In a 2012 Harvard Business Review article, Maxwell Wessel made an interesting point. He argued that the corporate scale had ceased providing large companies with the same competitive advantage as it used to in the past. Being bigger doesn’t guarantee safe harbor anymore. The cost of starting a new company is becoming lower and lower, and, with first-class management systems available in the cloud and Alibaba.com-driven manufacturing in China, the minimal efficient scale is rapidly shrinking. Small companies can now compete with larger players–and even “disrupt” them–with the ferocity not imagined just a few decades ago.
Writing for HBR in October 2015, Nicco Mele builds up on this argument by pointing out that while the global M&A pace is accelerating, resulting in the creation of new corporate mega-behemoths, America’s largest companies are steadily losing market share. Mele suggests that the ongoing industry consolidation is just a desperate attempt by large corporations to defend themselves from the attacks of smaller competitors. And yet, insists Mele, America’s return to a more entrepreneurial, more fragmented economy–comprised primarily of small, dynamic firms–is inevitable. Mele calls this emerging economy craft economy.
To me, the most intriguing aspect of this discussion is not the predicted demise of the “big,” but, rather, the increasing significance of the “small.” Of course, the important role played by small businesses in the U.S. economy is nothing new. According to published data (here and here), over 50% of American workers (120-130 million) work in small businesses. Small businesses employ half of all private-sector workers and 39% of workers in high-tech jobs. They provide 60% to 80% of the net new jobs annually and they produce 13-14 times more patents per employee than large firms.
At the same time, small businesses don’t reward their employees with a lot of job security: only half of new companies survive through their first five years, and only a third will be in business for at least 10 years. The attrition rate for high-tech startups exploring new, riskier technologies and business models seems to be even higher. It would therefore appear that increasing the longevity of small businesses and improving their wellbeing may have a profound positive effect on the U.S. economy in general.
Ironically, it’s large corporations that can make startups and early-stage companies more successful. This point was highlighted in a recent report by the World Economic Forum (“Collaborative Innovation Transforming Business, Driving Growth”). The report promotes innovation-focused collaboration between young, dynamic firms and large established companies. For small firms, such collaboration allows them to use resources of large companies to rapidly scale their businesses and get access to new markets, increasing therefore their chances for ultimate success. For large companies, working with nimble, inherently entrepreneurial startups may help them succeed with high-risk/high-return innovation projects.
Regardless of whether one believes in Nicco Mele’s concept of craft economy of tomorrow, the real question of today is how small and large companies can work together to ensure global economic growth through innovation. In other words, how David and Goliath should structure their collaboration to craft value together.