Why are businesses getting smaller?

There are 55% more businesses than there were 15 years ago, but they're mostly tiny. The jury's out whether that's a good thing.

by Adam Gale
Last Updated: 18 Oct 2016
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Entrepreneurs

Back in the day, size was an uncomplicated issue for businesses. Bigger was better and that was it. Nowadays, while entrepreneurs still dream of hitting the big time, corporate behemoths pine for the days when they were young and hungry.

The likes of Samsung, Panasonic and even Wal-Mart are trying to develop entrepreneurial cultures and agility, very often while shedding overheads (and jobs) to do it. Small is increasingly beautiful.

Indeed, the average size of UK firms, when measured in employees, has dramatically reduced in recent years. Between 2000 and 2015, the number of businesses increased by 55% to 5.4 million, far outpacing the increase in the workforce.

An optimist might put this down to a flourish of entrepreneurialism, as Britons rise to the challenge of the disruptive 21st century economy.

But most small businesses aren’t whizzy Shoreditch start-ups cannibalising obsolescent corporates like an unruly school of piranhas. They’re the dry cleaner down the end of the street, the kebab shop, the independent business accountant or that guy running a proof-reading service from his bedroom.

The great majority of the increase in business numbers since 2000 was in fact caused by a 73% rise in self-employment, with employer numbers increasing only 16%. There are now well over four and a half million of us working for ourselves in the UK, getting on for one in seven employed people.

The rise in self-employment and in small business numbers has two likely explanations. Either people want to work in that environment, or they have to.

It’s hard to know for certain of course, but judging from Resolution Foundation data that indicate earnings were higher for self-employed people in 1995 than they are today, one would imagine a lot of it is the latter.

Besides, even if that weren't the case, despite the hype about small firms, bigger businesses are significantly more productive. According to government statistics, large businesses (250 employees plus) have a turnover per employee 39% higher than small businesses (10-49 employees) – and 260% higher than sole proprietorships.

Judging from that, it would seem that the rise in small business numbers and self-employment is a symptom rather than a cause of the disruptive decline in organisations.

But is that all bad? Look at the beer industry. There are now 1,692 breweries in the UK. That’s up 65% in five years and perhaps twenty times what it was in the 1970s.

On the surface this may seem a backwards step, away from the 20th century trend towards mass production and efficiency, in favour of what is essentially a cottage industry. These microbreweries are not going to be bring in revenues per person that even remotely compare to the megabrewers, and only a very small percentage will ever grow to something more substantial.

But few apart from the industrial brewers themselves would argue that the situation is actually worse as a result.

Consumers have infinitely more choice and access to higher quality products. Pubs have gained a loyal and enthusiastic new clientele (perhaps two in fact, if you count hipster craft beer drinkers and be-sandaled real ale aficionados separately). And the brewers themselves? They are mostly hobbyists who’ve turned a passion into a living, which hardly seems like a bad thing.

Output isn’t everything, after all.

Image credit: Roger H Goun/Flickr

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