Cyclical Economics And Issues of Scale

Businesses have cycles of good times and bad times.  there also seems to be a larger trend of mergers and acquisitions, followed by splintering, spinoffs, and the rise of the small but feisty competition.

Back when I was an undergrad in the mid-eighties, the Wharton kids were all looking to join big Wall Street firms  and do mergers and acquisition work.  By the time we graduated, the heyday for this was coming to a close, and instead the recent grads had to readjust their expectations because the days of wining and dining newly minted graduates from one of the country’s most prestigious business schools had begun to dry up.

Mergers and acquisitions has always been about buying up smaller companies and acquiring talent you don’t have one your own.  It can be an extremely strategic and cost effective move.  But the bigger firms and businesses become, the harder they become to manage.  There are more and more moving parts.  Instead of trying to satisfy a niche audience very well, there becomes a push to satisfy the most number of people possible.  So instead of rabid fans of the special, businesses begin to play to the ubiquitous middle of the road.  And this works, sometimes for years.  But eventually, they become vulnerable to the small, nimble and risky competitor, which has less to lose by taking chances.

Seth Godin wrote about this in a recent blog post about the publishing industry.  What would happen if your profits dwindled?  What would you do differently?  Because that is the exact mindset of your competition.  They don’t need to clear millions of dollars of profit every year- they are perfectly happy just taking a small chunk of your business, until the point when you can no longer continue as is and they have sunk you, one small bite at a time.

Looking at retail, the big department stores have consolidated, in part, because there’s been a development of many brands with their own stores, own infrastructure, that no longer depend on the buyers for a big store for placement and sales.  In fact, with the internet, they can set up their own store for very little, and avoid placement in your big store at all.

Our local malls are experiencing a large amount of turnover, in part due to the failure of the anchor stores and their diversity, but also because of the rise of more and more small brands competing in the same niche you could find in the Department store.  Should I buy a Coach bag from Macy’s or the Coach Store, three doors down?  At this point, price only matters.  And Macy’s is no longer the only place to go to obtain this same merchandise.  Their shelf space has become more and more irrelevant in distribution.

My husband even remarked that health care is entering the same cycle we’ve seen in family farms.  Small individual businesses (independent doctors and their practices) are gradually consolidating and often coming under the wing of one larger entity (first large practice groups, or practices are bought outright by a hospital) for the sake of scale, the benefits of negotiating price and taking advantage of larger discounts, lowering administrative costs and the like, until very few individual small businesses will exist outside these larger entities, for good or for ill.

The problem with this consolidation/splintering cycle is that the large businesses become vulnerable to poaching by the specialty/niche providers, because the niche providers have less to lose.  the large firms can take advantage of economies of scale, but it also becomes easier for them to lose their way, lose their compass, manage all the different parts and cease to worry about pleasing the customer but instead become more interested in whatever they have to do to maintain themselves.  They start to think like sheep and less like scrappy entrepreneurs that are willing to take risks and try new things.

It’s the gradual onset of “This is the way we’ve always done it” that becomes the vulnerable Achilles Heel- the inability or unwillingness to take a look at what you are already doing, and imagine that it could be done differently, or better.

None of this is to say that big is bad or entrepreneurs get it right.  I’m trying to say that if big has its very clear advantages, is there opportunity for them to develop sections, departments, or even a think tank that has the task of looking at the business as a competitor might, but from inside the gates?  In there room to constantly challenge the status quo?  Or is there just a balance between big and small that can be managed the way W.L. Gore does, by not letting any one building or division grow beyond a certain size, because it eliminates the intimacy and flow of ideas that they value so highly?

As I see big industries disrupted by the way the internet is changing our decision making process, I wonder if what the big boys need is as simple as remembering what it was like for them before they were big.  And I wonder if the small guy, looking to become a part of something larger have to be equally concerned how to maintain their edge once they are in a safer harbor.

Sometimes security and safety is a panacea- an alleged cure-all that instead of solving all of our problems, actually creates some of its own in the process.  It can make us forget what it was like to be hungry and struggle, and we need just enough of that struggle to remain competitive and innovative.  Without it, we get lazy and complacent.  And striking a balance between these two extremes is not easy at all.

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