Column: How lightweight enterprises are outperforming industry heavyweights
Editor’s Note: This is the third in a series of excerpts we are publishing from sociologist Jerry Davis’s new book, “The Vanishing American Corporation: Navigating the Hazards of a New Economy.” For more on the topic, watch last week’s Making Sen$e report below.
— Kristen Doerer, Making Sen$e Editor
Suppose you wanted to start an enterprise without leaving your couch. Is that possible? Imagine a hypothetical product: the iPhone Remote Drone Assassin App. The app would allow users to control weaponized drones for classified operations. The market for the product would include government contractors of various types as well as freelance operators. The first step is to rent a virtual space at a legitimate-sounding address, preferably in Silicon Valley (to convey high-tech street cred). Next, incorporate online in Liberia, the legal home to many legitimate companies like Miami-based Royal Caribbean Cruise Lines. It’s easy and quick and may have certain unspecified advantages when tax time comes. What about funding? Thanks to the JOBS (Jumpstart Our Business Startups) Act of 2012, finding investors online through various crowdfunding sites is easy. Contract programmers to write the app can be hired via Upwork and several other sites. A manufacturer for the drone itself can almost certainly be secured at Alibaba.com, which includes a vast selection of remote control aircraft vendors in China. Square is a user-friendly payments company that allows anyone with a smartphone or tablet computer to accept credit card payments. Finally, Shipwire will pick up the products from the dock in Long Beach, warehouse them and distribute them to users. With a few clicks, you can be an entrepreneur.
You might want to go further. Silicon Valley firms almost inevitably have a mythic origin story about the exact coffeehouse in San Francisco where the idea originated or the garage in Palo Alto where the prototype was built. It’s easiest to hire an online “creative” contractor to generate an appropriate fable. If you want to further burnish your marketability, consider renting a defunct brand name like RCA or Westinghouse for your product, which the older members of the public might vaguely remember and trust.
This scenario is not entirely fanciful. Remember how Michael Dell started a computer company in his dorm room and ultimately grew it to be the best-selling brand in the U.S.? Today, almost anyone with a credit card and a web connection can create an enterprise without leaving their dorm room, as the barriers to entry have collapsed in industry after industry. In many sectors it no longer pays to be big and integrated; in others, large-scale generic producers are happy to serve anyone, allowing new competitors to test the waters and rent expanded capacity as needed.
Vizio grew to be the bestselling brand of LCD televisions in the U.S. by 2010, beating Samsung and far outpacing Sony, by offering low-cost TVs assembled by a Taiwanese partner and sold through big-box retailers like Costco. Just as Michael Dell realized that PCs were composed of off-the-shelf components with a superflulous brand name, Vizio’s founder recognized that anybody could make a flat-screen TV, and the lowest-cost producer with the best distribution would win. Unlike Dell, however, Vizio chose not to invest in assets or employees: It had fewer than 200 workers when it surpassed Sony, and even today, as it has expanded into sound equipment and laptop computers, it has only 400 employees — about as many as a typical Walmart superstore.
The Flip video camera also grew rapidly from its invention in 2007 to 2009, when it had become a must-have accessory for millennials. With just 100 employees, it had the largest market share in its industry thanks to its clever design and marketing. Cisco bought the company in 2009; two years later, it was closed because Flip was obsolete: Many people who would buy a Flip already had a smartphone that could do much the same thing. Flip was the corporate equivalent of a pop-up restaurant. At four years from birth to market dominance to obsolescence, Flip was much more efficient than Eastman Kodak, which took well over a century and tens of thousands of career employees to follow this same trajectory.
Compare Vizio and Flip with their better-known competitor, Sony. Sony is one of the most storied brand names in history, known around the globe for products like the Walkman and the Trinitron television. But with 150,000 employees, billions in assets and expensive real estate in Tokyo, Sony is costly to maintain and has lost many billions in its electronic business. (It fares much better in life insurance, movies and music.) A chorus of financial analysts has urged the company to quit the electronics industry entirely. As one analyst put it in 2013, “Electronics is its Achilles’ heel, and in our view, it is worth zero… In our view, it needs to exit most electronics markets.” Shortly after this report, Sony sold its personal computer business and exiled its television business to a subsidiary. Sony was fitfully exiting the electronics business, just as its analysts asked.
But the music business faces the same form of lightweight competition. Stockholm’s X5 Music Group, with just 43 employees, produced 13 of the top 50 selling classical albums in 2010 — about the same as Universal, the industry’s heavyweight. The company licenses the rights to performances owned by smaller classical music labels and virtually “packages” them into compilations for sale online via iTunes and Amazon. With no need for physical product, the company can be radically tiny, yet large in its impact. And unlike Sony and Universal, it does not require corporate jets or skyscrapers. Similarly, whereas Blockbuster had 83,000 employees and 9,000 physical stories at its height, Netflix today has only 2,200 employees and rents server capacity from Amazon. The ability to rent assets and use contract employees allows firms to be tiny and nimble, yet large in impact.
In 1977, sociologists John Meyer and Brian Rowan wrote that “the building blocks for organizations come to be littered around the societal landscape; it takes only a little entrepreneurial energy to assemble them into a structure.” At the time they wrote the article, this was poetic and almost whimsical. Today, it is descriptively accurate.
A corporation was once a social institution, with a mission and members and boundaries that separated the inside from the outside. Today it is more like a webpage. What do I mean by this? Right-click on a webpage and choose “View page source.” The pleasing coherence of the visual design you saw is replaced by pages of unreadable code. Much of the code is essentially instructions that say: “Go to the database located at the following address and pull an image from here to place in the following location; go to this other database and pull some text from there.” It is a series of calls on outside resources that are brought together just in time to convey the image that you see. Vizio, Flip and scores of other contemporary enterprises are a lot like this: not an enduring social institution with members and obligations, but a webpage.