
Why Small Businesses Are Starting to Win Again - ohjeez
http://www.newyorker.com/business/currency/small-bountiful-small-business-craft-beer
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JasonCEC
If anyone is interested in a start-up[1] that works with beer, shoot me an
email[2]! My company builds flavor profiling and quality control tools for
craft beverage producers using machine learning, sensory science, and
analytical chemistry.

[1] www.gastrograph.com

[2] JasonCEC [at] gastrograph [dot] com

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I believe that the growth in artisan firms is part of the trend towards
affordable luxury goods, where individuals who find products that better match
their preferences at nearly the same cost (not price _^_ ), become brand or
product loyalists - they'll continue purchasing and consuming that product
until it fails them (quality control) or their preferences change (which
happens quite often, usually as a result of experience - we build flavor
profiling tools to track and re-target these individuals).

 _^_ example: the average craft beer may cost ~2x as much as Bud or Natural
Light, but contains >2x alcohol by volume.

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showerst
Minor nitpick that doesn't dispute your point: Bud is 5% abv and Natural Light
is 4.2. Most craft beers aren't rocking 8+% alcohol, unless you're a big fan
of imperial stouts and skullsplitter =).

~~~
Rapzid
Those alcohol contents are quite reasonable for the NZ craft beer scene. If
you look at Garage project, recently named NZ's best brewery in certain
circles(and I can attest they are fantastic), the 7-8% range is well
represented: [http://garageproject.co.nz/](http://garageproject.co.nz/) .

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ap22213
"Small" businesses win when transaction costs between corps get smaller, when
supply chains get more efficient, when more available capital is fills out
choices in the supply chain, and when more corps can focus more on competitive
advantage. A "small" business (with some exception to service-based
businesses) is a just a "head" of a long, long supply chain. And, it only
looks small if you look at the head.

I have been hoping for years that this type of economy would emerge. This type
of transformation will allow for more small entrepreneurs to survive and
thrive. Large corporations tend to focus on optimization, and that
optimization narrows the types of products that they can produce. With small
businesses, customers can get more tailored products, more individualization,
more personalized service.

Although it's easier than ever to start a small business, I don't think we're
quite there yet. Large corporations still have economies of scale to their
advantage. But, I'm hopeful that we're trending in the right direction. I'm
hopeful that soon, small entrepreneurs with a good business ideas can make
reasonable profits staying small and fitting in somewhere in that massive,
global supply chain. In that type of world, we all benefit.

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syllogism
This was a frustrating article, because I think it's almost right, but not
quite.

It's not that mass-production kills quality or "intangibles". We don't have to
assume boutique products have a quality advantage. It's just that scale is
most effective on price, and price sensitivity is not linear. Once products
are cheap enough, price discrimination stops being decisive.

> The true-differentiation strategy seems to work best when scale, despite its
> efficiencies, also introduces blind spots in areas such as ... intangibles
> not entirely consistent with mass production and standardization.

That isn't really what's going on. Even if the big business is good, and scale
is quite useful, there are many, many small competitors. All of the
competitors are making products, and some of them are likely to be
exceptional. So for the big business to stay on top, scale has to be helping a
lot.

If there are 100 beers on the shelf, and one of them is a mass-produced, and
the mass produced one is not #1 in quality, you don't have to assume mass-
production hurts quality. It just that it didn't help enough.

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Rapzid
Craft beers are "mass produced", just not in the quantities of Budweiser. They
still use huge kettles, precisely controlled quantities of ingredients, etc.
They also tend to use higher quantities of good, natural ingredients and the
like. SO yes, mass production in and of itself doesn't necessarily drive
quality.

BUT. The size of the company can. Very large companies, particularly public
but not limited to such, start drifting toward the cheapest product they can
get away with while maximizing profit. That's their obligation to share
holders after all. I think the food industry(including beer) is particularly
sensitive to this from a quality standpoint.

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AnthonyMouse
> Very large companies, particularly public but not limited to such, start
> drifting toward the cheapest product they can get away with while maximizing
> profit. That's their obligation to share holders after all.

This is largely a myth. Corporate executives have an obligation to
shareholders, but that obligation is not to maximize quarterly profits. Short
term profit maximization at all costs is generally _not_ in the interests of
shareholders. If you have a reputation for selling a quality product you can
capitalize on it in the short term by selling a junk product at quality prices
and huge profit margins, but in any kind of a competitive market that opens
you up to exactly what you would expect. Someone else comes in with a real
quality product at the same price and you lose all your business to them.

The reason corporate executives do things like that isn't because they're
satisfying their obligation to the shareholders -- they're doing quite the
opposite. But they do it anyway because of how they're _compensated_. Big
bonus at the end of the year if profits are up; no repercussions if it tanks
the company by the end of the decade because by then you're working somewhere
else.

It's important to make the distinction because the shareholders are the ones
who have the power to do something about it. "Obligation to the shareholders"
makes it sound like the shareholders are the beneficiaries, but they're just
as much victims as the customers. Making that mistake is how they become the
victims.

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yuhong
I wonder why they are so common though.

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AnthonyMouse
My theory is that we have too much diffusion of ownership. When Foo Corp is
majority owned by four dozen mutual funds which are in turn owned by ten
million different people, there is nobody minding the store. The mutual fund
managers are picking a stock to make up ~1% of their fund, and they have the
same perverse incentives as the executives. The individuals who are the real
parties in interest don't even know what companies their money is invested in.

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yuhong
Does the mutual funds actually push for such people or is it caused by the
culture or something like that?

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AnthonyMouse
Don't think of it as a problem with specific people. It's systemic. You tell a
CEO that he gets paid primarily based on how much profit the company makes
this quarter and he's going to start slashing long-term R&D and burning the
office furniture for heat.

But you're asking why funds invest in companies like that or prefer that
method of compensation. Part of it is just laziness. Investing in a company or
rewarding a CEO who posts big profits seems intuitively sensible and is easy
to measure. It's a lot more work to do the investigation it takes to realize
they're going to crash and burn and you could be the one holding the bag.

Another factor is that fund managers are often compensated using the same
methods. If the fund does well in the short term then they're rewarded. The
companies dedicated to short-term profits do exactly that, as long as the
market doesn't factor in the long-term value before you divest. But the bonus
if it works goes to the fund manager whereas the risk is to other peoples'
money.

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jarjoura
I attribute the change to the influx and return of a strong middle class in
cities. It's easier to create "mom and pop" shops when you have affluent
buyers who live a block away.

Suburban lifestyle meant your nearest supermarket became the obvious decision
when the 5 mile drive was no shorter than a 45 minute drive.

It will be interesting when services such as Postmates, Curbside, and
Instacart evolve to extend these small businesses' reach.

~~~
jnbiche
>return of a strong middle class in cities

Where are these cities where a strong middle class has returned? Surely not in
SF, where one of the area's highest paid professions (software engineer)
cannot afford family housing? Certainly not elsewhere in California, where
incomes among middle class Californian households fell by nearly 7% between
2009 and 2013, while income among the state’s top 20% earners grew by 1.3%
[1].

Certainly not small cities in the Midwest or South. Having traveled through
those extensively the past few years, I can assure you there is no middle
class returning to those cities. Quite the opposite.

I'm not one of those who gloats about SV "privilege" and scolds people for
making the money they deserve to get paid, but the extent to which the typical
educated SVer is getting out of touch with the economic reality of this
country does have me concerned.

If software really is eating the world, and the industry's best and brightest
are blithely unaware of the dire condition of the country's middle class, then
we are good and truly fucked.

1\. [http://www.huffingtonpost.com/2015/01/24/states-middle-
class...](http://www.huffingtonpost.com/2015/01/24/states-middle-
class_n_6538148.html) (not usually one to cite the Huffington Post, but this
article clearly outlines the data sources and methods at the bottom, and they
seem solid)

~~~
graeme
I think they meant the return of the middle class to city centres. That
doesn't mean there's more middle class people in a metro area, just that they
now live downtown rather than spread out in suburbs.

Basically, anywhere with gentrification. The unaffordability of housing in
city centers is a sign it's now "in" to live there. Businesses follow.

I do agree with you about how out of touch people on here are about North
American economic reality.

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stalcottsmith
It is argued that one implication of Coase's Theorem[1] is that firm size is
inversely proportional to transaction costs. If transaction costs are falling
due to Internet enabled communication, this may contribute to reversing the
tide of centralization.

[1]
[https://en.wikipedia.org/wiki/Coase_theorem](https://en.wikipedia.org/wiki/Coase_theorem)

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mcook08
One overlooked factor is the modern consumer being desensitized to
advertising. This created huge advantages in the last 50 years but modern
consumers see so much advertising that they are largely immune to it.

~~~
pm90
Good point! Having been exposed to a bombardment of advertisements since early
in life, personally I don't think I'm influenced very much by them now
(although that's up for debate).

Also, the TV is largely being replaced by Netflix and such, so the exposure to
TV advertising is also falling in absolute numbers.

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logn
Part of this might be because of social media and consumer-oriented websites
(such as Yelp, Beer Advocate, Urban Spoon).

A big problem trying a new product or restaurant is fearing a possible bad
experience. With McDonald's you know what you're getting. It might not be
great, but it's consistent. Rating systems and recommendations from peers help
give confidence to consumers trying new things.

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whoisthemachine
I think some of it also comes from a lower barrier to entry in many cases -
the cost of supplying a small business (such as a coffee shop) has been
lowered dramatically in recent years by technological advances in the supply
chain, i.e. better tracking of coffee beans, more efficient delivery, etc.

~~~
bhauer
I think it is this, precisely. And I think legislatively we should clear the
way for small business by reducing the burden of regulation and oppressive
bureaucracy.

~~~
cheriot
I hear people talk about the "burden of regulation" a lot, but outside of
breweries and distilleries, what are the regulations that are so burdensome?
Things like building codes and inspections or are you think of things at the
federal level?

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XorNot
Voting this up. Too often this is political code for "handouts to big
business" by the way of environmental sundry exemptions, tax exemptions,
immigration exemptions (hello H1B issue) and the like, none of which actual
small business can take any advantage of (and which the people running said
businesses would probably be close enough to the immediate effects of to find
distasteful in a lot of cases).

I would like to hear some concrete examples of what people think needs to be
changed.

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allendoerfer
Ironically in the paragraph about "true differentiation" the author mentioned
Lamborghini cars, a brand of the ninth biggest company on earth with 600k
employees. Other niche brands they own are Bentley, Bugatti, and Ducati.

I would argue that these are indeed differentiated. It does not matter whether
production processes or internals are unified or not as long as the consumer
experience of the end product is.

Small businesses profit from mass production as they can build a consumer
ending frontend around standard technologies and products they can leverage
for all their internals.

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massice
I think small business is difficult to start in current competitive market,as
too many people try to start their businesses, and most of the survived
businesses have their difficitation products or services comparing with
others. I admit that big giants have their adventages, such as resrouces and
capital. But small businesses are more flexible, and they could keep more
focus on consumers, and provide better services to customs. In this approach,
small businesses would aviod blind spot.

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Mikeb85
And small businesses will continue to do well. Small businesses have the
advantage of agility - they can react to market changes quicker, they have
more freedom to experiment, and they can tailor the experience of whatever
they're offering to local markets.

Small businesses are also important for job creation:
[http://www.ic.gc.ca/eic/site/061.nsf/eng/02806.html](http://www.ic.gc.ca/eic/site/061.nsf/eng/02806.html)

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phkahler
Perhaps small scale production is becoming cheaper and more feasible. The cost
of equipment continues to drop, as even expensive things are made by someone
looking to increase their market.

What if the additive manufacturing fans are right? What if 3d printers that
can actually make good stuff get cheap but remain slow? Fused titanium parts
are awesome, but I don't expect that in my living room any time soon.

