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Counter – Culture: Smaller is Better

Posted by Flux on 

2 July 2013

Smaller-is-better

What’s trending now?

Counter-Culture: Smaller is Better.

The realisation that economies of scale produce efficiency drove business for the latter part of the 20th century.  Now there is a growing (albeit small) group of counter-thinkers which propose that localised businesses operating in a competitive environment, with less vertical integration and more employment opportunities, offer the preferred solution.

Why it’s important

Economies of scale are typically associated with production efficiency; i.e. overhead or fixed costs per unit reduce as more units are produced.  In the world of technology however, economies of scale can be achieved not only through traditional means (vertical integration and product-line-expansion) but by a company developing a consumer-interaction platform better than all others. Amazon is a great example of this, as few if any other retailers around the world can compete with its online website platform and customer service.  Add to this the network effect (the more people use it, the more valuable it becomes as its credibility increases), and suddenly Walmart, Target and Tesco are under severe threat.

The importance however is seen more by the smaller players.  There are few if any small businesses able to compete in price-wars, and all that they had to differentiate themselves were the level of service they offered, and convenience to the local community.  Now even these are under threat – due to the economic struggles that consumers have had in the past few years and the tighter budgets necessitated.

The two major reasons of importance of this trend are firstly that roughly 2 of every 3 jobs in a developed economy are provided through small business and by sacrificing local enterprises; a significant negative employment shock is to be expected.  Secondly, where online retailing had given the underdog an advantage in terms of competing on a more even playing field, this is slowly reversing as large companies utilize the widest range of support services to out-perform the young cash-strapped businesses.  Think Twitter-tracking, online trend-watching, individual app-development, integrated marketing campaigns….  It is little wonder that smaller companies are unable to match up.

What’s the butterfly effect?

The trends indicate that by 2020, 15% of USA’s 13000 malls will have closed down and that local diners will have been all but eradicated as they compete against corporate restaurant chains.  Because of this realisation, there are a number of movements advocating support of local business, and the question of whether monopolistic or anti-competitive behaviour by vertically integrated companies should be tolerated is becoming more and more pertinent.

In the South African context, we recognise that jobs are vital and therefore it can be expected that there will be a swing towards more competition law hearings – as seen in the Massmart deal in the recent news.  Companies should also look at the competitive environment in and of itself as a consideration on whether or not an expansion would be to the best interest of the stakeholders.

The pioneers and global hotspots

The Institute for Local Self-Reliance  is an excellent example of what many smaller movements are trying to do: provide help for local community development and defence of the smaller businesses against larger competitors.  Although it is clear that consumers are still widely supportive of the benefits of the economies of scale offered by the ‘Amazons of the world’ , there is an upswing in momentum in the counter-culture movements.  Particularly, there is interest anew in reasoning out WHY buying local and supporting small business makes sense to the consumer.

Pioneers can be found not only in the movements to support local small business, but noticeably also in fighting for updated and improved law principles to govern business expansion.  The EU recently updated its competition policy and Bloomberg Law published an article towards the end of last year calling for a revamp of telecommunications policy.

It is clear that a competitive environment providing employment is slowing becoming as popular the sought-after cost savings offered by the larger corporates.

By: Benjamin Shaw

About Benjamin

Ben Pic

Benjamin is a broad-thinker, fast learner and passionate trend spotter.
He particularly loves reading about the integration of technology into society, and the role that entrepreneurs have to play in new South Africa.

Image credit: Martin Barraud/ Gallo Images/ Getty Images

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