I Introduction
In the age of globalization, expanding business into global becomes increasingly important even for local start-up/SMB. The changes of external environment are rapidly changing the established pattern of the international expansion of small domestic organizations; increasing number of companies is entering overseas markets from the earliest stage of their operations (e.g., “Born Global”). I was a member of the management of three start-ups, and felt the impact of global competition. As a management consultant, I observed number of small companies to leverage outsourcing services, providing well-designed electronics in global market. I came to understand globalization brings significant threats and opportunities even for small organizations.
Theoretically speaking, a small organization can potentially enjoy competitive advantages against a larger organization in today's business environment. The emergence of new methods to obtain funding, outsourcing services, and low-cost marketing opportunities has destroyed the traditional limit of small organization. The flexibility enables these organizations to select the best-qualified partners and gives them the ability to deal with large fluctuations in demand. Furthermore, the shorter decision-making process allows these businesses to develop more innovative products and services in short amount of time. Given an existence of abundant external resources in the market, small organization can be an attractive and strategic choice to maintain a competitive advantage. Although it is not an instantaneous shift, there are many indications that within decades a small organization of 20-30 members will be able to operate a global value chain, potentially a billion dollar international business.
However, in reality there are only a few examples of such small organization that operates large global value chain. The two most significant factors may be the economics of scale and the additional transaction costs associated with the adoption of external resources. While the benefit of being small will be maximized in knowledge intensive business with fluctuating demand and diversified needs, it may not be advantageous in labour-intensive or capital-intensive business that requires the economics of scale. Furthermore, at this point higher transaction costs associated with inter-firm exchanges in the value chain consisting of several independent organizations outweigh the benefits in most cases. Therefore, general argument is that small organization is under significant pressure of globalization. Global competition is threat, not opportunity for small domestic organizations.
Number of articles aim at providing insight on the impact of globalization, outsourcing, offshoring and other major trends on the larger organizations. However, application of established theories on small businesses is still at examination stage, especially due to the diversity and complexity in SME sector. The question is if the change of external environment is an opportunity for small domestic organization or not. Potentially, globalization might destroy all the local businesses. On the other hand, it may provide significant opportunity for small organization. We have to figure out how small organization can maximize its unseen potential in the next century. This short work presents several preliminary thoughts on the potential of such small organizations in the next century.
II Underlying conditions of the increasing potential of “smaller organization”
Three basic indicators have traditionally been used to define the size of an organization: number of employees, amount of capital, and amount of revenue and profit. Until fairly recently, these indexes were directly correlated with each other. An organization defined as small in terms of number of employees and amount of capital in general reported far less revenue and profit than an organization with a large number of employees and capital. This is still true in today's business environment. However, the correlation between these indicators is becoming weaker and weaker. A small organization with limited capital is no longer necessarily limited in its revenue and profit. Small organization is becoming an attractive choice for managing even a large-scale global operation.
One contributing factor to this increasing potential of small organizations is the greater variety of methods to obtain funding. It has become easier to find a way to finance promising new businesses. Organizations no longer require a large amount of internal capital to establish a business. Thousands of start-ups with sophisticated business plans or innovative technologies such as Internet service and genetic science are attracting large investments long before they generate any profit. In many cases, intellectual capital is more important than financial capital. Provided that it has a well-developed business plan and sophisticated technology, a small organization with limited capital can fund its business in a short amount of time by leveraging external financial sources. Small capital is not always a significant disadvantage in modern business environment.
Another major catalyst in the increasing potential of small organization is the rapid emergence of outsourcing businesses, which enable businesses to grow their revenue and profit without increasing their number of employees. In the past, it was essential for an organization to manage its large part of process internally, with a single entity building and managing a global business operation. However, with the emergence of the international economy, a variety of outsourcing services have developed and are providing alternative ways to build large business operations. Outsourcing of production, logistics, customer support, IT infrastructure, marketing, and general administration has become common practice among organizations. Today, “small” does not always indicates its value chain under control is also small.
Moreover, new, low-cost marketing methods and changing attitudes of large corporation are creating greater opportunities for small organization to market their products and services competitively. It is now possible to advertise products and services without any marketing budget. The most popular Internet services seldom devote any capital to promoting their services, relying instead word-of-mouth of enthusiastic customers. Further, consumers are not the only ones. International corporations are constantly searching for new ideas. It is already common practice for a large organization to form a strategic alliance with a small organization if the alliance can create tangible value. These expanded marketing opportunities have made it possible for small organizations to compete with larger organizations that have typically held the major advantages of a well-recognized brand and large marketing budget. Small organizations are climbing to the same battlefields to their larger counterparts.
In near future, it is likely that more organizations will realize that they do not need to increase the number of employees nor the size of capital in order to grow revenue and profit. This will enable more companies to enjoy the greater flexibility and other benefits of being a small organization while continuing to increase revenue and profit.
III Catalyst for the emergence of “smaller organization”
Small organization has two major benefits: flexibility in the design and operation of the business process and a shorter decision-making process. In the modern business environment, business often faces fluctuating and sometimes quickly decreasing demand. To be competitive, it is crucial for a business to set up and manage a state-of-the-art process in a short period of time. The flexibility and the shorter decision-making are the keys to success in number of business areas.
Small organizations can benefit most from the variety of emerging outsourcing services to obtain the flexibility. It has become possible to select the most qualified partners in terms of capabilities and geography from a number of different service providers. The growing number of international players such as Nokia, Apple, and Sony are using Electronic Manufacturing Services for their key products. Some of these outsourcing companies are even launching their own branded products with cutting-edge technologies. These are the clear indications of the increasing quality and availability of external business resources. However, it is small organizations that will benefit most from this increasing availability of better quality outsourcing services. Given that the quality of these outsourcing services will continue to improve and the availability of such service allows small organization to seamlessly adopt them when it needs, small organization may derive an advantage against large organization. Small organization will be more flexible in response to today’s fluctuating market conditions.
Another benefit of being small is the shorter decision-making process. By definition, a limited number of individuals engages in the operation and so roles such as the middle manager become unnecessary. The people who conceive of the business concept are the same people who design the business process; therefore, the decision can be faster. Further, a shorter decision-making process increases the likelihood that innovative products and services will be taken to market. In the absence of a complex and many-phased approval process, managers have more freedom to realize the potential of these cutting-edge products and services in a short amount of time. There are numerous examples of the efficiency of small organization. The founders of an Internet service can outline their service offerings in a day, and launch the service to the global community within a week. Another example is private equity firms. These organizations usually outsource the majority of their activities. In many case a single case officer can quickly make all necessary decisions to secure the deal, generating large profits with only limited number of internal staffs. Provided that these members have the ability to make sound and far-sighted decisions, small organization has great potential to develop innovative products and services and take them to market remarkably rapidly.
Unstable and rapidly changing market environment is the catalyst of making the choice to be small more attractive. Today, a single innovative idea can completely change the competitive landscape. Small organizations consisting of people with cutting-edge skills and innovative ideas may out-perform larger organizations with a number of smart employees who are, however, limited in terms of responsibility and scope. Small organization is becoming an attractive choice in number of industries.
IV Potential fields for “smaller organization”
A small organization is not necessarily the best option for all types of businesses. There are apparently several considerations when deciding upon the optimal size. The two most significant factors may be the economics of scale and the additional costs associated with adoption of external resources, known as transaction costs.
First, the small-scale business model will most likely not be successful for labour-intensive businesses including agriculture, manufacturing, and general administration. The same holds true for capital-intensive businesses such as banking and transportation services. These businesses may lend themselves to mergers and acquisitions, resulting in a limited number of global giants. In contrast, small organization may be beneficial for knowledge-intensive businesses. Examples are the small organizations providing well-designed electronic products such as LCD televisions, mobile handsets, and PCs without own manufacturing facilities. The flexibility of small organization means, on the other hand, less integral structure of the organization. Small organization suits for generating ideas and inventing new concepts, however, these characteristics do not benefit a business that requires reliable operation and economy of scale. Small organizations do not replace large organizations. Small organization will became an attractive choice in selected business fields.
Second, higher transaction costs associated with inter-firm exchanges in such value chain consisting of several independent organizations might be a bottleneck. In many cases, relying on external funding and outsourcing services can cost much than using internal capital and internally reserved resources. It is likely that the price of external funding and business processes, as well as the internal coordination costs associated with the handling of external resources, will decrease rapidly in the coming decades, but at this point the costs are still high. Modular architecture realized in several products such as IT hardware and software can help reduce these costs; however, it is not advantageous in many industries. Thus, the question is whether the additional costs associated with the external resources will decrease to the point where the benefits of small organization can offset the costs. That has happened in IT equipment manufacturing sector. But it is unclear if this can happen in the other knowledge-intensive businesses, such as professional services. In order to determine if small organization is attractive choice, understanding of detailed industry and competitive landscape will be required. Small organization is attractive in today’s volatile market. However, it is a choice, a strategic decision of business entity.
To be small will be a strategic choice of organization in gaining competitive edge in volatile market. While small organization does not replace large organization, the option is becoming attractive alternative to traditional integrated organization structure. Although the potential of small organization attracts attention in many industries, at this point the costs associated with inter-organization transactions are still high and outweigh the benefits in most cases. Close observation on the dynamics of industry/value chain structure will be required to judge the unseen impact of small organization.
V Conclusion
Theoretically speaking, small organization is an attractive and strategic choice to realize growth in revenue and profit and maintain a competitive advantage in today's business environment. However, the potential of small organizations is not fully materialized yet.
A small organization can potentially even enjoy great competitive advantages against a larger organization. Flexibility enables these organizations to select the best-qualified partners and gives them the ability to deal with large fluctuations in demand. Furthermore, the shorter decision-making process allows these businesses to quickly develop more innovative products and services. Ideally these advantages will lead to increased revenue and overall growth.
Small organization will become a choice in many industries. The benefits of being small will be maximized in knowledge intensive business with fluctuating demand and diversified needs. However, it would not be advantageous in labour-intensive or capital-intensive business. Moreover, close observation of individual business environment is required to determine if the advantage of being small can offset the disadvantages.
Small organizations and large organizations will continue to co-exist as they each evolve in the coming decade. Although it is not an instantaneous shift, there are many indications that within decades a small organization of 20-30 members will be able to operate a global value chain, potentially a billion dollar international business.
Bibliography
Background materials include but not limited to the followings;
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タグ：English version small organization small business international business Globalization Outsourcing SME SMB local business 中小企業 経営 国際化 boundary of the firm transaction cost economics
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