Economists have noticed a trend. The biggest companies are becoming more productive, but is it at the expense of all other companies’ productivity? Large global companies are able to profit from globalization and new technologies, and this is only widening the gap.
Why are the top 5% of companies absorbing all the gains from increased innovation and productivity?
Economies of scale
The top companies benefit from economies of scale offered by new technology. Giant retailers are able to take on upfront investments because it cost them less to produce each unit. Scale gives global tech companies such as Amazon, Google, and Facebook a considerable advantage. The digital services these companies offer only get more valuable with each user, or seller, they acquire.
Top companies not only have global reach, but their customers are not restricted by geography. Globalization allows companies with the most resources to serve new customers in emerging or niche markets. An independent Swedish construction firm, for example, cannot compete with one of the world’s largest construction firms and its partnership with IKEA.
Large companies are able to experiment with advanced technologies more than most companies. Big tech is investing in AI because it can—it has the resources and the talent. And through early experimentation, digital firms have seen that AI can cut costs through optimization, as well as drive growth and accelerate shifts in market share. Early adopters gained a significant economic advantage over their competitors.
The biggest companies patent their technology more than others. Half of all tech-related patents filed with the European Patents Office between 2011 and 2016 were submitted by 25 companies.
We’ve seen gains at the top since the industrial revolution. Except, they used to benefit the whole economy. What has changed?
- One trend points to talent. Good managers are all leaving to work for top firms. Smaller companies, on average, are worse run than larger firms with established processes and management policies that are consistent across offices and countries.
- Some companies lack self-awareness. They might not know what they need to build, what problem they need to fix, or what they might need to invest further in. This is all too common and true across industries.
- Small to midsize businesses need to improve their manufacturing processes. Part of Wizeline’s mission is to make technology accessible to all. We upskill organizations on the latest technologies—data science, machine learning, chatbots—to make them less intimidating, and to show how they can be used to improve operations.
- It’s harder for smaller players to acquire specialized skills. Even the top companies struggle to find the specialized skills and programming languages needed to build sophisticated products at a fast enough rate.
Software is a key way to raise productivity
How can the remaining share of companies raise their productivity? Focus on software solutions. It’s no coincidence that some of the biggest companies are driven by software. You don’t have to be Facebook or Google to invest in a digital backbone. Today, all industries can use software solutions to better serve their customers.
Take Paul. He’s a manager of an accounting firm that employs six people in London. He understands how to leverage the latest technology and has set up a platform that allows his clients to manage their finances remotely.
He’s up against the PricewaterhouseCoopers of the world. PwC recently developed a software tool to mine thousands of pages of legal contracts in minutes. It can review media rights contracts 30 times faster than doing it manually, and at an eighth of the cost. PwC scoops up all the productivity gains because it developed the technology itself. Paul’s firm may have access to a similar tool, but it has to pay another software company to use it, and in doing so, loses out on those gains.
Paul might think that building the software isn’t viable for a smaller firm like his. That the cost to develop is too high or that it can’t provide the level of security that PwC can. How can these smaller businesses get ahead? By partnering with tech development counterparts who are agile like them, but with the experience needed to build the right tools.
Find out how Wizeline can help small to midsize firms access the software solutions it builds for Fortune 500 clients. Fill out this form or reach out to firstname.lastname@example.org.