The Illusion of Economies of Scale

When it comes to innovation, is bigger always better?

No I don’t think so. In fact I think it is a dangerous illusion. Smaller companies are more open and more collaborative by their very nature – because they have to and realise they have no choice. They aren’t blinded by the illusion of economies of scale. It is increasingly easier and cheaper to transact externally than internally. I am a fan of Dave Gray’s connected company book where he talks about pods that are connected by a platform (e.g. tech, culture, space…) and can be powerful together occassionally but most operate as agile and autonomous units. Blogged about that a while back too here.

How do small firms benefit from working with large firms?

The benefit for small firms is the opportunity to rapidly scale their business, which in turn creates opportunity to access new markets and build their brand through association. Often small companies have great ideas and capabilities but lack the channels, investment and infrastructure to implement them at a global scale. In addition, many growth-orientated small companies become overly focussed with securing expensive equity investment which definitely has a role to play, but only in the minority of cases. Much more frequently the route to market for their products and services is best delivered through partnership with a larger organisations. Small companies can of course go it alone and become the big players of tomorrow, however the vast majority of small company exits are through trade sales to larger customers.

…and what does the big firm get out of it?

In many ways large companies need small companies more than vice versa, and it certainly wasn’t always that way. Most large companies need to sustain a minimum level of growth to satisfy their shareholders, which becomes more difficult the bigger they become. This is partly because operating at scale leads to risk aversion; but also inflexibility and homogeneity that inhibit innovation. And so the innovation comes increasingly from outside – from customers, from suppliers, and from non-competing partners. If done well this becomes a much better, faster and cheaper way of innovating than through traditional methods. As well as revenue and growth opportunities, working with small companies can have tremendous uplift on other aspects of the business such as building a buzz around their brand, and creating creative and entrepreneurial opportunities for staff.

What’s the key to successful collaboration?

In our experience the key to successful collaboration between large and small companies comes down to having a clear process, collaborative business model and metrics that works for both sides. This requires an open and collaborative mindset that looks to create shared value, not just maximise returns for one side or the other. It also requires trust and empathy to enable honest conversations to surface and work towards a successful outcome together.

What are the key challenges?

In our experience one of the key challenges comes down to the risk aversion of the large company, which puts too much risk on the shoulders of the small company. This is amplified by the very different timescales and resources that large and small companies are able to deploy. Ultimately, collaboration can only happen through equals so even with an obvious buyer/seller situation, we work hard to understand the motivations on both sides and align incentives so everybody has ‘skin in the game’. For large companies the challenge can be that the sheer number of potential relationships is so great that it becomes too complex to manage, exposing the organisation to risk and IP contamination if not dealt with carefully.

What approach should a small firm take if they’re thinking of working with a big company?

Small companies should take time to understand the needs of the big organisation, which are often available and published, though frequently difficult to find. They should take care to tailor their pitch as you only get one chance to make a first impression. And finally they should start with ‘why’– namely why customers would want what they are offering, and what is the unmet need that they can solve. It can require considerable investment of time and energy but if handled smartly, collaboration can lead to much bigger opportunities than growing organically.

by Roland – excerpt of interview from forthcoming report due to be published on small business growth