When we think of business we think of big business. When we go to University, we often train to be the EVP marketing of P & G but that is not where the future is. When we start out we think that we ought to be in the big city where all the opportunity is - but that is wrong as well. So what is going on and where should we live? This short paper is all about why you have to live in the country if you want to have a future in business.
Most businesses in Canada are small. Most have less than 20 employees. Many have less than 5. Increasingly these small businesses are not small retail operations but are knowledge or design-based organizations. While many have a strong local presence, many operate in a global market and have a global network of colleagues and support.
You know all these things and are already asking your self – “So what”. We could say “So what?” because, until now, most SME’s were the servants of large business were consequently were not that important. If they were located in a rural setting, they were even less important.
All this is going to change. In some important areas, it has already changed.
We are in the midst of a new industrial revolution where the nature and the power of the business model are being turned inside out. Small is where the future will come. Small, dispersed and networked will overturn the large, centralized bigger is better model. Small and dispersed will network and become large and powerful.
If you are a small place, that can offer the right conditions to attract the revolutionary small enterprise, you will prosper in a way that small places in the past never have. If you are a financial institution, that can see what is really going on and then redesign your delivery system to get behind the new small, then you too will ride the wave of change while the unobservant and the laggards will fail.
So what is really going on? Why should small places and large financial organizations learn more about the new small business?
The bulk of the ideas, energy, services and products that are driving this revolution are coming from small groups of people who do not live in the traditional financial centres of the continent. They don’t even live in Silicon Valley. The real new economy, as exemplified by Southwest, eBay, Dell – even Wal*Mart, is being developed in small companies in small communities outside of the grip of the urban culture.
They have a radical idea behind them. They react to what customers want rather than to what they think the customer should want.
They decentralize decision making. They have reduced much of the traditional organizational friction. They have reduced inventory and sales and support costs while increasing the value of what they do for the customer. They have a radical view of where value is captured. They capture it not in the transaction but in the ongoing relationship with the customer. The best of them make community building the key activity.
“What we are doing is building a place where people can come together. They just happen to be coming together around trading” Paul Omidyar, the founder of eBay explaining the core idea of eBay.
Their system works from the customer in rather than from the enterprise out. The polarity of business is being reversed. The exemplar of this aspect would be Dell.
Michael Dell's essential insight was that you can't second-guess consumer demand, his recent corollary is that those same market forces should dictate corporate direction, too.
Almost uniquely among high tech firms, Dell forbids internal subsidies. No loss-leaders, no prolonged grace periods, no long bets on trends yet to emerge. Michael Dell is too smart to think he's smart enough to predict the future; he assumes that the world of IT increasingly resembles a global financial market, where the aggregate knowledge of all participants exceeds that of any particular player. Let others dream up products never before imagined and risk their futures on that vision. Dell is content to ask consumers what they want and then sell it to them.
These ideas, and the cultural shifts required to implement them, are so radical that it appears that most traditional organizations cannot make the required changes in their culture to meet the new threat
Here is what the Chairman of Southwest Airlines, Herb Kelleher, thinks about this point. “Manage in good times to prepare for bad times. To succeed in today’s marketplace, the company cross trains employees and increases their skill base so that individuals at all levels can take personal responsibility for keeping the company marketable, for maintaining high trust relationships, and identifying effective options for dealing with transitions.” In addition Kelleher and his leadership team inspire loyalty by communicating openly and truthfully with their staff, respecting the life work balance and fostering continuous learning. Southwest employees know that their voice matters and that they can implement new programs, make decisions and help customers in times of need. A guiding principle is: if you use your best judgment to do what is right, your leaders will stand behind you” Most traditional firms do not allow this latitude. United cannot do this nor can Air Canada.
This issue of culture is as important as the new costs and price that it makes possible.
Consequently, we see traditional airlines, retailers and the music business facing extinction. Even the Telco business, and all its accompanying investment, is under siege. As the new model enters new fields, we can expect the same result for the traditional providers in every sector no matter how dominant. The issue is not position but model.
Part of the threat from these new model organizations is that we tend not to see them until it is too late. They incubate and grow to adulthood below the radar screen of traditional competitors and emerge suddenly, such as Ryan Air, Southwest and Westjet in the airline world or Wal*Mart or eBay in retailing, to overwhelm and destroy a surprised competition. Why can’t we see them? In their early years, they are often too small, too boring or too risky, to interest a financial system or to interest the pinnacle players that have their eyes focused on their large conventional competitors. Why would the managers of Kmart worry about a firm that focused on serving small rural communities. What type of market and hence threat could that have been? Most importantly, they don’t register as being important until it is often too late because we do not recognize how powerful are the new rules and how obsolete are the old rules.
Even though Wal-Mart tended to be a less expensive than Kmart, the key was that it had to be different with regard to its customer service. Therefore, Wal-Mart's staff had to be friendly, helpful, and enthusiastic in order for Wal-Mart to be successful.
Sam Walton quickly learned that large stores could succeed in towns with fewer than 5000 people if they could offer something that would entice people to make a trip from 10 to 20 miles. The rural towns that were selected for his stores, ranging in size from 5000 to 25,000 people, were capable of supporting one discount store, but not two. One of the key elements in Wal-Mart's success has been the lack of competition in small rural towns, which has been helped by its fate to be consistently underestimated.
Once he was there, no comparable discounter could move in. This was an example of the classic “first mover advantage.” Wal-Mart gained monopoly power over a market, whose potential, only Walton himself understood. Between 1969 and 1979 Wal-Mart constructed a number of distribution centers that formed part of a hub and spoke distribution network, while its logistics system became an integral part of its strategy—serving the customer. Wal-Mart stores were springing up in one unknown town after another, none of which could support two stores of Wal-Mart’s size. It was the perfect formula for growth and success; indeed, this was a lifetime opportunity, just as long as no one noticed too early.
Think Bentonville and not Boston. Think Charlottetown and not Chicago. Go rural young man!
