News

Small Business, Big Impact

By Catherine Fredman

In the dotcom era, the formula for success was called “flipping burgers.” Start a business, ramp up growth to a point that attracts attention from big money, then sell to the highest bidder and go on to the next idea.

For many entrepreneurs, that business model still represents the American dream. But not for Laury Hammel, the founder and president of the Longfellow Clubs, a group of four health clubs in the Boston area. “If someone said, ‘I want to do a franchise and build your business to 100 clubs,’ I would say no,” says Hammel. “I don’t feel compelled to grow any faster.”

Hammel has a different aim in mind, one that turns the burger-flipping formula on its head. “We’re trying to develop an institution that meets the needs of the community. If that’s your goal, you have a different strategic plan than trying to cash out.”

Hammel represents a growing number of business owners who are guided by “the double bottom line.” In addition to calculating the conventional bottom line of financial profit, more and more entrepreneurs are paying attention to a social bottom line: having a positive impact on their employees, their customers, and their community.

“We feel there’s a shift afoot in capitalism,” says Don Shaffer, the executive director of Business Alliance for Local Living Economies (BALLE), a San Francisco based network of 14,000 entrepreneurs and owners of small companies across North America. “As opposed to maniacally driving forward with quadruple-digit growth each year just for the sake of growth, many entrepreneurs are making conscious decisions about the kind of life they’d like to create. Many are saying they would like to spend more time with their families and their communities, rather than striving for the 26-room house in Lake Tahoe.”

Where the Money Is

“The big businesses get the press and the bragging rights,” says Paul Schaye, the managing director of Chestnut Hill Partners, a New York mergers and acquisitions firm specializing in small- and middle-market companies. “But the real drivers of the economy right now are small businesses.”

According to the U.S. Small Business Administration (SBA), firms with fewer than 500 employees have generated 60 percent to 80 percent of net new jobs annually over the past decade. They produce 13 to 14 times more patents per employee than large firms and create more than 50 percent of nonfarm private gross domestic product.

The number of small businesses in the U.S. reached a new high of roughly 26 million in 2005, according to the SBA office of Advocacy’s annual report. More small businesses were started in 2005 than were closed, resulting in an estimated 6 million firms with employees and about 20 million sole proprietorships.

A variety of trends are converging to debunk the “bigger is better” myth. One of the most powerful is the backlash against big-box chain stores and impersonal corporations. “When you ask people what’s missing in their lives, it’s rare that they say, ‘a big store to shop in,’” says Michael Kanter, a co-owner with his wife, Elizabeth Stagl, of Cambridge Naturals, a health products store in Cambridge, Massachusetts. “They usually talk about neighborhoods and community.”

Recent statistics certainly make a compelling economic case for locally owned and operated businesses. Civic Economics, a Chicago-based consulting firm specializing in sustainable economic development, performed a series of “Livable City” studies in Austin, Texas; Toledo, Ohio; and Maine’s midcoast region. They found that local merchants routinely generated three times as much local economic activity, adjusted for revenue, as chain stores.

If local merchants need further validation, Civic Economics’ 2004 study of Chicago’s Andersonville neighborhood offers dollars-and-cents confirmation. For every $100 consumers spent with a local firm, $68 remained in the community, compared with $43 from a chain firm. For every square foot occupied by a local firm, the local economic impact is $179, compared with $105 for every square foot held by a chain firm. More than 70 percent of consumers surveyed on the streets of Andersonville strongly preferred the neighborhood shops over agglomerations of common chain stores.

At the same time, Shaffer says, the perception of these small business owners as “hippie throwbacks” who just want to get out of the mainstream is off the mark. Many are sophisticated entrepreneurs who are balancing financial and lifestyle concerns and are beating the big guys on their own turf.

“This is by no means a starving artist approach to entrepreneurship,” says Shaffer. He likes to quote BALLE’s unofficial motto: “No margin, no mission.”

The Benefits of the Double Bottom Line / Still, for many proponents of conservative growth, the mission is as important as the margin. They may not make a mint, but the intangible benefit of being able to dictate their daily schedule is priceless.

“Managing your own club is a dream job,” says Hammel. “You have a meeting, eat a healthy lunch, play some tennis, take a quick swim, and go back to work. It feels a little like cheating.”

Hammel estimates that he spends half his time on nonprofit work. Many local owners similarly devote their extra hours to community organizations, and they find that in their efforts to live a more meaningful life, they get back as much as they give.

Jay Graves, whose six Bike Gallery shops dominate the market for recreational cyclists in Portland, Oregon, is convinced that restricting growth is the secret to the success of the $10 million family-owned business. Graves regularly entertains offers to expand. Just as regularly, he and his board of advisers turn them down. “The idea of going outside our local market is not appealing,” says Graves. “I like to be able to visit any of the stores any day of the week. That wouldn’t be possible if we were in a community two or three hours away.”

He invests the hours he might other-wise spend on the road in a number of cycling-related nonprofits & activities that bring both personal and professional satisfaction. “Customers have said that my work in the community is one of the reasons they shop with us,” Graves says.

Small as a Strategic Advantage Business students have long been taught that bigger is better, but small can be a strategic advantage, argues Michael H. Shuman, the author of The Small-Mart Revolution: How Local Businesses Are Beating the Global Competition. Hometown businesses can leverage local knowledge to provide personalized goods and services. The result is customer relationships built on trust that last longer than those dependent on deeper discounts.

Last year, Cambridge Naturals moved to a new location in the Porter Square shopping center, which brought with it the benefits of a larger space, proximity to subway and commuter rail lines, and plenty of parking. The new location also added new competition: Four chain stores within a two-mile radius, a discount vitamin shop a mile away, and a supermarket in the same shopping center all carry many of the same products.

That’s more than enough to make any solo proprietor quail, but Kanter believes he has a secret weapon. “We train our-selves really well on the product. We have between 8,000 and 10,000 units in our store, and we require that our staff know every single one of them. We get to know our customers and their health issues from head to toe.” The result: “We have grown tremendously since our move,” says Kanter.

Proponents of “bigger is better” like to preach the benefits of economy of scale: The larger the organization, the more leverage it has to demand discounts from its suppliers or raise the prices it charges consumers. For the Wal-Marts, Toyotas, and Intels of the world, economy of scale is hard-baked into the business model. But, claims Hammel, “economy of scale is highly overrated.”

Certain businesses do not succeed at gigantic proportions, says Eric Flamholtz, who, as a professor of management at UCLA’s Anderson Graduate School of Business and the author of Growing Pains: Transitioning From an Entrepreneurship to a Professionally Managed Firm, regularly advises small businesses on how to manage growth. A company that makes its mark with a high-quality product or service is most at risk. “Past a certain point, it gets diluted and may lose its core customer base,” he says.

Service is what enables Argo Tea to thrive despite a chain coffee shop sitting smack across the street in Chicago’s Lincoln Park neighborhood. “People come to us because we’re a smaller business that has to work harder for its customers,” says Arsen Avakian, Argo Tea’s founder and president. Sometimes, a simple “Thank you” can be reason enough for customers to return.

It’s not just service that suffers when a company decides to focus solely on the amount of sales. “It means hiring additional supervisory staff, adding to the overhead, and taking on lower-margin work to cover fixed costs,” says Murray Low, the director of the Eugene M. Lang Center for Entrepreneurship at Columbia University’s business school. Flamholtz says, “You can actually double in size and make less money in the bottom line, while dealing with more headaches and getting a lower return for it.”

Graves learned that lesson a few years after opening a second Bike Gallery. “We were fat and happy, and we weren’t watching our expenses. We were busy watching our sales grow without understanding how much profit you have to have to fund growth.”

In 1985, the company crashed. Sales flattened. The bank called in its notes. Graves’ father was forced to sell the family’s home to cover the loans. “It took us years to dig out of that hole,” Graves recalls.

Since then, Graves has been a disciple of modest growth, expanding only as much as he and his board of advisers feel provides the ideal balance: enough profit to train and pay a professional staff, but not so many stores that they lose the personalized feel of neighborhood bike shops. For now, six locations seems just right. “It’s allowed us to be big enough to have a general manager,” says Graves. “If we had stayed smaller, I would be involved in the day-to-day operations, and, frankly, that would give me less flexibility. This gives me more freedom.”

And isn’t that the ultimate American dream?

Catherine Fredman has collaborated on five best-selling business books, including Use the News with Maria Bartiromo and Direct From Dell with Michael Dell.