Imagine a United States where small businesses didn’t exist. All products, services, stores, research departments, etc. would be large corporate operations with central control throughout. Would the economy and life in general be better or worse? Although, there’s no definite answer to this question, past contributions of small businesses suggest they are an important factor in our vibrant economy and that without them, fewer options for most products would exist. (Think the old USSR, with its planned economy). Knowing small business’ role in the economy, helps elucidate what it may be like to theoretically live without it.
The United States has a strong entrepreneurial tradition. A new business is born every 11 seconds in the US, and one in 12 Americans is actively involved in trying to start a new business (Holehouse, 2014). Although small, these businesses play a very valuable role in our economy. They account for 99.7% of all businesses in the US, and 97% of exporting businesses (SBA, 2011). They produce 51% of the nation’s private GDP and 47% of business sales (SBA, 2011). They create more jobs than big businesses, employing half of the nation’s private sector workforce, and provide many other economic benefits (SBA, 2011).
Small businesses have fewer employees, less capital, and many have less experienced staff than large businesses. Of new business owners, 64% are ages 25-44 (see figure 1). The survival rate of small businesses diminishes as the business ages (see figure 2), and only 25% of startups will survive to their tenth birthday party.
What is Small Business?
The Small Business Administration (SBA) is a government agency founded in 1953. Its mission is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses.” By SBA’s definition, small businesses are “independently owned and operated, and not dominant in their fields of operation.” To be eligible for the SBA’s programs, small businesses must meet the SBA size standards for their particular industries. Usually size standards are measured in number of employees or average annual receipts. For example, 500 employees is the standard for most small businesses (SBA, 2014 (2)). In the industry sector, the business revenue standard is less than $7.5 million in average annual receipts for many non-manufacturing industries (SBA, 2014 (2)). General non-manufacturer small businesses must be primarily wholesale or retail, and supply the product of a US small manufacturer (SBA, 2014 (2)).
Small businesses are inefficient in many ways, when compared large companies like Wal-Mart or General Electric. Penetrating a market is often a very capital intensive effort. Unlike large companies, small businesses don’t have billions of dollars in capital to buy materials in bulk and market their product offerings. As a result, small business products may not be as affordable when compared to large company products. Another problem for small businesses is they can’t afford to manufacture highly integrated technical products, like jet engines.
What does small business add to the market?
Despite these inefficiencies, small businesses are nimble. They can identify and exploit new opportunities in the market sooner than large companies with their typically rigid, hard to modify business processes. Small businesses can easily, quickly, and at lower cost change their product line and production processes. This often allows them to specialize and reach niche markets. For example, small businesses might not manufacture a jet engine, but they might significantly improve certain engine components and market or license those improved products to large companies, thus producing a win-win for each company. Such innovations by small businesses can revolutionize the market, forcing competitors to meet their new higher standards and efficiency. For example, the book “The New Rules of Marketing & PR” David Scott mentions a 50 room hotel in Belize that is changing the way hotels market. The Lodge at Chaa Creek’s website provides quality content about the surrounding area marketed to different customer personas, e.g. honeymooners, families, etc. About 80% of Chaa Creek customers come directly from this content marketing (Scott, 2013)!
Another example of small businesses identifying and exploiting new opportunities is in the shale oil and gas businesses. About a decade ago the process of horizontal drilling, or fracking, became widely applied. This new natural resource exploitation process increased prior drilled well exposure from 1,000 feet of strata to 100 miles of strata per well (Hefner, 2014). Conventional gas companies, traditionally attracted to much larger and more capital intensive oil fields that produce for many years, ignored shale opportunities. As a result, small oil and gas businesses were the first to purchase and/or lease drillable properties and use the new horizontal drilling method. After a few months of experimentation, horizontal drilling methods were further refined to reduce gas extraction costs by 40 percent (Hefner, 2014). Efficiency is still being improved today, while companies like Exxon Mobile are scrambling to acquire a few of the small shale companies. There are currently about 150,000 horizontal wells in the US, while the rest of the world has drilled only hundreds (Hefner, 2014). The profitability of horizontal drilling, especially for natural gas, has increased by several magnitudes. The US is far ahead of the rest of the world in oil and gas production efficiency and growth, as a result of small business oil and gas companies pioneering efforts with hydraulic fracturing.
Small businesses identified and exploited the new opportunity with shale drilling while it was ignored by big players in the market. This effort has been particularly valuable to the US economy because it has allowed the US to supplant imported oil with a low cost, domestic fuel that is relatively low polluting (Hefner, 2014). Shale gas has partially displaced coal as a fuel source for electrical power production and is reducing air pollution. Domestic energy production has positively impacted energy costs and trade and stimulated the repatriation of industry lost to foreign countries over the years. For example, gas well output is driving a significant expansion of the US chemical industry and derivative businesses, such as plastic manufacturing.
An innovative and competitive market is constantly becoming more efficient in products and services. It’s this kind of market that improves the way we live every day, taking us from the black and white to Blu-ray in HD. Some would say without small businesses, technology wouldn’t have advanced to where it is today.
Stay tuned for part II, discussing topics like “What do large business take away from the market?” and “How do small businesses add value to the economy?”
More horticultural posts coming soon!
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SBA. 2012. Advocacy: the voice of small business in government. http://www.sba.gov/sites/default/files/sbfaq.pdf
SBA. 2014. Guide to Size Standards. http://www.sba.gov/content/guide-size-standards-0
Scott, David. 2013. The New Rules of Marketing & PR.
Hefner III, Robert A. 2014. Why the Shale Revolution Could Have Happened Only in America. http://www.foreignaffairs.com/articles/141203/robert-a-hefner-iii/the-united-states-of-gas — foreign countries
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