Uncertainty of Economic Growth Remains

by Steve McKee

The National Federation of Independent Business (NFIB) says that small business optimism grew slightly in January. Slightly. The NFIB Optimism Index currently sits at 89.3, ten points below where it was prior to the recession.

Commenting on the index, Lawrence Mishel, president of the Economic Policy Institute, said:


"To absorb the over 15 million officially unemployed workers in this country... job openings and hirings must rebound dramatically. This report offers no indication that this is happening."


The NFIB's report is consistent with Decision Analyst's January Economic Index, a survey of several thousand households based on nine different economic measurements. The index remained unchanged for the third month in a row, stuck at 94, well below the 110 which signals an economic expansion. This index tends to lead the U.S. economy by up to a year, suggesting the economy will remain sluggish throughout 2010.

That's what the CEO of Unilever, one of the world's largest consumer product companies, is preparing for. Speaking of the economy, Paul Polman says:


"It's not going to just drastically change in the next 12 to 24 months. We will be in for a long and slow recovery, and that's what we're planning our business on."


Policy makers continue to point the finger at the difficulty of securing business credit. But the indexes above suggest the bigger problem is simply a lack of revenue growth, meaning employers simply don't need to hire. That sentiment is borne out by the fact that fewer than one in ten owners surveyed by the NFIB added employees in January, while more than twice as many cut jobs.

Businesses don't want to borrow money as long as economic uncertainty remains high. What we most need now is normalcy, not big ideas. Let's hope the politicians are paying attention.


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Steve McKee is a BusinessWeek.com columnist, marketing consultant, and author of "When Growth Stalls: How it Happens, Why You're Stuck, and What To Do About It." Learn more about him at www.WhenGrowthStalls.com and at http://twitter.com/whengrowthstall.

Small Business Needs Social Software

by Hutch Carpenter

A general observation of collaborative work is this:


"The larger and more diverse are your personal network of contacts, the higher the quality of your ideas and project work."


In the enterprise market, the opportunity being seized by companies is to better connect employees. The sheer size of these firms makes it obvious that they are not optimizing collaborative activities. Social software plays an important role in helping that. SunGard's CEO has a great take on this issue in the New York Times.

But what about small and mid-sized businesses (SMBs)? Do they have issues with maintaining connections? We'll tackle that issue in a second. First, however...

The Challenge of Growth: Traditional Collaboration Modes Don't Scale

When a small company starts out, it's rather easy to stay on top of what colleagues are doing. There just aren't too many of them. You easily banter, bounce ideas off one another and contribute your part to projects.

It's natural human interactions.

The problem is that small businesses continue to rely exclusively on the tried-and-true methods of collaborative work as they grow. Keep on with the emails, the desk meetings, the lunches. Sure, it's fun to keep with those who sit essentially in your visual perimeter. But it means you're missing out on a lot of valuable ideas and insight from colleagues.

The graphic below shows the challenge of scale in collaborative work:



The easy interactions of old are now replaced by the departmental exchanges, and the daily work inherent in those micro environments. The small firm mentality that employees enjoyed with fewer employees is no longer applicable as the company expands.

Yet as research has shown, employees who are able to break out of departmental silos and leverage a diversity of connections perform better in terms of innovation.

So how does this fit SMBs?

Metcalfe's Law Hits Dunbar's Number

Metcalfe's Law. Initially addressing fax machines, it speaks to the value of networks. Specifically:


"The value of a network is proportional to the square of the number of connected participants."


For those who study the value of information networks, this law makes sense. You increase your number of information sources. And all things being equal, the person with greater information has a decided advantage in term of:

• Awareness of key issues
  
• Long tail knowledge of different issues
  
• Access to information that will solidify an idea
  
• Identification of colleagues who can help advance an idea or a project
  
• Different points of view and information that make up for the knowledge limitations we all have

Every new connection inside a company increases these information advantages, for all members of the network. The problem occurs when employees are only using traditional methods for making and accessing these connections: email, desk conversations, departmental meetings.

They run into Dunbar's Number. I use Dunbar's Number here as a heuristic, describing the mental limit we each have to stay in top of what others are working on. With traditional means of engaging in collaborative work, the Metcalfe's Law advantages of information diversity are limited by our Dunbar's Number ability to keep up with the new connections.

This graph describes the issue, and SMBs' opportunity:



Up to a certain point, employees can stay on top of what their colleagues are working on, and interact relatively easily. Is this up to 150 employees? Maybe. As Danah Boyd noted about Dunbar's Number:


"He found that the MAXIMUM number of people that a person could keep up with socially at any given time, gossip maintenance, was 150. This doesn't mean that people don't have 150 people in their social network, but that they only keep tabs on 150 people max at any given point."


150 is a maximum number. Meaning for many of us it's less. And I'd argue, in a work context, where we're busy delivering on the daily tasks that define our jobs, it's an even lower theoretical maximum.

Which means at some point, small businesses begin to lose out on those information advantages when they rely only on traditional collaborative work modes. In the graph above, that's the part of the graph where Dunbar's Number crosses over Metcalfe's Law.

Call it the Metcalfe's Law Opportunity Gap.

At that point, companies need to look at systems that allow employees to share and filter information, and to interact with others outside their daily sphere of contacts. To access non-redundant information and points of view.

This is a problem well-known to large organizations. It also applies to SMBs as well. It's why they need social software at a certain point in their growth trajectory.

This is an important issue for innovation. So many of these employees will have front line customer and supplier experience, and ideas for the business. But visibility on these ideas will get harder and harder as the firm grows.


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Hutch Carpenter is the Vice President of Product at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation.

14 Most Important Innovation Factors

I came across a nice 2003 study by Dutch academics titled, "SME innovation and the crucial role of the entrepreneur." The study's purpose was to ask small and midsize enterprises (SMEs) what they viewed the most important factors in innovation to be. In this study, SMEs consist of 100 employees or less.

Rather than have the businesses come up with their own factors, the academics conducted an extensive survey into the prevailing studies on the matter. From this survey, they culled to the 14 most commonly mentioned bases for innovation.

They then asked 167 firms to answer 50 different questions, which resolved to the 14 factors. From these responses, they generated a statistically valid ranking of the what small businesses consider to be the most important drivers of innovation.

Before discussing these ranked factors, it's interesting to note the academics' take on this. They came up with a really rough ordering of the most important innovation factors, based on their frequency in research studies. They then compared the research studies to what the businesses themselves identified. It's of interest to see the discrepancies.

The chart below shows how business ranked the 14 factors, along with their approximate frequency in research work:



The findings are useful, and perhaps not surprising. In a firm with under 100 employees, the entrepreneurial zeal of a founder certainly is a key driver of innovation. Unique product advantages make sense as the #2 factor - although perhaps that's a bit confusing in that innovation produces the unique product advantages.

Innovation culture comes in for #3. This is important, and my guess is that if you were to survey growing sizes of firms, this factor would rise in the rankings.

Check out the full paper for details.

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Hutch Carpenter is the Director of Marketing at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation.

10 Rules for Small Business Success

I attended the fantastic first Small & Special conference one afternoon in July, with more than 100 other small business owners (some just weeks into their new venture) and several excellent speakers. The energy was palpable, and the agenda was inspiring.

It was clear throughout the afternoon that starting and succeeding with a small business involves a lot of hard work, but for nearly everyone that spoke it was a true labor of love.

Several themes developed throughout the afternoon, which I believe make up ten critical lessons or rules for succeeding with a small & special business. Here's what I took away:

1. Do What You Love (Follow Your Passion)

Fleurish was started with a $15K loan from a friend, and is now a highly-successful floral arrangement and consulting business. A gentleman whose business is laser engraving spoke at length about the history and usefulness of lasers, which culminated in a trivia contest about lasers for samples of his products. He's that passionate about lasers!

Moral of the story is to start and work on a business not because you think it's something that can make money, but because it's something for which you're truly passionate.

2. Past History, Education or Experience Doesn't Really Matter

Eric LeVine started CellarTracker.com without much experience or knowledge about wines at all. Just a growing passion for wine, and a knowledge of how he wanted to help other collectors organize their cellars. Rachel Venning now teaches sex ed in addition to operating four sex toy shops across the country, but admitted she didn't know much of anything about "that" (her word) when she started.

Others may know more than you now. But if you're passionate and willing to learn, it's your oyster.

3. Overnight Successes Take Years

The current revenue and margins for many businesses presenting today was impressive (to put it mildly). But most of those stories were preceeded by years of hard work oftentimes while still losing money or barely breaking even. Oliver Chin of Immedium spoke of hos important it was for his wife to have a "day job" to keep good health benefits for him and their two kids. Others spoke of difficult and lean early times (and early years) before they caught their stride.

If you're passionate and determined, you can get there. You just may need to be patient.

4. Be Open to New, Unexpected Opportunities

Joe Mansfield of EngraveYourTech.com stumbled upon an opportunity to do custom engraving on Moleskine notebooks. It was a new business like with hockey-stick growth until he realized the toxic PVC impact of lasering Moleskine covers. A promising, fast-growth business came to an immediate halt overnight.

Undeterred, Joe started experimenting with engraving on other media, including tech devices such as laptops and iPhones. He actively posts his new creations on Flickr, which generates significant new business on a regular basis.

Be open to new opportunities, especially when existing opportunities shrink or vanish. Your business likely won't evolve the way you think, but opportunities are everywhere.

5. You Can Start Now

Start it part-time. Several business owners spoke of doing research and starting initially during nights and weekends. Eric LeVine wrote code until the wee hours of the morning while keeping his day-job at Microsoft before deciding he was ready to take the plunge full-time.

Rachel from Babeland wrote a business plan, but really just got started. She said the advantage of "just doing it" gave her much better on-the-job learning, and better visibility into opportunities emerging in real-time. If you have a business idea or passion, start exploring it now. Do it for fun, start it as a hobby. You may be surprised how quickly you're ready to make it a full-time focus.

6. Ask For Help

Rachel had long admired a popular sex shop in San Francisco called Good Vibrations. She cold-called the founder to ask for advice, and that founder ended up serving as a quasi-advisor to Rachel and her partner as they launched and grew their own business. A successful founder helping a prospective competitor!

You'll be surprised who will help you - with advice, with their time, even perhaps with their products and services. It never hurts to ask.

7. Work With People You Love

Some speakers recommended finding a good partner. Steven Bristol from LessAccounting.com said his partner was critical to the success of the business, if for no other reason than they help each other "say no" to things they don't really need (helping them maintain focus and keep costs low).

What's more, working with people you love makes it fun! Andrew Bennett from Deneki Outdoors realized one day that he was working 50 weeks a year to spend two weeks a year doing what he really wanted. He now spends most of the year managing his fly-fishing lodges and working with people who share his passion.

8. Execute, Every Day

Jon Rimmerman from Garagiste talked about the importance of working hard, every day. You may occasionally hit a home run, but successful businesses are build from hitting a lot of singles. So, as the analogy goes, keep swinging. Keep a good attitude, keep your head down, and execute.

9. Embrace Competition

Steve Bristol loves competing against bigger brands like QuickBooks and Quicken. Competition is scary, he said, but it's important. When there's no competition, there's no market.

What's more, embrace your role as an underdog and you'll draw customers to you.

10. Focus On Your Customers

Last but probably the most important. Every single successful business speaking today not only had this as a central focus of their business, but they did it not as a proactive initiative but as a natural, critical part of doing business.

Jon Rimmerman talked about the conversation he has with his customers, not at them. He writes his wine emails (sent daily to nearly 100,000 recipients) as if he's writing a 1:1 correspondence.

Steven Bristol talked at length about the loyalty customers will have when you treat them right. Even if you screw up occasionally, loyal customers will stay with you if you treat them right. Make something people love, and you'll create long-term passionate users who tell your story to others.

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Matt Heinz is principal at Heinz Marketing, a sales & marketing consulting firm helping businesses increase customers and revenue. Contact Matt at matt@heinzmarketing.com or visit www.heinzmarketing.com.