Small Business Labs

The Future of Social Enterprise

Interesting Harvard Business School working paper called The Future Of Social Enterprise.  The working paper examines the forces impacting social enterprises and presents three possible future scenarios on how this sector might evolve in the coming years.  All three are pretty optomistic about the sector. 

The paper has several interesting stats on social enterprises:

• there are 1.4 million non-profit organizations in the US constituting roughly 5% of US GDP.
• $6 trillion is projected to go directly to charitable causes over the next 50 years.
• there were 71,000 charitable foundations in the US in 2005, a 77% increase over 1995

The working paper points out the expanding range of socially oriented organizations.  Key quote:

"...the sector itself is expanding to include no only traditional nonprofit organizations but also many for-profit and hybrid entities operating with a strong social missions...non-profits now routinely engage in profit-seeking activities, for-profits aggressively seek social value through business and charitable activities, and public agencies form partnerships with both..."

Many of the same trends driving the growth of the small business sector are also driving the growth of social enterprises.  We will be covering this topic in more detail in future research reports.

Economic Gardening

Economic gardening is a local or regional economic development strategy that focuses on supporting local entrepreneurs and small businesses instead of "economic hunting" - attempting to attract new businesses from outside the area.  The idea was developed in Littleton, Colorado (they have a great description of economic gardening on their website) in the late 1980s and has since spread to many communities across the US. 

The interest in economic gardening is being driven by two main factors:

1.  The growing body of research showing that small businesses create the vast majority of new jobs. With small business creating 70-80% of all net new US private sector jobs it makes sense that local economic development should focus on local small businesses. 

2.  A growing realization that "economic hunting" by itself doesn't work very well for most communities.  While some communities benefit from economic hunting, there are too few companies moving to meet the needs of the vast majority of US towns.  Policy makers are also realizing that the incentives required to attract new businesses (especially big businesses) are expensive and do not guarantee the firm will stay after the incentives run out.

Economic gardening programs tend to focus three areas to help build local small businesses:

1.  Information resources and marketing assistance:  these programs often include access to competitive intelligence and market information that generally are not available to small businesses.  For example, Humboldt county in northern California has set up a competitive intelligence program to help small businesses.  Key quote from an article on the program:

"Competitive intelligence (C.I.) research specialists -- both industry specific and for business in general -- are experts in conducting strategic research to facilitate business growth. Competitive Intelligence research and consulting services are typically expensive and are most commonly set up to serve urban-based and very large companies. However, Humboldt State University has just launched a new service to make this strategic research for critical planning and market development challenges much more convenient and affordable to local firms."

2.  Infrastructure:  these programs focus on building the right kind of local business resources and capabilities that will support local small businesses.  This includes traditional items like roads, taxes, etc. as well as quality of life and education. 

3.  Networking and information sharing:  early economic gardening program success in Littleton and other communities has shown that providing networking opportunities and access to local universities, think tanks, trade associations, etc. is a major key to local economic development success. 

While traditional economic development methods will continue to be used, economic gardening is becoming increasingly important for local and regional economic development.  This is yet another example of the growing role small business is playing in the US economy.

For more on economic gardening see the US SBA report The Small Business Economy 2006, chapter 6 "Economic Gardening."

Gas Prices Hitting Consumers

A number of interesting surveys are out on the growing impact of higher gas prices.  BIGresearch has been tracking consumer reactions to rising gas prices over the last few years.  Not surprisingly as the price of gas has gone up, more consumers cut back on dining out, travel and other discretionary expenditures.  The chart below is from BIGresearch's monthly consumer intentions and actions executive briefing email, which is free and quite interesting (click on chart to enlarge). 

Supporting this are survey results from Neilsen showing that alcohol purchases are down in bars and restaurants.  As the chart from Neilsen below shows, 44% of bar managers and bar tenders surveyed in May of 2008 reported a decrease in consumer traffic.  Many also reported consumers ordering fewer drinks and switching to cheaper drinks.  Marketing Charts covers the survey in more detail.

  Global Strategy Institute blog, a “$1 increase in the price of gasoline could cut the obesity rate by 10 percent, saving 16,000 lives and $17 billion in health care costs each year.”  One of the reasons for this, according to Courtemanche, is that Americans tend to eat smaller portions with lower fat and calorie counts when dining at home instead of restaurants.

There may be some good news on this topic.  According to UNC Greensboro professor Charles Courtemanche via the

We continue to be impressed with the resilience of the US economy.  Despite multiple economic shocks - including rising gas and energy prices - the US has so far avoided a recession.  But as these surveys show, rising gas prices are reducing consumer spending.   

 

Small Business Embracing Social Media

The University of Massachusetts Dartmouth Center for Marketing Research recently released a longitudinal study examining Inc. 500 social media usage. The key result is in early 2008 77% of the companies surveyed were using online social media.  This is is up from 57% in 2007. 

The study was conducted by by Eric Mattson and Dr. Nora Ganim Barnes, Ph.D., a Senior Fellow of the Society for New Communications Research.  The chart below, which is taken from the report, shows social media usage by type for both 2007 and 2008 (click to enlarge).

The Inc. 500 consists of small, fast growing, private US businesses.  These firms tend to be very successful and and innovative.  They tend to adopt technology earlier than the average US small business, but the list represents a wide range of industries and company sizes.  It is a good proxy for early and early majority small business technology users.

As this and other studies show, social media use by small businesses is growing very rapidly.  While small business has traditionally been viewed as a late adopter of technology, an increasing number of small businesses are both early adopters and sophisticated users of technology.

Disclosure: I am a board member and Senior Fellow at the Society for New Communications Research.    

 

 

June Small Business Employment Mixed

According to the June Sure Payroll National Business Trends report small business hiring showed a slight increase (0.3%) in June.  Accroding to the report, this is the 19th straight month hiring has increased.

The ADP National Employment report was less positive, with small businesses (less than 50 employees) adding 7,000 jobs while mid-sized business (50-499 employees) employment declined by 35,000 jobs.   

Given the multiple shocks  - soaring energy prices, the housing melt down and related mortgage and credit crisis - the US economy is holding up amazingly well.  However, most economic forecasters are now calling for a weaker economy and recession over the next 12-18 months. 

Slideshare

Slideshare is a web 2.0 site that does exactly what its name implies - it allows people and companies to post and share presentation files.  It is very useful for seeing what others are presenting as well as a good source for presentation ideas. 

NDE on Borderless Business

The National Dialog on Entrepreneurship's weekly newsletter points to two studies on the growth of borderless business.  One is a Manpower study called The Borderless Workforce.  Key quote on the study from the NDE newsletter:

"Manpower researchers surveyed more than 31,000 workers in 27 countries to assess their views about work and relocation. The survey found that 78% of workers were willing to relocate for work, and 37% of workers were willing to move anywhere in the world for a good job and career. Forty percent of respondents would consider a permanent move."

The second study is on the growth of global venture capital and is from the National Venture Capital Association and Deloitte.  Key quote on the study from the NDE newsletter:

"As the borderless workforce becomes a reality, the venture capital (VC) industry is likely to follow suit and become similarly borderless."

We certainly agree that business is increasingly borderless.  We even have a section in our most recent research report on the future of small business called "Borderless Business."   

More on Boomers

The New York Times article "Early Retirees in New Ventures, Mostly for Fun" discusses the trend towards baby boomers starting small hobby businesses instead of pursuing traditional retirement.  Key quote:

"Many of them are part of the first wave of America’s 76 million baby boomers who are taking early retirement and turning their hobbies into small businesses. Very small businesses."

Somewhat related one of my favorite trendwatching sites - PSFK - recently posted their list of 14 boomer blogs to follow. 

We cover boomers and small business in more detail in our research report The Changing Face of Entrepreneurs .

The Dollar, Transportation Costs and US Manufacturing

Got pointed to two interesting articles on the impact of rising transportation costs and the weak dollar on US manufacturing.  The consulting firm Oliver Wyman has a piece titled "How the Weak Dollar is Reviving US Manufacturing" that argues that rising transportation costs and the lower dollar is making US manufacturing more competitive.  Key quote:

"Where’s the business case for making car seats in China, when the cost of shipping them 12,000 miles and the redundant cost of storing and sequencing them for an assembly plant in Indiana will far exceed the savings in labor? Factor in additional savings from leaner inventories, more robust assembly processes, and the agility to more quickly respond to changes in market demand and the case for shifting most of your footprint from North America to China or India become dubious."

Related to this is an article in the Financial Times called "Oil prices force P&G to rethink supply network."  The article discusses the supply shifts P&G are doing in response to higher energy costs.  Key quote:

"Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill."

The weak dollar clearly helps US manufacturing.  Also, with transportation costs rapidly increasing locating supply close to demand will become increasingly common.  Added to the cost pressure is a growing focus on reducing manufacturing and supply chain carbon footprints.  Combined these trends are helping to drive the increased competitiveness of US manufacturing. 

We've posted quite a bit on this topic in the past and we cover it in detail in The New Artisan Economy research report.

Disclosure:  We've done work for P&G in the past year.   

The Long Tail and Small Business

Harvard marketing professor Anita Elberse has caused a stir with her Harvard Business Review article "Should You Invest in the Long Tail."  The article argues that several parts of Chris Anderson's popular Long Tail theory are wrong.  Key quote:

"It was a compelling idea: In the digitized world, there’s more money to be made in niche offerings than in blockbusters. The data tell a different story."

The article has an excellent summary of the long tail theory, so I won't bother covering it here.  But the bottom line of Elberse's research is that for the two markets she studied - online music and home-video sales - the long tail effect as described by Anderson did not show up.  Her data indicates that hits may even be gaining relative share instead of losing share as predicted by Anderson. 

We've spent a lot of time looking at niche markets, small businesses and industrial structures.  Interestingly enough, we think Anderson and Elberse are both right.  Our research shows that the long tail is happening and the number of niches able to support small businesses (or niche products from big companies) is rapidly increasing.  The two main drivers of this are:

1.  Reductions in the cost of doing business in many niche markets.  Technology, outsourcing and access to third-party services are making it easier and cheaper to create niche or highly customized products and services. 

2.  The Internet has made it cheaper and easier for buyers and sellers of niche products and services to find one another.  This means the producers of niche products can cost effectively attract enough customers to create viable niche businesses. 

These two drivers are combining to shift demand curves and create many new niche opportunities - for both digital and physical goods - as shown in orange in the chart below.  This chart is taken from the HBR article.

While the long tail theory and Elberse's article focus on companies aggregating long tail demand, we are seeing a growing number of successful small businesses that serve narrow long tail niches. An example is My Beating Heart, a pillow company we've profiled in the past.  They serve a very narrow specialty niche way down the US pillow market long tail. According to their founder, the company wouldn't exist without the use of Internet based marketing to reach their customers.  They also would not be able to make their product at a price low enough to attract customers without outsourced manufacturing and services.  They are a long tail small business.   

At the same time we agree with Elberse's research showing that hits will continue to be important.  We think this is true for both digital and physical goods.  So while economically viable niches will grow in number, hits and highly successful products will continue to garner large relative market shares. 

The market share losers, in our view, will be products caught in the middle.  These are products that aren't hits, but also aren't unique enough to be niche products.  We see customers moving away from these products on a relative basis, creating in many cases an even steeper demand curve than shown in the chart above. It is important to note that while mid level products will lose relative market share, the overall growth and size of the global economy means these products can still be successful. 

The growth of long tail niche markets is creating many new opportunities for small businesses.  We also are seeing a strong trend towards large corporations partnering with small companies to serve niche markets, instead of trying to aggregate long tail demand on their own.  We cover these trends in more detail in The New Artisan Economy research report.