Paul Jarvis

Unscaled businesses

Think about it: large corporations haven’t always existed. Outside of the industrial revolution, and the last 100 years or so, companies were tiny and many were even multi-generational.

Business was run as small and lean as possible, was mostly durable beyond a single lifetime, and sometimes even served customers across generations as well. It’s only in the last short while that economies of scale have happened, yet we assume that they’re the norm and that they’re the only path forward for business.

Large companies started to come into existence only because a unique and temporary set of conditions happened: a post-war workforce needed jobs (after WWI), industrialization and manufacturing moved from made-to-order and handcrafted to mass produced, and there was a surplus of natural resources (oil, gas, trees, etc) available.

Scale, at that point, was a competitive advantage, because people became obsessed with cheaper consumer goods becoming readily available, like cars, radios, phones and fridges. In order to handle the demand, large companies were required to extract the required resources, manufacture them into consumer goods, and then fulfill and ship orders.

It’s debatable whether or not the industrial age is over, in favour of the information or imagination age, but either way it’s in its death throes currently. And the reason isn’t because we no longer need mass produced goods (we completely do), it’s more that the way consumer goods are produced has changed.

We used to have to own a factory and hire workers to create the goods we wanted to sell. These days, anyone with enough capital can “rent” factories to produce on-demand goods. We can similarly rent server space to host websites, use cheap and existing ecommerce software, or work with order fulfillment companies to package and ship the goods we sell, as we sell them. Nevertheless scale is required to make full use of benefits of volume because almost everything can be done on-demand.

I remember in the mid to late 90s, in order to sell something online it required a ton of custom programming, a very special merchant account, time to process and approve the account creation, that came with reams of paperwork and needed a specific bank account. Now we can pay a few bucks a month, connect a bank account in a click and start selling on any number of ecommerce platforms in minutes.

But what does this mean for smaller companies? Well, by having on-demand access to scale as required and then the ability to scale back down if demand peters off, it means we can focus on the specific part of the business we want to do.

For example, Dan Provost and Tom Gerhardt run a successful physical product business, selling very stylish and high quality goods like pens, smartphone tripod mounts, and notebooks to 1,000s of customers a year. And, they can do it as a two-person business, from a garage behind Tom’s backyard. By employing post-industrial methods that make use of on-demand methods instead of scale, they can focus on developing new and interesting products. They then offload production, order fulfillment and everything else to on-demand partners.

Even for myself, if I want to self-publish a book, I don’t have to hire a full-time staff to edit, design, bind and ship my books anymore. I can hire freelancers for each project to edit and design the book, who’ll do a great job, and I only have to pay for the work they do (not their full-time salaries). I can then upload my book to Amazon’s CreateSpace, where the book is printed on demand as each order is placed by a consumer. It’s printed at the closest location (to save on shipping), and I don’t have to have a factory nor do I have to have 1,000s of printed books waiting in inventory (that would have had to be paid for up front). The books print and ship when they’re ordered. So my focus can be on writing books… I don’t have to be in the book editing, book printing, or book shipping business.

Businesses no longer have to scale to succeed. Sure, there was a century where the ideal engine for business was growth and scale. It just doesn’t make sense any longer. Instead, our businesses can grow to a point and size that makes sense, and then we can shift our focus to optimizing for enough.

MIT Sloan School of Management released a study, The End of Scale, showing that companies are staying smaller and “unscaling”, as the main way to gain traction and market dominance. Unscaling meaning that companies can do better with less by providing custom products and solutions, building on demand, and offering heavy customizations.

By staying small and lean – by renting or using scale on demand, by outsourcing tasks and parts of the supply chain we don’t want to focus on – companies can adapt and pivot as needed without leaving a huge trail of workforce or equipment that no longer serves its purpose in its wake.

For example, Helix Mattresses builds each mattress to custom specifications from each customer via a form on their website, and then manufactures the mattress in their much smaller than average factory located in the US, shipped in a small box and for a price that’s under $1,000.

The MIT Sloan School of Management study provides more examples:

Stripe is an unscaled financial services company based in San Francisco that is challenging the big banks. Airbnb, also based in San Francisco, is an unscaled hotel company that is taking customers away from the big chain hotels. Warby Parker is a New York City-based unscaled eyewear company that is threatening the big eyewear brands.

Unscale is at the crux of what it means to be a company of one—to question whether or not growth/scale is required to succeed (since most of the time, it’s not). Large companies and corporate leaders would do well to adopt this mental model for unscaling and become more like companies of one who work towards efficiency with less, instead of exponentially chasing more.

Today there are more small businesses than large businesses, even though huge corporations make up the majority of press coverage and even the majority of “business yearning” (as in, “I want to be the next Steve Jobs/Mary Barra/Elon Musk”). Big businesses may get the majority of fame, but US Census stats from 2014 identified 28 million businesses in the United States and 22 million of them had no employees. So 78% of businesses in the US are companies of one, literally. With the rise of cheap technology solutions, on-demand manufacturing and fulfillment and AI/robotics, these smaller businesses are going to continue to thrive.

It’s time to start challenging the old (and even current) mental models of business, as the time of monolithic companies could be coming to an end. The new age of business could take from millennia of small and durable businesses, and add to them by factoring in new technologies and on-demand production and fulfillment availability. A new set of conditions now exist, and the peak of the industrial age has past. Unscaling, or working towards enough makes it now easier to start, easier to profit and easier to thrive long term. Unscaled companies of one are the future of business.

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