Small Business Labs

Bullwhip Effect May Lead to Stronger than Expected Jobs Recovery

According to Fortune Magazine, the giant consulting firm Accenture plans to hire 50,000 people this year.

They are not alone.  We've heard from executives at a wide range of companies because of recession driven job cuts - and a lack of hiring over the last 2 years - they are painfully understaffed.  We're also hearing these firms have started, or are going to start, hiring again. 

Although our hiring data is anecdotal, we believe the U.S. labor market will likely see a surge in job creation later this year and into 2011 due to a bullwhip effect. 

The bullwhip effect is a term used by economists to describe inventory swings caused by changes in final demand.  It is called a bullwhip because even small changes in demand can cause a big "snap" in the amount of parts and materials needed. 

While the term is not used to describe labor markets, we're seeing a lot evidence that companies are running extremely lean and will need to add staff to meet the demands of even a modest recovery. 

Economic data shows that job creation over the last two years has been at its lowest point since the depression.  A recent Heritage Foundation study states that "The main factor driving the unemployment rate so high during this recession was, and continues to be, the sharp drop in creation of new jobs." 

The chart below, from the Heritage study, shows that job losses during the current recession are lower than job losses during the relatively mild 2001-2003 recession. 

    
An analysis by the Federal Reserve Bank of Atlanta also highlights the job creation problem. 

The response to the beginning of the Great Recession was quick and strong.  Even healthy firms quit hiring out of fear of the future.  Instead of adding employees, companies turned to automation and business process improvements to squeeze out additional productivity. 

As the economy recovers, we believe companies will not be able to meet additional demand through productivity gains alone.  They will need to add staff, and this could lead to a positive surprise in job growth over next year.   

Job Lock, Health Reform and Entrepreneurship

John Tozzi over at Business Week has an excellent summary on how job lock may change due to new health care legislation.

Job lock occurs when people won't quit their job because they are afraid of the loss of benefits.  Health insurance is the benefit most associated with job lock because it is expensive and has been hard to get for people with pre-existing conditions.  The new legislation changes this by creating insurance options for people with pre-existing conditions. 

As John's article points out, there's lots of evidence that job lock exists.  We see it in our research and agree it's real.

What's unclear is how widespread job lock is.  Also unclear is how big an impact the new health care legislation will have on small business formation rates due to the provisions that reduce health care related job lock. 

In our surveys and interviews people often tell us they would quit their job and start a business but don't because they don't want to lose their benefits.  But when we probe deeper in interviews, we usually find that benefit job lock is just one of several reasons they aren't starting a business.  It is also generally not one of the top reasons ("too risky" is the almost always the top reason we find in our in-depth interviews). 

Because of this, we think the impact of the job lock changes in the new health care legislation on small business formation will be positive, but modest. 

Results like this are not uncommon in our research.  We often find contradictions between what people say in surveys or conversations and what we observe or uncover through interviews.  This is a key reason why we augment survey research with interviews and ethnographic (observational) methods in our work. 

The Rise of Smartphone Apps and Entrepreneurs

The BBC has an interesting article covering the growing number of smartphone application entrepreneurs.  These are folks building and selling smartphone applications for a living. 

The article uses as an example the developer of Pocket God, which is an iPhone game that costs $.99 and has sold over 2 million copies.  The setting for the game is a tropical island and the user controls the lives of local residents.  Great quote from the developer on why the game is fun:

"You can do good things like watching them fish or feeding them," explains Mr Castelnuovo. "But most of the fun lies in the sadistic things you can do, like sacrificing them or flicking them into a volcano."  He describes the game as "a safe sandbox that allows people to get that mean itch out".

According to a recent Yankee Group forecast mobile app sales will be $1.1 billion in 2010, growing to over $11 billion in 2014. 

A couple of interesting trends are driving this growth:

• 1/3 of apps are purchased.  This is up from just 18% a year ago.
• The average app price is $2.85, up from $1.99 last year
• A number of popular apps cost more than $10

About 1/3rd of Small Business Owners Support Health Care Plan

A new surveyfrom the American City Business Journals shows that about 1/3rd of small business owners support the health care reform plan. 

I like this survey for several reasons:

1.  American City Business Journals is non-partisan.  Most of the surveys related to the proposed health care legislation comes from partisan groups who are trying to their surveys to support their political position. 

2.  The survey included questions on the political party affiliations of the respondents and shows that the views on this topic tend to split along party lines.  Key quote from the Baltimore Business Journal:

"About a third of small business owners support President Barack Obama’s health care reform, though the response split closely along party lines. Forty-five percent of business owners are Republicans and 26 percent are independents, while 21 percent are Democrats."

Our research on small businesses shows similar results on party preferences by small business owners.  We haven't done any survey work on how small business owners view the proposed health care plan, but are not surprised by these results. 

Explosion in Mobile Apps - and Paid Mobile Apps

Technology forecasting firms are dramatically increasing their sales and download forecasts for mobile applications. 

The Yankee Group recently updated their September 2009 mobile app forecast.  In September they forecast that mobile applications would generate $4.3 billion in revenue by 2013.  Their most recent forecast is mobile applications will generate $11 billion in 2014.

The even raised their 2010 forecast substantially.  Their September forecast for 2010 was $573 million, it is now $1.6 billion. 

Yankee is currently forecasting that 1.6 billion mobile apps will be downloaded this year, growing to 6 billion by 2014.  Apple iPhone users are leading this charge, downloading an average of 60 apps per year. 

One of the major shifts driving this market is the growth of paid applications.  According to Yankee:

"Despite conventional wisdom that says apps want to be free, app stores are training consumers that they need to pay a few bucks for quality phone apps. Almost a third of downloaded apps are now paid apps, up significantly from the 18 percent we saw last year.

Forecasting fast moving technology markets is really, really hard.  Kudos to Yankee for being willing to make this forecast update. 

Facebook Passes Google as Most Visited Website

According to Hitwise, Facebook passed Google becoming the #1 site in the U.S. measured by number of visits.  The number of visits to Facebook also continues to grow at a strong clip, up 185% from March 2009 to March 2010. 

 
  
Facebook's platform business is one of their drivers of traffic growth.  The social game Farmville, for example, is built on Facebook and has experienced amazing user growth. 

With Facebook offering application developers easy access to hundreds of millions of potential customers, we expect the number of Facebook apps to growth dramatically over the next few years.  We also believe the types of 3rd party applications available on Facebook will move beyond games and entertainment to a wide range of application spaces.

Facebook as an application platform is a key reason we think Facebook may be taking over the web.

Small Brewers Continue to Gain Share on Beer Giants

US beer sales fell by 2.2%, or about 5.1 million barrels, in 2009.  But according to The Beer Association, craft brewers - also known as micro-brewers - increased their unit sales by 7.2% and dollar sales by 10.3%. 

Craft brewers still have a small share of the overall beer market - 4.3% by volume and 6.9% by revenue.  But since 2004 craft brewer sales have increased roughly 66% versus under 5% for large brewers, leading to steady share gains for small brewers. 

As the Beer Association chart on the right shows, the number of craft brewers also increased in 2009, and is at its highest level since before prohibition.   This happened despite industry consolidation resulting in 2 global companies - SAB and InBev - controlling over 80% of the U.S. beer market. 

We've posted in the past on the beer industry and often point to it as an example of a barbell industry structure.  This structure consists of a few giant corporation on one end, relatively few mid-sized businesses and a large and growing number of small businesses.   It is a structure we are seeing in a wide variety of industries. 

There are many reasons for the growth of craft beers.  Deregulation, the Internet and the lower costs associated with starting and running a small brewery all have played a role. 

But according to one craft brewer it's consumer demand for niche products that is driving the growth of craft brewers.  The following quote is from a CNN Money article on the success of craft brewers:

"There's an overall trend in the U.S. for people to speak out for better quality stuff in general -- foods, wine, beer, clothes, produce -- and more local products," agreed Metzger. "That's typically what's embodied by the craft brewery."

The New Entrepreneur Presentation

I was forwarded a link to a really interesting presentation on small business trends called The New Entrepreneur.  It is from Grasshopper, a company that provides virtual phone systems for small businesses.  They worked with the market research firm Trends Spotting to develop this very professional and visually appealing presentation.   

The New Entrepreneur covers a number of trends and includes information from a mix of sources such as the Kauffman Foundation, IDC, GEM and others - including several references to studies done by us. 

So while I'm a bit biased, I think the presentation is quite well done.  It was posted yesterday on Slide Share and already has close to 2000 views, so many others agree it well worth taking a look at.   

Outlook for Jobs, Small Business Hiring Improving

According to the Bureau of Labor Statistics, U.S. unemployment held steady at 9.7% in February.  This was a positive surprise because most economists thought the east coast blizzards would cause the unemployment rate to increase. 

According to T.R. Price's chief economist as reported by NPR, the economy probably would have added jobs in February except for the storms.  Floyd Norris of the NY Times concurred, saying:

The decline in overall employment, of 36,000, was almost certainly caused by the weather.  As I have noted before, there were two sets of blizzards in the East to affect employment in the week the survey covered.  The “real” number almost certainly was positive, and we are set up for a good gain next month. 

Small business hiring signs are even more optimistic.  John Tozzi's Business Week article Hiring by Smallest Employers May Signal Job Recovery covers recent data from Intuit and Sure Payroll showing that small business hiring is picking up.  The chart below is from the Business Week article.

 

Intuit's new Small Business Index is based on payroll data from over 50,000 of their payroll customers.  It shows small businesses with fewer than 20 employees started adding jobs last June.   Sure Payroll's February report, also based on small business payroll data, showed a 1.9% increase in small business hiring.

Most economist expect hiring to increase as the year goes on.  Some are even quite optimistic about U.S. job and economic growth.  This is good news for all. 

Great Quote on How Chinese and Americans Respond to their Leaders

The quote comes from Hongmei Zhang, deputy general manager at the center for technology strategy and development at Chinese power supplier ENN Group. 

She was speaking at a MIT energy conference, explaining why nuclear power was more accepted in China than in the U.S.  The quote is from a CNET article:

"There are some cultural differences. To be honest, Chinese people tend to listen better. When our president Hu says something, we say, 'Yes, sir,'" she said. But in the U.S., people respond to directions by saying "Says who?" or offering second thoughts, she said.