David versus Goliath: The Long Tail of SMBs
A few years ago, the concept of the Long Tail was taking over the world. Popularized by Chris Anderson, editor-in-chief of Wired magazine, in an article called The Long Tail (he later wrote a book on the topic), the term initially was meant to reflect that, as production and distribution costs fall, entire industries are shifting from a small number of mainstream hits to markets dominated by niche products. The term was also used to describe how digital companies have a leg up against old-school analogue companies. Whereas the inventories of distributors and the shelves of retailers are finite, companies like iTunes have a practically unlimited selection of songs. Amazon for example is able to display an incredibly deep offering, composed of products it sells as items sold by 3rd-party sellers selling on its marketplace. Across industries the term describes how the economics of supply and demand are being rewritten in a digital age. In this blog post, I want to use this term to describe another phenomenon – the long tail of SMBs.
While blue chip companies and large multinationals grab most of collective attention, they ultimately are the trees that hide a MASSIVE forest. Indeed, national economies and entire industries are rarely dominated by a handful of companies. They are rather composed of a big collection of small and medium size companies. Indeed, 99.8% of existing companies in Europe are SMBs (with less than 250 employees), which tallies with more than 20 millions of enterprises. These latter contribute to nearly 60% of the European value added and are providing jobs to 67% of the European workforce (data of 2008 from the Eurostat report of 2011).
Companies seek to move from being one of the many SMBs to becoming one of the market leaders. While far from impossible, those companies are often at a disadvantage as they seek to grow beyond their local market compared to larger players. Their brand is less well known than, they don’t have significant buying power, a high buyer base or masses of employees able to create think up new products or investigate new markets. Their only option to grow therefore boils down to competing on quality and sheer innovation – both of which are difficult to sustain. (This rule of competition and growth does not apply to all industries and SMBs as there are instances of SMBs dominated niche industries are creating very profitable businesses as a result).
Connecting these SMBs together and facilitating their expansion to new markets (e.g. finding of new suppliers, distributors or other partners) could help level the playing field. In addition to improving their chances of moving from being an SMB to a large multinational corporation, this could unlock tremendous value for economies and industries. While being a profitable business venture in itself, strengthening the ties between SMBs should also be a top item on the agenda of public institutions.
This overriding need of support in the development of networks helpful for the international expansion of SMBs is stressed by the present economic situation. The constant risk of a demand reduction in local markets makes market diversification the only way to secure production rate, by avoiding dependence on one single market.
The numerous unknown small firms accounting for the major part of the existing firms and contributing for a major part of the national economies have to increase their chances of expansion on booming markets. For public institutions to support SMBs’ expansion is not only a matter of growth but a matter of survival of the backbone of their economies. Strengthening the SMBs’ business network should be the first path to follow.