A LOS ANGELES TIMES - FINANCIAL TIMES SPECIAL REPORT : The Next California--The State’s Economy in the Year 2000 : The Next California / SMALL BUSINESS : Virtual Companies : Small Firms Will Team Up to Form Network Economy of Future
When it comes to California’s future, small business may be the key.
Corporate downsizing and advances in information technology are not merely features of the new economic landscape, but the means by which small business will eventually dominate that landscape, many economists and analysts believe.
California--with its lead in information technology, business networking and sheer numbers of small businesses--is ahead of the rest of the country in coming to grips with that future, they say.
“All business is going through a shattering restructuring of the economy that is as fundamental and disorienting as the Industrial Revolution of 1750,” asserts Jon P. Goodman, director of the Egg Co. 2, a business think tank at the Annenberg Center for Communication.
Slow-moving corporate structures with their armies of employees in sales, accounting and production will be increasingly replaced by swift-moving, temporary teams of small companies, uniting and working via computers, video and on-line systems, Goodman said. The changes will affect the way products are bought, sold and distributed, giving the lead to small businesses, she said.
“Small business is business,” Goodman said. “Whole new industries are opening up as the process by which we deal with each other changes.”
In 1994, about 50,000 new businesses were incorporated in California, according to state statistics, the highest number since 1986, Goodman said.
Of the more than 775,000 businesses estimated to be operating in California this year, 95% of them, or about 739,000, have fewer than 50 employees. The picture will remain much the same through the end of this century. The number of businesses with fewer than 50 employees will grow by 5.8% to 780,900 by the year 2000, according to estimates by the Economic Development Corp. of Los Angeles County.
California embodies the very means by which this change will occur, with computer hardware manufacturers in Northern California’s Silicon Valley and entertainment, software manufacturers and other content providers in Los Angeles, she said.
Although Goodman may sound excessive, others in California’s small business community hold similar views.
“We already see the transition occurring,” said John Rooney, president of the Valley Economic Development Center, a nonprofit corporation that provides financial and management advice to 10,000 small businesses annually.
Small businesses are mushrooming in the San Fernando Valley, a region previously economically driven by the defense industry and major studios. With layoffs, former corporate employees are creating their own firms to form a network of small companies driven by technology, he said. Such firms include engineering services, medical instruments, high-technology, health care-related companies and entertainment. Studies show that in the past five years, entertainment employment alone has grown by 60% in the Valley, Rooney said.
Technological advances mean that small companies can compete with corporate giants, Rooney and others said. Business meetings and business-to-business sales can be conducted more economically over the Internet instead of by corporate sales staff, trekking from city to city and hotel room to hotel room with a sample bag, Goodman said.
The same holds true with consumer sales, say analysts.
“By the year 2001, more products will be sold on the Internet than by Christmas catalogues,” said Thomas O’Malia, director of the entrepreneur program at the USC School of Business.
And the nature of products made by small businesses is changing. About 70% of new products are non-capital intensive, such as design work and consulting and management services, O’Malia said.
“You don’t need $1 million to start a company today,” he said. For example, publishers used to need expensive printing equipment and a number of employees to start a business. Now, anyone with a $3,000 computer for design and editorial work can go into business and farm out the actual printing to someone else, he said.
This type of teaming will also be the means by which most business will function in the future, analysts say. O’Malia calls it a “virtual corporation.” Business writer Joel Kotkin calls it the “network economy.” Others call it the “patchwork economy.” Basically, it means teams of small businesses working together to get jobs done. It functions best in a dense urban locales, such as Los Angeles, with its large concentration of small businesses, and urban San Francisco, analysts say.
But the system also can be used to allow companies in one geographic area to team with others across the country and remain competitive. For example, George C. Robinson, co-owner of R.P.M., a radioactive waste removal firm in Newport Beach, recently teamed up with a laboratory at Research Triangle in North Carolina and technicians at the University of Pennsylvania in Philadelphia to come up with a polymer storage container to hold waste. His own 11-person company lacked the research facilities and certification to make his theoretical idea a reality, so he made the temporary alliance.
Teams of small businesses in the fields of information technology, entertainment and health services working in the same way are seen as key to California’s improving economic climate, analysts say.
They also single out the ethnic diversity of California as another strength. Kotkin said the food products industry in Los Angeles has grown along with the Jewish, Latino and Asian communities. Goodman said those communities also provide links to tourism and international business, making Los Angeles a world-class city on a par with New York, London, Paris and Berlin.
But the coming economic transition won’t be an easy one, analysts warn. Kotkin calls it a scary terra incognita and not exactly a paradise of entrepreneurial enterprises.
“For every business that makes it, three will go under,” Goodman said, adding that the economic and human dislocation seen in Los Angeles will continue.
But the state is already three or four years into a 10-year transition period. By the year 2000, California should have made the change to a new, small business-dominated economy, Goodman said.
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Reality Check: Small Business
Opportunity: Los Angeles has the most Latino-owned businesses of any U.S. city, with 75,000 firms.
Obstacle: But advocates for minority small-business owners say they fear the inroads Latinos have made in business community won’t last. They cite as reasons Proposition 187 and the California Civil Rights Initiative, which seeks to eliminate affirmative action programs.
