Tuesday, July 14, 2009

The Future of Business is Small

In the past, companies had to be big because they had to in order to stay organized. Communications and transportation technologies were slow and expensive, so they needed a hierarchical chain of command to maximize efficiency. You can't have an open discussion about an important business decision very well via snail mail.

Another reason bigger used to be better is that there were fewer competitors and they were mostly producing physical objects of some sort. If you sold 100 widgets a day, you could beat out the guy selling 10 widgets a day on sheer scale, because there wasn't much possibility for differentiation of the products. They just had to work.

But now, product differentiation and company flexibility matter a lot more.

The number of businesses has increased vastly, therefore, the number of choices have increased with it. All those choices have made a crowded marketplace, and it seems to me that people are less and less satisfied with a product just being a good deal. They want the product to stand out, to have good design, to meet some special niche need, and on top of that, they also want it to be cheap and they want it to work. When a product stands out it gives people a reason to not have to sort through every last boring alternative to see which one is marginally better.

Think of Apple for example. Mac computers cost more on average than their PC counterparts, but people still buy them. Why? They perform the same tasks as a PC but they do it with style. They are fun to use as works of art themselves, not just a means to some end.

I'm sure a lot of people will say, "You're just describing the luxury market, nothing has really changed." This is part true, but I think that we shouldn't underestimate the momentous shift caused by the internet. Before, branding was an expensive thing, you had to pay for advertising which was really expensive. Now, any company can make a snazzy looking product and advertise and brand it themselves online for much cheaper. We're seeing a branding arms race. People want to be a part of a community and companies want communities formed around their products. The internet is enabling this to happen to a greater and greater extent.

So back to my initial thesis, that the future of business is small. The reason I think we'll start to see a trend toward leaner business is that people are starting to reject mass-advertising. Friends are much more trustworthy than some marketer. With the internet, it is becoming easier to rely on real connections with people we trust to make purchasing decisions. I'm describing businesses that are more like movements. They are smaller and more flexible, so they can always outpace their bigger rivals when the markets shift. They'll be able to stay on top of trends. They'll have a more loyal customer base. They can get in touch with suppliers through similar social networks, rather than the traditional good-ole-boy network. These suppliers can come from anywhere in the world.

The global market is getting a lot more competitive, and the products that stand out, and are made by lean companies will win.


  1. I agree to some extent. I'd love to be some kind of neo-artisan. Some things scale very well, and for those things, the future is small. Niche products, and products that can 'stand on the shoulders of giants' can be produced and sold on a small scale. Everyone is happier. Some guy makes wine, and has a following of people that pay him for the privledge to drink it. Another makes software. But who makes steel beams? Who ships sea containers? Who makes microchips? These things require tremendous amounts of investment, and will likely always be big. Perhaps there is a downward spiral of diminishing profits in many 'big' sectors, but that doesn't mean that they are getting small. I think the future is small only if you don't consider the rest of the supply chain. Consider the CrunchPad. The guy that started the blog Techcrunch decided that he could make money with a start up that produced one product, a little tablet that you can surf the web on. On face, he's a small firm. He fits all the stereotypes of a born global, innovative, value-added, synnergistic member of the 'information economy.'But what about the firm he contracts to build the CrunchPad? They're BIG.

  2. I definitely agree. I didn't really think about all the back-end B2B type products that just need to be produced as commodities on massive quantities of scale.

    Michael Arrington's CrunchPad is going to be awesome.