Seth Godin on the Right Company Size

Seth Godin has a very interesting post  about scale and business size.  Key quote: "Many businesses that are in trouble are in trouble for a simple reason: they're the wrong size."

We've done a lot of work on this topic over the last few years and we certainly agree with Seth.  In particular we are seeing two broad trends on this topic:

1.  Most industries are moving towards a barbell industrial structure with a few global giants on one end and lots of small businesses on the other.  Mid-sized firms (sizes vary by industry) are being acquired by larger firms or squeezed out. 

Driving this is the changing nature of economies of scale.  In many industries scale has become less important due to technology shifts.  And as Seth points out, in some industries scale has become a major competitive problem.

2.  Variable cost business models allow small firms to be competitive with large firms in an increasing number of market spaces.  New technologies have reduced the costs of starting and operating a business. 

And outsourcing, partnering and business infrastructure service companies (UPS for logistics, contract manufacturers for production, Amazon on others for IT and web services, etc.) have created the ability to start and operate businesses using a high degree of variable costs. 

The chart above is taken from an earlier post on this topic.  It shows that in niche markets small firms with low fixed costs have a substantial advantage relative to larger firms with high fixed costs. 

And we see more and more markets becoming niche markets.   

We are not suggesting that large firm are going away.  There are many market segments where scale still matters. 

But a key reason we are forecasting continued growth in the small business sector is their ability to use their size and agile business models to effectively compete in a growing number of markets. 

Comments

[GoEverywhere Team]

If size really is such an important factor that may need to be adjusted, then building a business that is truly "scalable" is one of the smartest things you could possibly do.

I have always been drawn to fully scalable business models for their flexibility and freedom. This is just one more reason to lean that direction.

[John Krech]

Very interesting post. It would be interesting to conduct this same analysis using economic value added instead of a cost perspective. This way you could consider the cost of capital as well as the tax implications based on business size.

My business specialize in taking this same analysis relative to order size for inventory management. It is surprising how much a strictly cost perspective over-estimates inventory requirements.