Scaling Small to Win Big

Insights from Yoxi Executive Director, Kaz Brecher

In our Secret Sauce series, we attempt to open access to the essence of our observations even as we are still connecting dots across complex, interconnected systems. Our insights are gleaned from our examinations of the work being done by Yoxi explorers in the field. We seek to understand which of their solutions rely on specific contexts and which are more portable or adaptable to other geographies and industries. Overall, we aim to share our learnings and inspire further experimentation with potentially transformative ideas and interventions.

What’s Scale Got to Do with It?

Everyday, we must navigate a barrage of news about the mounting and increasingly complex problems that we face as a civilization. Individually, it’s daunting to know where to begin. As a social innovation explorer, Yoxi begins with an unabashed dedication to funding inquiry, making investments that arrive when the art of questioning is mission-critical to creating real impact. We draw courage from a group of intrepid but pragmatic optimists, and supporting them is what gets us out of bed each day.

While we believe a commitment to continual inquiry is core to catalyzing meaningful change, Yoxi doesn’t exist to ask rhetorical questions. The insights (or cautionary tales) resulting from our investments must feed into a holistic approach to detangling intricate systemic issues, guiding the subsequent allocation of time, talent and resources. But, before we design the HOW, we must return to the WHY. Why are we toiling to illuminate the threads woven between dynamic systems, and what might our world look like if we succeed in plucking the right strings?

In a Stanford Social Innovation Review article relevant to anyone working on systems change, Alice Gugelev and Andrew Stern underscore the importance of understanding your endgame, defined as “the specific role that a nonprofit intends to play in the overall solution to a social problem, once it has proven the effectiveness of its core model or intervention.” And, though the article dates from 2015 and was addressed specifically to nonprofits, it makes a point that is broadly relevant: scaling is rarely the best way to achieve the impact you set out to have. The authors argue that there are many paths to transform markets and systems, and these paths increasingly require organizational characteristics like agility, openness and collaboration over mere size or valuation.

Indeed, at Yoxi, we specifically seek entrepreneurs who experiment with bold ways to deliver products and services that maintain dignity for their producers, elevate quality and beauty, and demonstrate the value and potential of novel approaches to reshape calcified industries. From using mobile technology to empower rural farmers in India and drive adoption of agroecology to creating more just supply chains for the production of affordable cashmere to redefining women-owned ethical apparel manufacturing in Africa, our explorers may first prove the viability of their methods at a small, localized scale, but they always toil within the context of global structural transformation.

At this point in describing our portfolio, someone inevitably asks, “so, how do you plan to scale?” and reveals an important underlying assumption that bigger-is-always-better will save us. We have been examining this deeply-held belief, as we have seen enough evidence to suggest that scaling in the traditional sense has become toxic. We propose that developing a more nuanced understanding of scale is now critical not only to thrive but also to survive.

When More Equals Less

According to a recent article in the MIT Sloan Management Review, “for more than a century, economies of scale made the corporation an ideal engine of business…Scale conferred an enormous competitive advantage. It not only lowered fixed costs — it also created a forbidding barrier to entry for competitors. Organizations of all kinds spent the 20th century seeking scale. That’s how we ended up with giant corporations, and universities with 50,000 students, and multinational healthcare providers.

Throughout the Industrial Revolution, and even during the early Information Age, our culture had reason to assume scaling was always a good thing. We became somewhat obsessed, coveting unicorns over zebras (companies which reward quality over quantity, creation over consumption, sustainable growth over quick exits, and shared prosperity over shareholder profit). And we are now acutely experiencing the downsides of unmitigated growth and an orientation which consistently decouples producers from the beneficiaries of production.

With exponential population explosions and shifting economic mobility, as in China for example, we have very visible evidence of the difference between what happens to our ecosystems when a few hundred thousand people litter versus many billions dumping plastics into the ocean.

Discovered in 1997, the Great Pacific Garbage Patch is the world’s biggest collection of ‘floating trash’. Located between Hawaii and California, scientists have found that this circling pile of plastic pollution is actually 16 times larger than previously estimated. At one point it was compared to the size of the state of Texas, but now researchers are claiming this enormous oceanic landfill is actually three times the size of France.

The MIT article argues that new technologies, like artificial intelligence (AI), are turning traditional economies of scale inside out, offering an alternative approach. “Economies of unscale are enabled by two complementary market forces: the emergence of platforms and technologies that can be rented as needed. These developments have eroded the powerful inverse relationship between fixed costs and output that defined economies of scale. Now, small, unscaled companies can pursue niche markets and successfully challenge large companies that are weighed down by decades of investment in scale — in mass production, distribution, and marketing….The winning companies in today’s tech surge are companies that profitably give each customer exactly what he or she wants, not companies that give everyone the same thing.” The authors essentially frame personalization and customization as drivers that might save us from the monolithic rationale for scaling. But personalization is far from the Holy Grail across industries.

Indeed, something like Waze, the largest “community-based traffic and navigation” app, which relies on hyperlocal, real-time data, will surely live and die by its ability to give you what you need when you need it — the epitome of a bespoke experience. But the success of a business like Whole Foods has nothing to do with personalized solutions; they deliver the same quality and value, irrespective of who is asking. So, what do these vastly different models have in common? They deliver consistently on their promise. And, surprisingly, that element of how brands began holds a clue to how we ended up with this hyper-scaled mess in the first place.

Has Brand Outlived Its Purpose?

An amazing thing about life before 1850 is that most people never experienced a world more than a few dozen miles outside of their birthplace. Life was local. You ate food grown in your town. Your house was made of local lumber. Your clothes were woven by a local seamstress. Bulk commodities were traded far and wide. But finished goods were a local affair. You knew the person who made them. That person was often yourself. The industrial revolution and the Civil War changed everything for Americans. Millions of people were suddenly on the move. Railroads transferred goods farther and faster than ever before.

Shopkeepers in a German village circa early 1800s

Morgan Housel of the Collaborative Fund beautifully outlines the conditions which led to branding as we know it. Summarized in brief, as incomes rose and America grew its urban centers, consumers became increasingly disconnected from the producers of their goods. The Civil War upped the stakes, as it created the first opportunity for many Americans to rely on canned goods — unevenly-produced and batched by regional suppliers.

Harper’s Weekly wrote in 1869: “The city people are in constant danger of buying unwholesome [canned meat]; the dealers are unscrupulous, and the public uneducated.” The William Underwood Company cottoned onto this and, having pioneered glass packing and canning for pickles earlier in the century, expanded into a meat spread called Deviled Ham. They created a logo and a tagline, to help consumers recognize the provenance of their product and feel more confident that poisoning was unlikely with this particular canned meat.

Brent Beshore, CEO of private equity firm Adventur.es, contends: brand is the distribution of likely outcomes that you can expect from any company or person. So, where they used to connote ownership (as with cattle brands), brands evolved to become a shorthand between consistency and trust.

Why are the famous golden arches of the fast-food chain inserted into an exotic watercolor painting in Yangshuo, a village in southern China? Because many travelers prefer to consume something they know and trust, even if it’s not the best product or experience.

It’s fascinating, then, that there has been a backlash against so many big labels and a huge swell in the development of so-called artisanal products, sometimes referred to as the rise of the craft economy, which is really a proliferation of anti-brand goods. At one time, today’s “homemade artisan whole-grain sourdough” was simply sold as bread. And the peasants who produced the wheat got essentially the same product as the feudal lords who owned the land being farmed. Has trust diminished as a factor for consumers?

It’s unclear, as small batch items, part of this growing cottage food industry, still require protections conferred by new laws, since safety is re-introduced as an unknown factor despite demand. And even new efforts like Brandless, building a brand around the apparent lack of branding, still tout transparency and consistency as paramount. One thing is definitely clear, though, which is that values are shifting, and consumers don’t want more (for less) — they want better, and they’re willing to pay for it.

Micro-thought experiment: when was the last time your cup of carefully-brewed filter coffee was cheaper than swinging by Dunkin’ Donuts?

Scale is a Many-Splendored Thing…

To date, the concept behind more has usually meant bigger, faster or cheaper — raise more funds, dial-up efficiency, and drive down costs. But if consumer demands are changing, what does this mean for how businesses approach growth and deliver on their promises?

Stanford professors Robert Sutton and Huggy Rao have examined the differences between scaling operations, employee bases, geographical representation or pockets of behavior and beliefs. In a Harvard Business Review article, they share that “in each of these situations, ‘scaling’ refers to something different. But as we dug deeper into these and other cases, academic studies, and stories, we realized what they shared. Scaling challenges nearly always come down to the same problem: the difficulty of spreading something good from those who have it to those that don’t — or at least don’t yet. It is always, in other words, the problem of more.

Sutton and Rao argue that entrepreneurs and, indeed consumers, would do well to reframe the idea of scaling as getting better instead of just getting bigger, in their book, Scaling Up Excellence: Getting to More Without Settling for Less. They talk about spreading exceptional ideas, systems, or even business models and then inspiring others to adopt them as their own. “The question we started with is, How do you spread something good from the few to the many, or from those with to those without?” says Sutton.

They point at the notion of replication, which can happen laterally. And they use anatomy as a way to consider other models for growth — is circulation happening in the system? What is being circulated? They note that circulation itself isn’t a sign of something good, as you can circulate pathogens. To this end, they urge us to be decidedly more nuanced and specific in considering the many facets of scaling.

The human circulatory system next to a system of colder and warmer water flowing around the globe, carrying with it everything from temperature changes and migrating sea life to pollution and chemicals from spills. (Illustration by Jack Cook, Woods Hole Oceanographic Institution)

Putting unscaling or scaling down aside for a moment, why isn’t anyone experimenting with how to scale things other than size? Characteristics like agility, decentralization, coordination, integrity or even power could be scaled using the benefits of new technologies, and it’s possible that focusing there might be what the 21st century requires if we want to sustainably deliver better products to meet growing demand. The monolithic structures of 20th century industry are clearly outdated, and, Housel reminds us “that the pursuit of two things — speed and scale — tainted many brands. Maybe we’ll realize that slowing down to focus on quality and consistency is the new way to win over more customers.

Or perhaps we should be dissecting whether we need scale at all. In the experience economy (or now the coherence economy), scale almost seems gauche. Tim Leberecht, co-founder of the Business Romantic Society, argues that we should prize the beauty of things that don’t scale. “This new demand for meaning has dramatic effects on the economy of attention…We like convenience and comfort, but we love brands that offer us unexpected beauty and friction. We look for rebels who interrupt our routines and offer us not just purpose and personalization, but a heavy dose of punch-drunk love. We want experiences that are unique and precious; experiences that can’t be scaled and must not be optimized either. In other words, we want romance, the ultimate insurgent in a regime of maximizers and optimizers.

He notes that, in 2015, “Etsy, the online marketplace for local craftspeople…ha[d] smartly associated itself with the maker movement and prides itself with values-based trade in keeping with heightened social consciousness. Like other mission-driven brands such as Starbucks, Virgin, or Red Bull, it promotes a philosophy to market its product, or in fact, it promotes a philosophy through a product. All these brands share a romantic quest to imagine another, better world and are self-assured, if not fearless, about their respective contribution…they are all activist brands that take a stance and take it to the street.” But most of his examples are still recognizable brands with significant scale.

An Evolution of the Brand Promise

Let’s take a step back and consider some of the ingredients that underpin the “better” (or more romantic) product and service experiences that consumers are beginning to demand — and where more fitting than the coffee industry, which is well into its third wave. When a friend was making a documentary called The Perfect Cappuccino as part of her Fulbright Scholarship, I became fascinated by and hooked on tracking coffee as part of an ecosystem that exemplifies these macro-trends.

For example, Blue Bottle Coffee, which gained attention in the early 2000s out of a San Francisco alley, simply focused on producing exceptional coffee with little fuss or packaging. They proceeded to raise $120 million from various investors in the ensuing years, with which they gobbled up regional darlings, like Tonx, a mail-order coffee subscription — causing consternation and worry for those of us who champion small producers. “How will you maintain your quality and values while scaling as rapidly as you seem to be?” was a common question of brand representatives.

Consider the realities of coffee as a commodity: with more customers to serve but an actual limit on the batches of beans you can procure from each small farmer, how does a brand deliver a “consistent” experience, and what does that even mean if every micro-lot is different? The hints can be found in their successful subscription service (full-disclosure: I’m a die-hard fan).

Blue Bottle tells a story. They take the time to print a unique card for each micro-lot and share the details with whichever lucky subscribers get some of the single-origin batch. And, rather than worrying about not being able to order more, you feel lucky to have had these particular beans — learning a bit about the family and history of the finca and knowing you’re part of an evolution as the longer-term relationship with Blue Bottle over time means an ability for each small farmer to increase their own production capabilities.

“We have a saying internally,” Bryan Meehan, chief executive of Blue Bottle said. “We don’t worry about staying the same as we grow. We worry about getting better.” Part of that has meant providing easier access to their product, which led to the opening of larger storefronts and broader geographic distribution. The rigor around their production seems to be holding steady, while they have made adjustments that clearly address the need to differentiate in a crowded market. And, they have figured out how to balance growth with the challenges that inevitably come with increasing size by perfecting the art of the blend, using a broader range of beans to create a high-quality roast, even if it varies from batch to batch.

The Atlantic author, Alexis C. Madrigal, did a detailed analysis of Blue Bottle evolution when their New Orleans Iced Coffee appeared. “They’ve always been known for consistent, delicious blends, for sophisticated brewing methods, for perfectionism…[founder, James] Freeman fell in love with coffee, roasting it in his oven and meticulously developing his brewing methodologies at home.” And Blue Bottle has upheld standards of freshness (an obsession with serving beans within 2 days has been relaxed a bit, though they still stamp every bag with the roast date), the utmost respect for their process and their customers, and a promise to apply those standards to any and all new products, including iced coffee. But despite growing success and cash infusions from investment, Freeman found that there are some challenges which can’t just be solved with more money.

Producing an iced coffee with milk that met his rigorous standards was one of those problems. So, the New Orleans product doing so well in stores kept failing tests when produced in larger batches. After a few years of experimentation, they hired Ron Megahan, who had worked his way up at Whole Foods from checker to vice president. He had the idea which has led to those blue and white cartons on shelves everywhere. The epiphany? “We don’t need to hire a fleet of trucks and all this team and lose millions of dollars until we get it to scale,” Freeman said. “What if we just work with a dairy? Because that’s what they do. They pasteurize raw milk, they put it in trucks, and they deliver it to stores.”

Madrigal concludes that they have “created a lean, scalable operation by depending on the strong regional ecosystem of food and beverage companies in the Bay Area…the most important component of scaling was the ideas of the people working with Blue Bottle. Blue Bottle’s success at scaling comes from hiring and partnering in the right ways…they have scaled perfection.” By squarely remaining the arbiter of their definition of perfection, indeed pinning their brand to that promise, their founder has successfully been able to achieve high-quality and an expanding footprint by stitching together a network of small-holding coffee farmers, a coordinated set of partners with diverse operational expertise, and the right mix of evolving products. They have scaled the right strategic interconnections in a system.

A Federated Approach in the Information Age

It’s not a surprise that consumers are delighted by the stories of lovingly-made or local products, as stories are often a proxy for how we build trust — recall the cautionary tale of canned meat of unknown provenance. Increasingly, people want to know where their food comes from (and not just when there are outbreaks of E. Coli on romaine lettuce).

Blue Bottle states on their website: “All Blue Bottle Coffee roasteries in the US are Certified Organic by CCOF, following all protocols and systems required to maintain this certification. Over 85% of the coffee we buy is Certified Organic. Most of our blends are Certified Organic.” But what exactly does this mean? The implication is that they buy some coffee from farmers who don’t have organic certification. But certification is expensive to achieve, so many farmers who meet the standards don’t bother with certification, denying them access to distribution and muddling consumer understanding of what they’re actually getting anyhow.

In the scheme of things, Blue Bottle is a speciality coffee company whose product offers fair market compensation to its suppliers but is targeted at consumers with above-average economic standing. Is it possible to take a strategic approach in this spirit to make ethically-produced goods available more affordably to larger numbers of consumers across the socio-economic spectrum — while maintaining quality and engendering trust? Our experience with several Yoxi explorers gives us hope that indeed a blueprint is emerging. We have begun to refer to this approach as the discipline of scaling small.

The critical shift lies in the coordination of a group of micro-producers, all using the same standards and methods with minimal but often necessary contextual adjustments, that can be verified under the banner of a single larger brand. Many industries have used similar models to pool the output of a larger group, as with dairy cooperatives, but few have combined the guarantee of a consistent product with transparency in acknowledging myriad contributors. Historically, factors like refrigeration or even communication limited the size of these cooperatives — if you couldn’t transport milk more than 50 miles without it going sour, your radius of cooperation was thus defined. The advent of refrigerated vehicles changed everything.

In that vein, several new technologies can now be combined to deliver better quality goods and experiences than we’ve seen from the monolithic brands. We’ve already seen what so-called platforms can do to restructure elements of our lives from ride-sharing to co-working. By using technology to increase utilization of shared or privately-owned resources using GPS and connectivity, these companies can solve previously impossible logistics to deliver localized and on-demand services.

At left, a livery dispatch now has to compete with the dynamic routing that services like Lyft provide.

Most of these new organizations use a federated approach to services, coordinating exchanges of the smallest units of value between providers and consumers, leveraging rating and reputation systems to underpin quality. That said, there are myriad problems yet to be addressed from how too many gig economy platforms merely amplify existing discrimination to re-engineering the hard-won workers rights now being eroded. But the platform trajectory shows promise, creating new opportunity and more access to services. A few brands have already begun to experiment with ways to leverage a collective approach in order to deliver better products.

Whole Foods has embraced its role as the arbiter of quality and been transparent in exposing the many sources of their produce. So, even if consumers don’t recognize the name of the farm where their apples come from, and the source may vary from week to week, they trust Whole Foods. Certification provides higher standards for the most discerning of consumers, but brands can now take on the role of curator, defined by the delivery of consistent values, even when there is variation in the products themselves. And, as the tracking capabilities of technology are being applied further and further down the supply chain, there is untapped potential to increase trust amid the horizontal web of production.

The Foundations for Decentralizing Scale

There is now enough evidence that more than a century of applying a monolithic approach to growth is at the root of many of our global challenges. Simply, if you have hundreds of small farms with 10 cows each, farmers can maintain soil quality and keep the animals healthy, while managing grazing over time. But factory farms, designed to gather thousands of cows together, now face polluted groundwater and tapped-out soil and require the constant use of antibiotics to combat the spread of disease from overcrowded animals.

And at a time when every system seems to be demanding more resilience for survival, monocultures themselves are fragile and vulnerable. So, how might we stitch together networks of small producers who can not only sustain production but also regenerate systems in ways that benefit society at large more durably over time? Technology can finally help us do this, but we will also need to foster shifts in how we attach identity to ownership, compensation, cooperation and information flows. There are heartening examples from other industries which provide inspiration and guidance.

Take Community Grains, which allows consumers to get information about 23 facets of production (!), serving the dual purpose of educating consumers and exerting pressure on other producers to start providing the same data. While they use some formal certification bodies, they have expanded the ways in which they assess the systemic, regenerative and ethical nature of farming and labor practices, showcasing each producer while keeping a focus on collective benefit.

Others are experimenting with ways to track methods and origins of production, through the use of blockchain, to reduce costs for small businesses who can’t afford certification and to provide new ways for consumers to have confidence in small-batch goods. Tech-enabled networks can also foster knowledge exchange and spread ideas to radically improve conditions or tackle challenges in novel ways for different contexts. Reducing friction in the flow of information can be a critical amplifying factor in speeding transformation and impact.

The Family Independence Initiative provides a fascinating example of how a technology platform can strengthen social networks, ease access to resources, and allow low-income families to support one another in achieving mobility. Ultimately, they change the narrative about low-income families, reframing them as experts in how best to survive while empowering them to share their solutions with others. Similarly, groups like Indivisible have demonstrated how using simple technology tools can turbocharge long-time models like the snowflake community organizing approach. Essentially, mobile platforms can reduce isolation and create common cause far beyond the water cooler or watering hole.

The ‘Snowflake Model’ is a way of organizing teams of supporters or activists. It was popularized by the writing and teaching of Marshall Ganz and the field (voter contact) programs of Barack Obama in 2008 and 2012.

Where community organizing models generally focus on using networks to spread singular ideas, a growing number of new power efforts purposely relinquish all control and invite participation to move the needle as a byproduct of many coordinated but varied approaches. Giving Tuesday was one of the first to do this, essentially “open sourcing” their toolkit all the way down to letting organizations hack the logo for their own use. By leveraging platforms, Giving Tuesday succeeded by spotlighting the many approaches that organizations took, allowing new participants to find examples that fit their seemingly unique context and limitations.

Combining ownership and flexibility around a clearly articulated set of values and principles is at the heart of Buurtzorg, one of the fastest growing healthcare disruptors in the Netherlands. In less than 10 years, they have fostered more than 1000 small teams, which are completely self-organised to take on new clients, plan their own the work, deliver care and even hire new nurses for the team. This robust network succeeds because they use an important and supportive IT infrastructure to allow and promote knowledge-sharing, client-focus and constant alignment and adjustment.

With a small headquarters of only about 50 people to support the distributed teams of nurses, their success has been researched extensively over the years. With client satisfaction through the roof and employee satisfaction proven to be the highest among any Dutch organization consisting of more than 1000 employees, the costs of the healthcare Buurtzorg provide is lower than those of any other Dutch home-care provider.

The role of cross-pollination can’t be underestimated in scaling an ecosystem of small producers — to reduce the costly overhead of archaic systems, even in the realm of healthcare, and to optimize cycles of learning between network members. Technology can support the discovery of champions, new friends, and comrades in the vagaries of figuring out how to get started, allay fears, and solve problems as part of a larger initiative. So, what will it take to reframe our entrenched approach to scaling?

Conclusion

First and foremost, we must be able to demonstrate the financial benefits which result from producing goods and delivering services in these ways, as small business owners face enormous financial pressures to just survive. And their efforts must translate into supply chains and infrastructure that delivers high-quality affordably, consistently satisfying consumers. Finally, we need to be able to trace and expose provenance along the supply chain and reward products that do this. We suspect that a high degree of humility will be necessary to spread the effort to scale small, as we have years of history and culture invested in size as a measure of worth. But we know that it’s not the size of the dog in the fight, as Mark Twain opined.

The devastating downsides of scale interpreted through solely a bigger-is-better lens fuels our commitment to exploring how we might achieve broader impact through this new approach to what scale could mean. Scaling small — developing networked micro-implementations in contextually appropriate ways to extend the value and benefits of a given solution without environmental and social degradation — will require an orientation to share information and ownership, right-size the reward structures, and put collective long-term success above pure short-termism in the context of broader economic and trade trends.

Several Yoxi companies, working in what we call regenerative consumerism, are pioneering and proving the viability of this model. And there are hints of others willing to put impact on par with profits, like Kimo Sabe mezcal who shared their view on taking a systems approach as core to their business at SXSW this year. As we explore the potential of how scaling small can extend and amplify impact, we would love to hear your thoughts.