The Coming Dominance Of Small Business.
Anyone can create value with anyone else from anywhere: value is freely created. That’s the new feature of the emerging digital age of business. Digital technologies have been around for a while, but the digital business economy is just getting going.
More significantly, tomorrow’s structure of business promises to be much different than today’s. The path forward to a new, high-productivity future in the digital age is more likely to be paved by micro-startups than tech giants.
But the new structural patterns in business are not confined to technology industries. One example that comes to mind is the craft beer industry. Growing from a minuscule level of commercial significance in its industry in the last century, craft beer now represents about 25% of beer revenues in the US. Moreover, this new segment has introduced dynamic innovation in recipes, flavors, label design, bottle style, and usage occasions (like beer flights on brewery visits). Craft beers command higher unit prices and higher unit dollar profits. The big brewers are scrambling to keep up.
Size and scale are not the economic variables that matter for craft brewing. And industry dominance by a few mega brewers turns out not to be the natural structure for the beer industry. Creativity and innovation are what count, rather than manufacturing scale. In fact, according to Beverage Daily, “small is the new big” in brewing.
Recipes are free – they come from the imagination. Raw materials are low cost. Brewing equipment can be purchased at low cost, borrowed, rented or made. There’s a flourishing online community of enthusiasts and experts and mentors to help with everything from P&L structure to sourcing. Entry to the industry is open. It’s easy to be a micro startup in brewing.
The trend in favor of micro startups is even more marked, of course, in digital technology industries. When production capital is code, which, like beer recipes, is a creative product that can be made from the imagination, then the “manufacture” of digital products is open to all.
More broadly, there is a raft of reasons for a surge in small business in the economy, in all industries.
A new relationship between people and capital.
In the traditional left-leaning depictions of capitalism, there are two separate groups: capitalists and the rest of us. Capitalists are privileged and endowed owners of production capital and financial capital, and the rest of us work for them. We can’t cross the divide from worker to capitalist. Nothing is further from the truth in 2022. Capital is now highly distributed and available and accessible for all. What used to be fixed capital is now rentable via the cloud – Amazon Web Services being the most notable example. No need to own servers and infrastructure. Entrepreneurs don’t need real estate or a storefront. Nor do they need a factory when they can 3D-print products, or rent factory time. Product designers are available for projects or by-the-hour through high-trust apps and services.
It’s a similar world in financial capital. Lending platforms, angel investor networks, fintech apps and crowdsourcing are all available to channel investor money to promising startup ideas. The new relationship between people and capital operates in financial capital equally as well as it does in production capital, distribution capital and human capital.
Tho power of networks.
One of the great breakthroughs of the digital age is that anyone can connect to anyone else, and to any other resource. There’s no need to build a big firm; just assemble all the components required for one via digital interconnection. Entire supply webs from component manufacture to assembly to shipping to retailing and home delivery, plus the requisite financial services such as insurance, can be woven together digitally without any requirement for infrastructure ownership. There are expert, experienced organizers and integrators and managers for hire. Digital reporting facilitates real-time monitoring and control.
Because all the support services are available and on-call, the startup entrepreneur is able to focus tightly and entirely on their one unique value-creation contribution. Peter Thiel in the book Zero To One, a foundational text for high tech startups, recommended that every business seek to be a monopoly, i.e. so highly differentiated that no competitor could match or replicate or under-price their product or service.
Ever since 1776, when Adam Smith wrote about the division of labor in a pin factory that raised output by 1000%, business has understood that specialization can drive local productivity. Now, in the digitally networked economy, micro specializations can be interconnected for unprecedented multiples of global productive capacity. The individual nodes in this network, entrepreneurial businesses, seek more and more highly focused specializations to maintain and reinforce their differentiation, their pricing power, and their brand uniqueness.
What kind of businesses can sustain such productive specialization? Small businesses.
Peter Drucker famously stated that business is knowledge applied to knowledge by knowledge workers. In the digital world, knowledge is freely available and shared at speed, and as new knowledge is created by A.I. or machine learning or experimentation, it is instantly distributed. Entrepreneurs who need knowledge can find it, or can locate someone with the requisite knowledge who knows how to apply it and how to combine it with others’ knowledge in some new combination that represents an innovation.
Knowledge becomes a universal resource and less easy for big corporations to claim for their own.
Technologies are evolving at speed. Small business entrepreneurs don’t need to invent technology or even originate new uses; they just need to keep up with the evolution. The cloud, IoT, data science and advanced analytics, and robotics are just a few examples of a broad array of evolving technologies. Participation in the technology ecosystem keeps entrepreneurs on a leading edge of innovation without needing to be inventors. Entrepreneurial firms can move quickly and compete effectively by treating technology as a flow that carries them along rather than an investment that locks them in.
This, then, is the future for small business: get smaller, all the way to micro. Integrate with evolving tech ecosystems for momentum. Network with other specialists to form powerful business systems. Get infrastructure capital from the cloud and the internet, and financial capital from the fintech universe. The future structure of business is small and networked, not big and dominant.