Consider a few surprising and optimistic facts for the new year: nationwide, independent bookstores have grown by about twenty per cent since 2009; meanwhile, American craft breweries collectively now sell more than 16.1 million barrels of beer annually, outpacing, for the first time, Budweiser. This isn’t the only evidence that small-scale businesses are making a comeback. Over the last ten years, the long-running decline of small farms has levelled out, and more than three billion dollars was spent last year on more than four thousand independent feature films. Over all, since 1990, small businesses (with, generally, fewer than five hundred employees or less than $7.5 million in annual receipts) have added millions of employees, while big businesses have shed millions.
None of these developments has individually transformed the American economy, but taken together they represent something. Once upon a time, or in the last century, to be precise, it was an article of faith that most sectors of the economy faced unavoidable domination by a few big players. The pattern just kept repeating itself. In the automotive industry, hundreds of small companies became Detroit’s Big Three. Old general stores and other local shops were killed by department stores and chains, which were in turn devoured by the big boxes. Even restaurants, which might seem inherently smaller scale and local, became dominated by big fast-food and family-restaurant chains such as McDonald’s and Red Lobster.
Despite all this, some people, ranging from Louis Brandeis to the “small is beautiful” economists of the nineteen-seventies, continued to believe in the advantages of small-scale business. “A corporation may well be too large to be the most efficient instrument of production and of distribution,” Brandeis said, in 1911. It may also “be too large to be tolerated among the people who desire to be free.” But Brandeis and his ilk were regularly dismissed as naïve. Here is Peter Drucker, a twentieth-century management guru who wrote a worshipful tome about the efficiency of General Motors: “Mr. Brandeis maintained that bigness was economically inefficient. We know today that in modern mass production, the small unit is not only inefficient, it cannot produce at all.”
Drucker’s logic held forth: scale does yield natural efficiencies—it simply cost Ford and General Motors much less to build cars than it cost their rivals. A retailer such as Walmart, buying at scale, can offer lower prices. For most of the last century, no matter where you looked—retail, telecommunications, apparel, manufacturing—scale businesses ran over their smaller, inefficient rivals. Today, in some industries, that story continues to hold true: on the Web, for example, some of the big companies, like Google and Amazon, have eliminated many of their smaller rivals.
Consider the story of craft beer. Large-scale breweries destroyed their smaller rivals in the twentieth century because they were able mass produce the stuff for cheaper (reaching wholesale prices of about fifty cents a beer or less) and because their fat margins allowed them to pay for things such as television advertising. In the late nineteenth century, there were thousands of breweries in the United States; then, Prohibition came, and, after it ended, a consolidated industry emerged. By 1979, there were just forty-four remaining. The giants had won again.
But the small breweries came back. Their beers were not better advertised and certainly not better priced. Rather, the crafts went after an enormous blind spot for the big breweries—namely, flavor. I don’t entirely mean to be snide; more precisely, craft beer succeeded by opting not to compete directly, instead pursuing what can be called a “true differentiation” strategy. That means they established a product that, in the mind of the consumer, is markedly and undeniably different (as opposed to “false differentiation,” which is more or less the same thing with different packaging). True differentiation, if it works, actually changes consumer preferences. The dedicated craft-beer drinker, once he’s hooked, no longer cares if Coors Light costs three dollars less. Today there are once again thousands of breweries in the United States (more than 3,000, in fact).
You can see the strategy of true differentiation at work in other areas of the economy as well. Farmers who sell, say, organic or free-range foods, cannot hope to compete based on price. Instead, they try to create consumers who won’t eat chicken produced by big companies for moral, health, or aesthetic reasons. As Jaime Rogers, the owner of Pushcart, a small chain of coffee shops in New York, put it to me, “We compete with Starbucks by selling to people who don’t want to go to Starbucks.” Independent bookstores (whose sales are actually rising) can’t beat Amazon on price or selection. But they can curate intensely and make the act of browsing for books an enjoyable experience that cannot be matched online. True, the differentiated product is often more expensive, but a craft beer or a fancy coffee, unlike, say, a Lamborghini, is not beyond the reach of the middle class.
True differentiation will not and cannot work everywhere. We’re not likely to see hand-crafted 747s anytime soon, or friendly neighborhood oil refineries. The advantages of scale are too overwhelming. The true-differentiation strategy seems to work best when scale, despite its efficiencies, also introduces blind spots in areas such as customer service, flavor, curation, or other intangibles not entirely consistent with mass production and standardization. Where getting big begins to hurt the product, small can be bountiful.
The economic wedge created by true differentiation is a cause for great optimism, even if you don’t hold Brandeis’s view that big business inherently threatens democracy. It helps to realize the true promise of a free market, in which people have dozens of genuine choices among products that differ in more than just their marketing. There is also something to be said for a country where things like food or drink actually differ by region. Most profoundly, the trend creates an industrial upheaval important to the long-term strength of the economy. It suggests an economy that is alive and reinventing itself, that is mutating from within, that is engaged in the never-ending process of creative destruction. Oh, and yeah, we also get to drink better beer.
