8th Global Peter Drucker Forum

Experimental Capitalism
by Haydn Shaughnessy

It seems like an amazing time for entrepreneurism. Yet, if measured by the net addition of new companies to the US economy, home of the startup, or the number of new startups, entrepreneurship has been in decline for twenty years, according to both the Kauffman Foundation and Brookings Institute.We have convinced ourselves that the startup scene is vibrant and we need to ask why.

There are similar illusions around the decline of larger companies. You’ve heard it said often enough that the lifespan of companies on the S&P 500 is also in decline. This too tends to be untrue. Companies don’t disappear when they leave the S&P 500. New companies arrive who have earned their place.

Yet we assume or believe that a sea change has hit entrepreneurism, and change is for the better. In this article I will explain what I think is going on and why entrepreneurism is now more important.

There are essentially five elements to this:

 

  1. The first is that smaller businesses are becoming more important as a component of the global economy

In most developed economies the rate of internationalisation of smaller businesses is increasing. The World Trade Organization estimates that smaller businesses traditionally have been responsible for about 50% of global intermediary goods trade. That figure is now looking like closer to 60%.[1] Other research shows small businesses are expanding fast across borders. According to Oxford Economics, “In three years [from 2013], the number of small firms that do business in six or more countries will more than double, from 15% today to 35%.”

What are the reasons for this? Partly because it is now much easier to expand overseas, particularly in digital service and goods. SaaS platforms typify this. But even producers of hard goods are finding it easier to grow global markets because of the increased sophistication of global package delivery.

What most commentators miss is that this change is tied to structural change in the global economy.

 

  1. The platform economy will enable more global business; the secular trend is towards polarisation between small and huge.

Business platforms like Alibaba are actively campaigning for a new world trade order. Legendary entrepreneur Jack Ma (Alibaba, Ant Financial, Didi Chuxing) has called on the World Trade Organisation to set up special privileges (such as lower tariffs) for package delivery. Internally in China his company promotes rural small business as well as urban. In fact Ma has promised to train 1 million rural youths in entrepreneurism. Small is an essential part of tomorrow’s competitive landscape.

One of its most successful manifestations is within Haier, the Chinese white goods maker that sets out to create small entrepreneurial businesses within the overall business. How successful is it? Haier recently acquired the consumer goods business of old industrial giant, GE, and has entered a cooperation agreement in which GE will learn the benefits of going small.

The business model for platforms (Apple, Google, Alibaba, Uber, AirBnb) is to enable and organise small entities, devolve innovation risk onto them, and take economic rent (the 10 – 30% cut that Uber to Apple take off their “ecosystem”).

 

  1. The third is that, periodically, segments of the economy go through phases of experimentation.

Going back to the days of Schumpeter, there has been some grudging recognition that small firm entrepreneurism plays a significant role in creative destruction. But look at disruptive innovation in any sector and you will see a phase of experimentation where entrepreneurs are trying to determine the preferences and structures of new markets.

As an example of this, look back to the early 2000s. At that point a new infrastructure, The World Wide Web, had emerged. Microsoft, Intel and Apple dominated computing. The large telcos dominated another new field, mobile telephony. Entrepreneurs speculated that there must be another way, a non-monopolistic way, of exploiting these new infrastructures.

A movement called the Internet of Appliances grew out of this speculation. It resonates with the Internet of Things. It was the experimental period when many features of what was to become the IoT were cast into the market for the first time. Entrepreneurs used the early to mid 2000s to test hypotheses about what this new landscape would tolerate. What technologies and applications could actually work on the WWW; what might customers really want? How could they be drawn into some kind of emergent market structure?

All these questions were asked hypothetically and the experiments with the IoA laid the ground for the IoT to come. These experimental periods are critical to how economies restructure.

 

  1. More segments of the economy than ever are going through this phase, many of them through new business platforms.

Right now the economy is being forced through a whole array of experimental phases. IBM’s Watson has been set up as a platform for a new generation of Artificial Intelligence experiments by the AI startup community. Predix, the GE data platform, plays a similar role in data science. GE has attempted the same in health analytics, though it looks for now that the fitness band industry will be the owner of the personal health “platform”. Apps platforms now abound. Ride hailing, table booking, renting, bring experimentation into personal services. Design communities are another area – creative design, industrial design, engineering. Each is running its own experimental phase to test what the new economy will accept.

 

  1. The fifth is that business is now being built on a different infrastructure (Cloud, mobile, SaaS, various integrated platforms, and superfast logistics.

This means the “need to learn” plays to the small companies or the intrapreneur and against the large enterprise. The learning model is a key advantage, which is why we will also see more companies becoming participative – following the Chinese model of huge participation platforms where consumers or users determine the functionality of products in real-time interaction with manufacturers or developers.

For all these reasons smaller companies are becoming more important even if they are not becoming more numerous. Larger enterprises will continue to grow in importance too – but the best of them will organise whole markets and enable the future of small.

Only small businesses have the capacity to learn and adapt quickly to an economy that is restructuring rapidly. As they become more significant we need to learn quickly how to support their global competitive advantages.

 

About the author:

Haydn Shaughnessy is the author of Platform Disruption Wave, an account of how megaplatforms are reshaping the global competitive environment.  He has consulted on platform disruption and strategy to global organisations.

 

[1] WTO/UNCTAD World Investment Report 2013: CH 4 Global Value Chains: Investment and Trade for Development.

 

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