The size of things to come

When it comes to companies, big is usually better. Or is it? While different models prevail, economies of scale are one of the favourite reasons for making a business bigger. Towards the end of the eighties large companies seemed untouchable and predictions were widespread that by the end of the century, industries such as electronics, banking, publishing and advertising, would be controlled by a few very large companies. This prediction is rapidly being turned on its head. Let’s look at some of the trends.

Downsizing, upsizing, rightsizing

Corporate America and Europe have spent the last ten years re-engineering their companies. Management consultants have made a tidy fortune advising companies on strategies that will make them leaner, meaner and more manageable.

The basic problem seems to be that as organisations mature, just like their human counterparts, they tend to acquire layers of fat. Growing companies continually struggle with this phenomenon and it is not uncommon for an organisation to break itself into pieces in order to manage itself better.

AT&T, the international telecommunications giant, is in the process of splitting its business into three autonomous operating units. In South Africa Gencor started an unbundling exercise 2 years ago by selling off their interests in subsidiaries so that it could focus on core business.

Technology and the internet

Sheer size made it possible for large organisations to dominate their markets. With the advent of more sophisticated technology this domination has become increasingly more difficult. Small lean organisations are able to compete effectively by deploying ever-improving technology quicker and more effectively than their larger counterparts. Big companies seem to get bogged down in project teams and documentation while small companies are following Nike’s advice and “Just doing it!”.

The internet is now also playing a notable role in this David and Goliath battle. Because barriers to entry are very low, small companies are able to utilise the internet just as effectively as companies with major budgets.

It is often the small companies that seize the opportunities while the more conservative corporates are still making up their mind. Small companies, while lacking the benefits of economies of scale and the muscle provided by large amounts of capital, are able to compete by being innovative and keeping overheads down to a minimum. Technology, it seems, is the great equaliser.

Many small businesses are started by executives who leave their corporate environments with large severance packages, loads of experience and a determination to succeed on their own. Having been exposed to the benefits of technology, these entrepreneurs spend their money on the hardware and software with which they are familiar.

Robin Sternbergh, head of IBM’s worldwide small and mid-size sales and service, observes that companies with fewer than 50 employees comprise the fastest-growing market segment. Annual sales to this segment are increasing at 14% a year.

The small business community is growing at unprecedented rates and some major companies are sitting up and taking notice. American Express recently announced a new credit card with a $20,000 limit, which is the centrepiece of a focus on businesses with fewer than 100 employees. Other services will include new credit options, lease financing, and financial management services.

Why are corporations taking small business seriously? “Small business is the third-largest economy in the world, after the US and Japan” says Steve Alesio, president of American Express Small Business Services.

The Future

As the global market place grows in size and complexity, it has become increasingly important to find a niche and focus on it to succeed. Large companies spread into numerous business areas will find it difficult to compete with small companies focusing on just one niche market. The need to offer a one-stop solution is, however, still a big selling point for any business.

In the past, this was the domain of the large diversified company but going forward the “one-stop shop” may well be networks of small companies who run autonomously but work in alliance with partners offering complimentary services.

Author: Dale Williams

Dale is based in Cape Town on the southern tip of Africa from where he maintains connections with people all over the world through his portfolio life.