Diseconomies of Scale – Sewing Machines Los Angeles

 As an entrepreneur toys with that one big idea he/she will undoubtedly weigh the pros and cons in an effort to determine the feasibility of an idea.  The biggest question that occurs during this fragile stage is: are the big, entrenched, experienced, and rich competitors too much of a threat to proceed? A lot of people in the business community believe that success is positively related to the size of an organization.  In this growth-drunken world of executive management many entrepreneurs forget about the problems that coincide with the bureaucracies created by big business.

Ever since Andrew Carnegie perfected the practice of vertical integration, companies have been implementing business models that take advantage of economies of scale.  Their instincts lead them to these decisions, but what is the cost of spending their cash and spreading themselves thin for the sake of growth?  This article will focus on how small companies efficiency, speed, and innovative nature trumps the ultimate diseconomies of scale produced by big business.  The Greenhouse believes that big companies are the sea turtles of business given that they continually hide within their powerful shell and move only when about to be killed.  Whereas Howard Gleckman of Business Week believes that “The critical role of entrepreneurs may be more akin to wolves: aggressive and skilled at culling out the old and sick.”  New entrepreneurs must harness their inner wolf and challenge the business models created by big business.  Their size is your opportunity.  How and why is described below.

History of Big Versus Small Business

 Before the 19th century small business was obviously the norm.  It was the era of the sewing machine, the grain elevator, morse code, and dishwashers.  All great entrepreneurial ideas, but hardly the tools of business conglomerates.  The Industrial Revolution changed all through the rapid expansion of the country.  Inventions during this time not only changed the world, but demanded management by big companies, not small ones.  Industries that paved the wave for big business at this time were railroads, automotive, construction, and telephones.  These types of businesses required extensive capital, human resources, and experience.  These are all things that big business could take advantage of, but small businesses couldn’t.  After the war this economic favoring of big business continued for about 40 years.  Between 1958 and 1979 businesses with less then 500 employees lost total grossed market share to its bigger counterparts: falling from 52% market share just 29%.

Big businesses were implementing push instead of pull strategies, meaning they would just sell what they made with little-to-no market research and dismal forecasting.  They could get away with push strategies because the population was booming, and there was little competition.  But then came the 80’s.  A revolution driven by the desire for creativity upheaved.  Technology and business-oriented environmental changes favored small companies.  Finally, power was being put back in the hands of entrepreneurs.

Catalysts to the Small Business Revolution

 The short answer to the complicated question of why there has been such a dramatic change in the business environment is technology.  Technology is making barriers of entry smaller then they have ever been in the past.  Two great examples would be overnight delivery services which reduces the need for distribution centers and their corresponding holding costs.  The second and more important being the advent of the personal computer.  This invention put the power back in the hands of the masses and allowed newcomers to be more productive then ever before.  

Distance and speed are no longer hurdles on the pathway to information thanks to the internet.  In the decades prior to the personal computer information was considered power and thus bought out by big companies.  That pricy information had to be stored in even pricier manners.  Even if you technically owned the information it was difficult to find exactly what you wanted out of it, let alone implement it into your plans.  

Geographic reaches have infinitely expanded for both consumers and entrepreneurs.  Online gamers chat and play with other consumers on opposite sides of the world.  At the same time corner shops in Kansas City scour the earth for international suppliers for their “mom and pop” businesses.

Very few experts will disagree that in this day and age the customers are the boss.  Consumers are taking on larger roles that start earlier and end later in the product life cycle.  They are demanding customization and personalized service that ultimately makes gigantic holes in the market that big businesses cannot fill.

 Small Business Works

 “What astonishes me in the United States is not so much the marvelous grandeur of some undertakings as the innumerable multitude of small ones.”  (Alexis de Tocqueville, 1835).  What Tocqueville is saying is that our economy works through the hands of many entrepreneurs, not a few big businesses.  From 1987-92 small businesses created  5.8 million jobs where as companies employing 500 or more people lost 2.3 million jobs.  But why?  What is it that young, inexperienced entrepreneurs have going for them that powerful and rich conglomerates don’t?  Ultimately it is boiled down to small companies core competencies of being quick to market, innovative, risk-oriented, and technologically armed.  

 

Quick to Market – To describe this concept visualize two entities that both have the same idea for a new product launch.  The first is a company of more then 500 employees, the second is a young entrepreneur fresh out of B-School.  For the big company the idea is first passed by upper management (who typically hate good ideas coming from below), then sent through research and development (which could take years), then integrated into their current model without cannibalizing present sales, and then distributed through complicated supply chains(that were formulated and contracted before the new idea was on the drawing board.)  On the other hand the young entrepreneur only needs to convince himself of the ideas worth, develop the product on his own terms and schedule, develop the business model around the product (instead of the product around the business model), and distribute it through more efficient supply chains that the entrepreneur feels comfortable with.  The end result is that a small business has the ability to take an idea from product conceptualization to actualization light-years faster then their big business counterparts.  

 Customer Knowledge – The more a business knows about their customer the better.  This also means more then typical demographic information.  In a big company the people that actually “touch” the customer are lower-level employees.  The same employees with little-to-no power to act spontaneously, no backing to be an individual, no motivation to sell the company’s mantra, and probably no real education to justify their position.  Very often in an entrepreneurial environment the person touching the customer is the entrepreneur himself.  Thus that person has more power and motivation to satisfy that customer and provide more value. 

 Innovation- Over 2.4 times as many new innovative products come to market from the hands of small companies.  Big business is big business for a reason.  They found something that worked and grew because of it.  This “if the shoe fits: wear it” mentality gets companies stuck on a path of destruction.  Look what happened to Blockbuster’s market share after Netflix redefined the video rental model.  What would have happened to Polaroid if they had staid the instant picture company and not branched out into new areas of business?  It is ironic how creativity can be viewed as a four letter word to a big company who was originally founded on that very premise.

 Risk (the ultimate motivation) – Risk makes businessmen work like dogs.   Who is going to try harder to make an investment pay off, the person that is spending their bosses money, or the person spending their children’s college tuition?

Internal Business Incubation

Business incubation refers to the act of nurturing new business creation.  It typically involves grants between $2,000-100,000, office space, consultation, financing, and networking amongst other businesses.  Big businesses are starting to see the concepts power by developing their own internal ones.  Internal incubators allow employees, as well as outside proposal seekers to develop new business ideas from within big, innovative companies such as Microsoft and Google. 

Phillips Electronics (a $31 billion dollar company) has a system in place which allows its employees to pitch their ideas in the form of a venture capital proposal to top executives at the company.  This system was probably put in place after they realized that their employees were getting life changing entrepreneurial ideas and then leaving the company to reap the rewards on an individual basis.  Other big companies such as PepsiCO dish out stock options to every employee at the company, including it’s janitorial staff to get everyone both thinking and acting like an entrepreneur.  

Fundamental Difference Between Mindsets

The biggest difference between to two types of companies is the way in which their employees attack problems.  Wage warriors that run big business have a task-based approach to their business models.  This mindset is one of looking at each task to be completed individually as a one-time necessity of completion.  No one with this mentality is asking why anything is being done, nor is it looking towards the future to understand how the completed puzzle piece fits into the grand scheme of things.  On the other hand a process-based perspective integrates the many facets or departments of an organization and determines how each can and/or should contribute to the business model as a whole.  This is an incredibly entrepreneurial tendency and gets harder as an organization gets bigger.  It encompasses one of the best and most necessary traits that an entrepreneur carries with him: the ability to see the completed outcome in its final state.

 Conclusion

 As an entrepreneur it is up to you to take advantage of all that you have.  It is important to understand the power that comes with being versatile and freethinking.  Your job is  take advantage of opportunities left abandoned by big business.  Challenge yourself to not only run your company, but also your life the same way that a good entrepreneur does: like a game.  

Big business makes our economy work.  They employ most of the world.  They’ve invented products and services that changed the way we live.  They have more money, experience, and brand equity then new entrants.  However, none of this changes the fact that those successful and powerful companies once started as one entrepreneur, and one idea.  They weren’t scared.  Why are you?

Works Cited

 Edersheim, Elizabeth H. The Definitive Drucker. New York: McGraw-Hill, 2007.

 Jam James, Feldman “Think Like an Entrepreneur to Achieve Growth, Productivity.” Sell!ing (2003): 2-10.