BUSINESS As Usual
In the same mini-mall with Dr. Nova Cain's dental offices and Smilin' Ted's All Comers Insurance Agency, resides Manny Mustard's House of Sandwiches -- one of those small, out-of-the-way, off-the-wall sorts of restaurants that has great food, excellent service, and plenty of atmosphere. Manny, the proprietor, is a good friend of mine who's struggling to turn his dream of restauranteering into reality. His restauranteering dream doesn't stop with one small, out-of-the-way, off-the-way restaurant with great food, excellent service, and atmosphere. No, Manny is shooting for a nation-wide chain of Manny Mustard's House of Sandwiches. He wants to go from being an overworked, underappreciated member of the third estate to a member of the second estate who overworks and underappreciates others. To help out my good friend Manny, let's take a long, hard look at the differences between small business and the larger, Fortune 500 kind.
All Business is not Created Equal
Let's start with the basics. In our economy, the primary task of a business is to produce stuff. They combine natural resources, labor, and capital in such a way that the goods coming out the front door are more highly valued by consumers than the stuff that goes in the back door. Of course businesses aren't the only ones to produce consumer-satisfying goods. This enormous task also falls onto the shoulders of government, as they produce assorted public goods. Consumers are prone to do a lot of production themselves, such as preparing meals, washing clothes, painting houses, and the like. Businesses, though, do it as their, well, as their business. We consumers of the third estate are willing to pay businesses to produce and supply consumer-satisfying stuff.
If we had a century or two, we might be able to list the wide assortment of goods and services that result when businesses do their production thing. However, because we don't, let's just note that they produce a wide, and I mean extremely wide, assortment. Businesses also require a wide, and I mean extremely wide, assortment of different production techniques to produce their goods and services.
For example, some businesses, like those that generate electricity, need a lot of capital, machinery, tools, and equipment, but not much labor. Other businesses, like home construction, use significantly less capital (oh sure, they need their hammers and saws), but relatively more labor.
Taking Stock of OwnershipA business, like Manny Mustard's House of Sandwiches, has a choice between one of three methods of organization -- proprietorship, partnership, and corporation.
- Proprietorships. A whole bunch of businesses, that is, the producers and suppliers of our economy's output, are owned and operated by one person -- a proprietor. Any afternoon pedestrian stroll around our economy is likely to turn up dozens of proprietors in areas like retail stores, farming, and home repair services. The important thing is that a proprietor makes all decisions, takes all risks, and gets all rewards. In particular, a proprietor has what the legal-types refer to as unlimited liability. That means there really is no difference between the business and the person running the business. For example, if you slip on the sidewalk in front of Manny Mustard's House of Sandwich, then Manny Mustard is responsible for any and all damages. Manny's personal belongings, in addition to business assets, can be confiscated to pay the damages resulting from a lost lawsuit.
- Partnerships. The only real difference between a proprietorship and a partnership is the number of owners. A partnership has two or more owners, while a proprietorship has one. Everything else, though, is pretty much the same. The partners share the decisions, risks, and rewards. That nasty legal thing about unlimited liability also holds for partnerships. If Manny Mustard takes on a partner in his House of Sandwich -- a guy by the name of Hopeless Harv, a descendent of our wheat farmer from Fact 3 -- then both partners are responsible for any civil damages. Manny Mustard could lose his personal possessions even if a lawsuit resulted from some horrific act on the part of Hopeless Harv.
A really big problem with proprietorships and partnerships is their size. A proprietorship is only as large as the amount of wealth one person can accumulate. Partnerships can be bigger in that several people pool their wealth. But, the unlimited liability thing has always meant that you really, really, REALLY need to trust your partners.
- Corporations. That's were corporations enter into the grand scheme of economic life. The most important thing about corporations is that they're considered legal entities by the government, meaning they are separate and distinct from the people who own or run the them. This also means that the owners have what is legally deemed limited liability. Unlike proprietorships and partnerships, the owners of corporations are only liable for the amount of their investment -- no more. This let's a corporation acquire a lot of funds by getting a little bit from a lot of different people. In fact, for good or bad, the gargantuan companies like Omni Conglomerate, Inc., could not produce the vast array of goods that are part of our industrialized lifestyles it they were not corporations.
As a general rule, small businesses tend to be proprietorships or partnerships, while big businesses tend to fall under the heading of corporation. This doesn't mean that Manny Mustard will become a huge megalith like Omni Conglomerate simply by changing from a proprietorship to a corporation. It only means that his House of Sandwiches is unlikely to find its way on the Fortune 500 list as a proprietorship.
Organization, though, is only the beginning of what separates the big boys form the little guys. Read on.
Competing Like the Big Boys
Let's consider some notable and not so notable differences between big businesses and smaller ones.
Competition. Big companies compete in a different way than smaller ones. For example, when Omni Conglomerate talks about competition, it's concerned about the actions of it's chief rival in all sorts of conglomerate-type business -- Mega Industries. Omni is always keeping a close eye on Mega Industries. The reverse is also true. Both companies know that they can sell their products, make a profit, and be successful if they satisfactorily best the other. This is much like a foot race, where it matters very little how fast you run, as long as you run faster than your competition. So much the better if your competitors happen to trip. A small business, like Manny Mustard, doesn't have just one or two competitors, he has dozens, or even hundreds. Manny can't worry each and every competitor. He's better off just doing the best darn job of sandwich production that he can.
Market Control. The size of a business and number of competitors translates into market control -- the ability to control or substantially influence the market price. The big boys usually have this control, the little guys don't. The control applies to the stuff it sold as well as the raw materials, intermediate goods, and even labor that's bought. Manny Mustard, for example, has very little say over the prices he charges for his sandwiches. He needs to charge about the same price as everyone else. Nor does he have much control over the prices he pays for mustard, bread, and other essential ingredients -- take it or leave it. This isn't the case for Omni Conglomerate, Inc. For example, its OmniMotors division ultimately faces one-on-one negotiation with each person buying an XL GT 9000 sports coupe. Likewise, OmniMotors negotiates prices with the tire company, steel company, labor union, and other input suppliers.
Cooperation. The best way to know when a small business has become one of the big boys is the inclination to cooperate with the competition. The thought of trying to organized some sort of cooperative pricing with all 5,000 plus restaurants in Shady Valley probably never crossed Manny Mustard's mind. Even if it did, it would be hard to accomplish. However, Winston Smythe Kennsington III, the CEO of Omni Conglomerate, Inc., has probably considered cooperating with Mega Industries more than once -- each day, every day. It would be relatively easy for Omni and Mega to cooperate, raise prices, cut production, and do all sorts of other things that would create more profits for both. More than likely the only thing keeping them from actually cooperating is the fact that it's illegal because of antitrust laws. Many of the big boys have tried the cooperation route, some have succeeded, most have been caught.
Political power. The journey from market control to political power is a very short one. This road has been extensively traveled by most of the nation's big businesses on a regular basis. Big businesses have a great deal more control over resources, production, and wealth than smaller ones. Even in a democracy such as the one we have in the good old U. S. of A., wealth is power. The big boys have the wealth and power, and they're not afraid to use it to increase their market control, often through the political system by smothering politicians with campaign money, that's bound to produce helpful laws, subsidies, or restrictions on competitors.
Risk. The last difference between the big boys and the little guys is risk. Small businesses, moreso than their bigger counterparts, are subject to the uncertainty of the future. Small businesses are usually on the verge of bankruptcy every morning of every working day. All it takes to slip over the edge is a tax miscalculation, a disgruntled customer (one who knows as good lawyer), or an unfavorable government regulation. In fact, most small businesses close their doors within a few years after starting. In contrast, most of the big ones, like Omni Conglomerate, are so big and well-known that they have to really, really, REALLY screw up before they lose enough sales to go bankrupt.
The Second and Third Estates
Let's close this entry by clearing up a potential misconception. Our pedestrian's trek through the economy has sent, and will continue to send, signals warning consumers about the perils of the high-powered leaders of the second estate. These warnings, though, don't apply to all businesses. If the lack of control over the things that affect a small business sounds like the plight of hardworking, underappreciated, taxpaying consumers of the third estate, it should. That's because small businesses are very much a part of the third estate. The blue-blooded, certified, card-carrying members of the second estate are the ones who populate the corporate board rooms and upper management positions of our nation's big businesses.
The battle between Manny Mustard's House of Sandwiches and Omni Conglomerate's OmniSandwich Villa, is on. I'm pulling for my long time friend Manny, but the prospects aren't good. Omni has the resources, negotiating power, and political connections to squash Manny like a bug on the wall. I think I'll buy one of Manny Mustard's Deluxe Club Sandwiches. It may be my last chance.