In doing some research for this post, I ran across several alternative meanings of the term “think small”. These are summarized in the Related Reading section at the end of this post. In the context of this post, however, “small” has a very specific management and operational meaning. Read on …

You don’t get big by thinking small

Thinking big has been a primary driver of business strategy since almost forever. Especially in America. And if you are already big, think bigger.

The founders seem to have overlooked this vital imperative in the U.S. Constitution but most businessmen did not. Bigger is better and biggest is best.

Until something happens. Like the COVID black swan and its never-ending series of consequences. Unforeseen. Unforeseeable still.

Managing “big” tends toward a high degree of operational and financial interdependence. It often takes the form of almost identical business units and products. Think retailers. In 2020, many of the big, successful businesses were quite monolithic.

In stable, predictable times, this business structure works just fine. Costs are minimized and profits maximized. Growth toward bigger is generally easy if you are already big.

But there is a major problem with this great structure: it is often extremely brittle. Its resilience is severely limited. It is not designed or managed for huge change and unpredictability. It is far from black-swan proof.

Black swans happen

Black swan days

Everybody knows about black swan events and their consequences. They do happen – rarely but unpredictably, by definition. Their nature is unforeseeable – also by definition. Unfortunately, managing a business for such unlikely black swans is very difficult. But not impossible.

The preceding description of typical big businesses suggests it is a combination of strong interdependence and lack of diversity among business units that creates brittleness and a high risk of full-business failure. A bad enough hit can take the whole shebang out, speaking technically.

Dealing regularly with disruption tends to develop resilience. It is long periods of relative stability and predictability that create brittle business structures and operations.

Becoming resilient by undergoing actual major disruptions is a bit Darwinian for most of us. But minor disruptions don’t generate enough motivation to make significant changes. So, what to do?

Build resilience into your business

Resilience – typically defined as the capacity to recover quickly from difficulties, as toughness – does not address black swans in practice. This approach deals with known or discoverable risks. Black swans are not foreseeable in either timing or nature: they just happen, like in 2020.

Another unpleasant reality concerning black swans is that they tend to travel in flocks. One black swan gets the ball rolling and next thing you know, the whole flock arrives. The flock here is the set of consequences that are also largely unforeseeable and undefinable beforehand.

Black swans travel in flocks (Yuting Liu on Upsplash)

How can you plan and execute plans that may be long-term, costly, and fundamental without having any idea about what you might be planning for?

The answer I believe is to plan around event impacts

You may not have any idea about the underlying causes until they reveal themselves by actually happening but you sure can develop a list of significant impacts that may result. Resilience in this context is making the business as impact-resistant as possible, regardless of the cause or causes.

I am sure that all of you can make a fairly extensive potential impact list in a few minutes. A supply chain failure is a very popular impact possibility today, as is some extended period of tighter lockdowns. Bank failures is another.

Each of these will have a specific and well-understood impact on your business. Lockdowns and COVID restrictions have virtually or actually killed many large retailers – some recent bankruptcy stats are noted below.

Better yet, you can model the impact of such hits on each of your major business units and then model the effects of proposed changes. This is business systems simulation in its essence and perhaps most valuable application.

Here is the basic concept:

Brittleness from interdependence and lack of diversity can be countered by restructuring your business into a number of small, more independent units.

Then, if one of these small units takes a fatal hit, the rest of the business can continue largely unaffected. This is in effect a strategy of isolating parts of a business enough so that they can fail without making any serious impact on the other business units. Not redundance but instead resilience.

How to do the analysis

In my mind, this analysis requires a business model containing a set of potential “small” independent units. This is what risk analysts do routinely, although for rather different purposes. Conventional business risk analysis looks for weaknesses and ways to mitigate them.

Here, we are looking for a business structure consisting of a number of mostly “independent”, smaller units any of whose individual failure cannot do serious damage to the overall business.

In practice, this means developing models for each proposed business unit structure and then testing its broader impact from failure on the other business units. Each of the component units may be structured differently so as to constrain or localize its failure impact.

The analysis might identify several units, but not all, that could sustain a major hit by a failed unit. This is clearly an iterative process that systematically varies both unit structures and failure scenarios to see what happens. If many units are involved, this can quickly become quite messy.

It is probably best to begin with the smallest number of units that can be made independent – localizing failure impacts. Management can probably identify a starting set quite easily simply based on their detailed knowledge of how the business functions. Some ideas …

Units in different businesses

You may be able to see a potential unit structure based on units in substantially different businesses. These might for example be units that could readily be sold without a major impact on the remaining business (other than a sales and earnings decrease). The core business might be manufacturing while the “disposal” part might be a set of service units that function quite separately. The restructuring in this case might appear very similar to what you would do to prepare the service group for a spinoff.

Units in different countries

Another easily-visualized structure might be country-based. Individual countries have nasty habits of becoming unpredictably unstable. Your business may in fact be already well-insulated against this possibility. Financing may be mostly local. Product sourcing may be done locally or structured as if between completely independent businesses.

Units identified by risk analysis

Many larger organizations do risk analysis and mitigation routinely. It is typically required for large publicly-owned companies. This means that you may have already identified your riskiest business units and if so will have done some serious risk mitigation. The remaining job for our purposes is to figure out exactly how a business unit failure may impact each of the main remaining units.

Bloomberg recently reported that 50 businesses with assets greater than $1 billion, 60 businesses with assets between $100 million and $1 billion, and 25 businesses with assets between $50 million and $100 million went bankrupt in 2020. The most since 2010, another extremely tough year.

The reasons for most, and perhaps all, of these failures is COVID-related disruptions. Or maybe not.

My bet is that the majority of failures actually result from extremely interdependent, brittle business structures that may well have failed under much less catastrophic circumstances. Few businesses today build resilience, diversity, and unit independence into their structures. Reducing costs dominates many management practices, dramatically increasing brittleness.

Bankruptcy is a fairly expensive way to assess your business resilience. I wonder how many large businesses today have any real idea, or interest in, their ability to survive and even prosper after being hit by inevitable major disruptions.

Diversity is critical in your moves toward small

Structuring a business into smaller units that any individual failing will not endanger the overall business is not the whole story. If these units are all in the same market or product categories, then they are all vulnerable to a market or category disruption. Think the dozens of highly-focused major retailers that filed for bankruptcy in 2020.

Part of the “think small” restructuring process has to be building a solid base of business diversity. Major retailers are learning this lesson most harshly.

Your business structure needs to be tested against market-wide and category-wide disruptions. If your primary customer base disappears or cannot access your main sales outlets (e.g., stores), game over. Same goes for product categories that are too narrowly sourced. A supply chain hit can topple the whole show.

Much of this cannot be done quickly or easily so an early start, like yesterday, is probably wise.

The objective is to localize each “small” unit

Making each “small” unit relatively independent of other units is the path to isolating the effects of any unit’s failure. Each small unit should in effect be potentially “salable”, as in a spinoff. This restructuring approach should illuminate all of the major areas of interdependence.

Again, this is neither easy nor quick in most cases. Interdependence was created over decades and has often become institutionalized. Unravelling such a structure may be costly and disruptive itself, likely requiring some years of effort.

Brittle interdependence to small independence and diversity

So, at long last, what is “small”?

Good question. It isn’t little kids, or VW Beetles, or startups, or a consulting buzzword (see Related Reading below). We need a very practical definition to use  in practice. Here it is:

“Small” in this context is a largely independent business unit, the failure of which cannot endanger the full business under a wide range of situations.

A business unit of this kind may actually be a very substantial business. It can only be defined as “small” if you can demonstrate that its failure is not likely to inflict any significant damage upon the rest of the business (other “small” units).

The key here is to identify a potential “small” unit and then to demonstrate that the remaining business units are highly unlikely to be damaged by this unit’s failure for whatever reasons.

In practice, this means developing a view of the full business as a collection of largely independent business units and then testing the units one by one across a set of nasty scenarios.

Good job for your number crunchers.

Bottom line:

A focus on growth and cost reduction by management in largely stable, predictable times can lead to dangerous brittleness and business unit interdependence. These can be fatal in times of great change when a special kind of resilience is essential. This resilience involves making sure that the impact of any business unit failure cannot endanger the rest of the businesses.  Restructure your big business into many small, largely independent and diverse units.

Minnesota-based Think Small was organized in 1971 (originally Toys N Things Training and Resource Center, then Resources for Child Caring, and finally Think Small in 2012) with a mission “to advance quality care and education of children in their crucial early years”. “Small” here refers to children kinds of small, not to businesses.

Volkswagen in 1959 introduced its Think Small advertising campaign for the VW Beetle. Wikipedia provides some interesting background if you are interested:

“The campaign has been considered so successful that it “did much more than boost sales and build a lifetime of brand loyalty […] The ad, and the work of the ad agency behind it, changed the very nature of advertising—from the way it’s created to what you see as a consumer today.”

There is even a book about this ad: “Think Small: The Story of the World’s Greatest Ad (2013)

“Small” in the VW Beetle context referred to car kinds of small, not to businesses.

“For example, someone might say they are thinking of setting up a business, and someone else says to them “think small”, meaning “don’t try to do too much to start with; start on a small scale”

Steli Efti’s “Close” blog looks at think-small in a startup or entrepreneurial context. He argues that you need to start by thinking small in order to be able to think-big in practice. He has some nice examples, such as:

“Look at how Facebook started out. Mark Zuckerberg didn’t start out with a big vision of connecting people all over the world or creating the largest social network in existence. Facebook came into existence from a “hot or not” game for Harvard students.”

“AirBnb is now a multi-billion dollar company. But it started out because they wanted to make a bit of extra money to pay the rent.

“When I heard about AirBnB very early on, I was thinking to myself: “What a stupid idea! Here am I, trying to change education, and you guys want to do an air bed and breakfast?!”

“Small” refers to a startup kind of small, again not what we are dealing with here.

And of course there are startup consultants like Start Small (aka “Start-Small! Think-Big”) whose mission is:

 “We help under-resourced entrepreneurs create thriving businesses in underserved areas so owners can build wealth for themselves, their families and communities. We do this by activating and engaging a top-tier network of professional volunteers who provide high-quality legal, financial and marketing services, at no cost.”