In 1973, EF Schumacher’s argument that small was beautiful attracted hippies but barely took flight in mainstream business thinking, largely due to a competing philosophy: that of scale economics.
Adam Smith famously observed that scale, and the division of labour it makes possible, lowers costs and increases efficiency. And his views still resonate today. For corporates and investors alike, size matters. It fattens margins and beats out competition, promising greater market share. This vision, spearheaded by the likes of Henry Ford, was not just about markets and profits. It also promised ever more affordable goods and services to the masses – from cars to televisions, soaps to food – together with the attraction of steadier factory-based jobs than the volatility of agricultural employment.
Today, this model does not quite have the same appeal. Many traditional business giants have come under fire for a huge range of offences – from keeping real wages low despite soaring profits, to tax avoidance, overly complex, opaque supply chains, offshoring and breaking up communities. Some large companies, facing investor pressures or even hostile takeovers, are now questioning the wisdom of the corporate quest for scale, especially if it means losing prized national treasures to foreign investors. In 2019 this revival of interest in smallness will increase.
Small businesses now have many more resources on their side. Cloud computing, e-hubs and platforms provided by the likes of Alibaba have connected small businesses to potential markets and suppliers at a fraction of previous costs. They have also given smaller players and even individual entrepreneurs low-cost ways to outsource back-office functions such as accounting, payroll, logistics and e-commerce.
In 2019, these political and technological forces will continue to converge. More businesses (and even governments) will espouse what the Harvard Business Review has called the economies of “unscale”. And this will play out in a number of different dimensions.
The innovation challenge for large incumbents is well known. They are often reliant on buying smaller players for ready access to innovative, market-leading ideas and products. Indeed, smaller has long been seen to be better when it comes to innovation: Lockheed’s small, empowered Skunk Works teams date back to the 1940s, and they have been emulated by the likes of Facebook and Apple.
Next year we will most likely see examples of the small-team-in-big-companies approach expand beyond innovative units to a whole business. Research published this year by Deloitte has highlighted the growing adoption by enterprises of the networked-organisation model, eschewing functional hierarchy towards operating as a network of smaller teams.
In a globalised world with shorter demand chains and even shorter attention spans, nimbleness can make or break a business, and not just in fast-moving consumer sectors. Small renewable-energy operators and community-based energy providers have already upended the business models of power utilities in countries such as Germany. Further uptake of technologies such as electric vehicles and lithium-ion batteries could further reconfigure the energy landscape.
This disruption will also be evident when it comes to food, and not just in more affluent economies. As incomes grow, consumer preferences gravitate away from mass production and towards local, more sustainable food products – with shorter supply chains – as well as to bespoke services and experiences. Other factors, such as food-safety concerns in emerging economies like China, are also fuelling the growth of local-food movements and farmers markets.
Three-quarters of companies in Deloitte’s survey named “inclusive growth” as a core value, indicating higher sensitivity to the socioeconomic and environmental impacts of their operations, which are often highly localised. And the growth of social enterprises, not just as a niche sub-segment of businesses institutions but a strategic direction worthy of pursuit in itself, is yet another sign of change.
None of this is to say that scale and efficiency no longer matter. In 2019, however, we will see that they cannot be pursued at the expense of everything else.
Bernice Lee is research director for global economy & finance at Chatham House, a London-based thinktank
This article was originally published by WIRED UK
