy better than smaller firms.
But these advantages of bigness may be changing. In some economic sectors, small companies are beating big firms. We may be witnessing a shift in the economic climate toward “small” being the new “big.”
Several factors – some old and some new – are behind this shift. Historically, American consumers – rightly or wrongly – have often been suspicious of big companies. This viewpoint may be a hold-over from the early 20th century, when “trusts” (we’d call them monopolies today) ruled much of the economy. We like to root for the “little guy,” maybe because most of us can identify with him. So our hearts are with small over big.
Also, as consumer tastes and preferences change over time, small companies can frequently give us what we want more quickly than large companies. Large businesses may have to go through several layers of bureaucracy, testing and decision-making before a new product or service is rolled out. In many small companies, one person can do this.
Yet the most significant game-changer helping small firms today may be technology. Information technology can easily put a small firm in touch with both suppliers and customers half a country or world away. Small companies can do all their management tasks – accounting, payroll, taxes, etc. – using inexpensive and sometimes free programs.
Plus, sophisticated market analysis of buyers, trends and “what-if” scenarios can now be easily installed and run on almost any pc or tablet. It used to be that only the “big players” could afford this kind of economic intelligence. But no more – the playing field has been leveled.
Add on top of these the fact that companies don’t need scores of employees and building square-footage to be successful. Companies with revenues in the millions can literally be run from a room with a couple of workers.
This is why, despite all the recent changes and upheaval in the world economy, small companies have held their own. Indeed, in the 2000s, companies in the United States with less than 20 employees accounted for more than 85 percent of all establishments, and that percentage actually increased slightly during the decade.
A good example of the changing economic landscape of company size is in the beer industry. In 1980 there were fewer than 100 breweries in the country. Today there are nearly 2,700, and the growth has all been due to the rise of micro-breweries.
Younger beer consumers especially are flocking to these start-ups that offer twists on the traditional recipes and flavors and are tied to local areas. While big breweries still dominate the beer market (two companies account for 90 percent of all domestic beer sales), the market share of the micro-breweries has been slowing rising.
Does this mean big companies are doomed? Of course not. In fact, in several industries there is a trend toward consolidation of smaller firms into larger firms. This has recently been the case in the telecommunications industry.
But in terms of small companies having the tools and ability for a “fighting chance” against the big firms on the block, that opportunity is there. Of course, there is still a high potential failure rate for a business of any size in the early years. However, failure is always an option when beginning something new and bold.
A common plot line in many popular novels and movies is the “little guy” triumphing over adversity. You decide if this is becoming more of a reality in today’s world.
Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.
Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide.
Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective
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