December 3, 2015 Reading Time: 3 minutes

I’ve recently been talking to successful small business owners about what allows them to prosper when facing competition from larger firms or national chains.  In a diverse array of industries including retail, manufacturing and financial services, business owners tend to report three things they do better than larger competitors: 

  • More attentive customer service
  • A deeper understanding of local market conditions
  • The ability to make and implement decisions more rapidly

Success in business often comes down to gathering information and making decisions in response.  In most large firms, there is a good deal of separation between the people gathering the information (front-line employees) and the more centralized decision makers.  This can lead to important efficiencies: Walmart can charge lower prices and have a unified business strategy.  But in the three attributes above, small businesses thrive on the fact that there is far less separation and red tape between these local bits of information and the owner who makes decisions.

Some examples will help illustrate the point.  A small independent pharmacist here in Western Massachusetts told me about serving contracts for local hospice patients.  The providers reported back to him that the patients were having difficulty managing their medications and remembering when they had taken the last dose.  Within days, the pharmacist was able to begin using packaging and other products to assist with the problem.  While the CVS Pharmacy around the corner was likely privy to the same information, making this pivot would have required input and approval from headquarters, and likely a national response that would have taken time and resources.

Similarly, the owner of a small menswear boutique made use of these advantages when selecting the products he offered.  He was able to immediately respond to preferences that customers shared in conversations by selecting designers and products that addressed their needs.  While the national chains with whom he competes have lower costs and higher marketing budgets, they cannot nimbly respond to such on-the-ground information as quickly or specifically.

Economists have long understood the benefits of decentralized decision making.  In a classic 1945 paper, Friedrich Hayek argued that a fatal flaw of centrally planned economies was that a central decision maker could not possibly take in and respond to the complex and dispersed information of an economy as well as the sum total of millions of individuals on the ground.  Though Hayek dealt with policy rather than competitive strategy, his assertion was remarkably similar: 

“[P]ractically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.  We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstances.”

Advocates often focus on the feel-good aspects of “supporting” small and local businesses.  For an example, look no further than Small Business Saturday (an event ironically created by American Express).  But small businesses that prosper do so not because consumers are doing them a favor, but because they offer something of robust value to the market.  By definition, smallness allows a business to respond directly to detailed local information, and provide customers with an experience that it is difficult for larger competitors to match.

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Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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