A Small Business is Not a Miniature Version of a Large Corporation
When I was in large companies, I honestly thought that a smaller company is not essentially different than a large corporation. After all, business theory does not change. You still need Product, Marketing, Sales and Finance department – and they all need to achieve similar objectives. It was only when I started evaluating small businesses for acquisitions during my time in a large industrial firm and visited many small factories, I realized how wrong I was!
It is intuitive to think that the primary difference between a smaller and larger enterprise is that of scale. At first, that certainly seems to be the case. They have employees, offer services/goods in exchange for monetary compensation, have some internal hierarchy, and so on.
However, that paints an incomplete narrative with potentially harmful consequences. It may lead one to assume that the primary objective should be to emulate the practices of a larger enterprise to achieve success as a minor or prospective small business owner.
The problem with that line of thinking is that it glosses over specific fundamental differences in the operation and the challenges posed by these businesses.
A core component of this difference is the disparity in the scale of resources. A smaller business typically relies on investment from the personal savings and loans of the founder and, at most, a few close associates. In comparison, a larger corporation has significantly larger pool to raise capital from – ranging from public equity to corporate bonds to private markets
Comparatively, a large-scale corporation can raise massive amounts of capital from investment through means such as the sale of shares and selling corporate bonds.
Accordingly, a more significant business has more resources to expand on research and experimentation, leading to innovation. That doesn't even consider the disparity in capital enabling more significant brand expansion and promotion.
Smaller startups, in effect, cannot operate on the same business model because they do not have the capital to do so.
What is the strategy for a smaller business, then? First, it is to cater to a niche. A company with fewer resources cannot compete with big fish in the industry.
The only option then is to use a specific market sector to establish themselves first, then branch outwards into the mainstream. However, note that the situation is cutthroat. A smaller business often cannot survive a failed venture. A significant loss could mean the end.
It is thus no surprise that most startups fail, and the smaller a business is, the more likely it is to flounder. While this may seem overly pessimistic, these are essential things to remember. A significant disaster such as the bankruptcy of your business can be life-changing for all the wrong reasons.
Similarly, corporations have invariably more resources to expand on research and experimentation, leading to innovation – the challenge becomes to pick the projects and keep the teams productive & creative.
Hiring is relatively easier. New graduates want the name of a branded firm on their resume and not a relatively unknown firm. On top of that, smaller businesses cannot remotely pay equivalent salaries dished out by the likes of Amazon or Microsoft (especially true in the tech universe). While larger companies can absorb multiple mistakes (a product failure, a lawsuit or resignation of key employees), any of these for a smaller company can be devastating.
In the Harvard Business Review article titled ‘The Gap Between Large and Small Companies Is Growing ‘ the authors explain that larger corporations are getting richer while smaller companies remain small. Very much reflective of the societal nature & wealth accumulation across the globe.
So, one must really ask the question if small businesses indeed are the engine of the economy – are we doing enough as a society to nurture & promote them? These business owners are doing their part by creating a very specific niche, going over & beyond in serving the customers and taking the entrepreneurial risk. But, are we doing our (part)?