CHAPTER THIRTY-THREE
Tomorrow’s Company: Dressed for Success
THE BIG COMPANIES DOMINATE the headlines. But midsized businesses are fast replacing them as the engines driving the American economy.
Between 1985 and 1990 American manufactured-goods exports rose by more than 80 percent in volume; those to Japan actually doubled. Yet, only two of the nation’s biggest companies, Boeing and General Electric—selling airplanes and aircraft engines, respectively—significantly increased exports. The rest of the growth—the fastest ever recorded in peacetime America, and one of the fastest in any country’s history—was contributed by medium-sized firms with sales (in 1990 dollars) of more than $75 million to less than $1 billion.
Since the 1987 stock market crash, big businesses across the board have steadily cut employment. Indeed, for the first time since the Great Depression, big businesses have been laying off white-collar people in large numbers. Yet, until the second half of last year, total employment still grew faster than population. Labor-force participation remained the highest in our history (and the highest ever recorded in peacetime for a developed country), and unemployment remained at a boom-time low. At least 75 percent of America’s almost explosive employment growth since 1975 took place in midsized businesses.
Handicaps Disappeared
During the past decade or two, midsized business has become more competitive and big business less competitive. The handicaps under which midsized business used to labor have largely disappeared. Above all, now that a managerial or professional job in the big company no longer promises life-time security as it did only 10 years ago, midsized companies are fast becoming the employers of choice for many of the ablest young people.
But more important than the strengthening of the midsized firm is the decline in the advantage of being big.
The manufacturing companies that dominated their industries during the past hundred years—GE, Siemens, and Philips; Procter & Gamble, Unilever, and Nestle; Du Pont, Hoechst, and ICI; International Harvester and International Paper; the Standard Oil companies, Shell, and Texaco; GM, Ford, Fiat, and Daimler-Benz—were all built on the same conceptual foundation. And so was the Bell Telephone System. To each industry, the theory asserted, belongs one clearly delineated technology. It generates all the knowledge needed to lead the industry. In turn, whatever knowledge comes out of the industry’s specific technology will become a salable product for the company. And there is, the theory asserted further, very little if any overlap between different technologies and between different industries based on them.
This theory still underlay the rise of the very big companies of the post-World War II period, such as IBM in the U.S. and Matsushita, Hitachi, and Toyota in Japan. It also underlay the rise since 1950 of such pharmaceutical giants as Hoffmann-La Roche, Merck and Pfizer. One of them, only 20 years ago, defined its business as “the application of biochemistry to supplying whatever products are needed in health care.” And Citibank’s strategy for becoming the world’s first financial institution that is both transnational and a “universal bank” was based on the same theory of the business.
A parallel theory underlay the rise of the large retailers, such as Sears Roebuck in the U.S., Marks & Spencer in Britain, and the department-store chains in the U.S., Western Europe, and Japan. They assumed homogeneous but totally distinct mass markets, again with little overlap between them. Everything bought by a customer within one of these markets would belong in the same value category, in terms of price or quality or lifestyle appeal.
This theory enabled the successful retailer to change from being a “distributor” of goods designed by outside makers into being a “buyer” who creates and designs the goods he sells—the pioneers were Sears and Marks & Spencer in the ’20s and early ’30s. Again, the theory still worked in the postwar period. Kmart, for instance, was built on it.
No new theories on which a big business can be built have emerged. But the old ones are no longer dependable. Technologies are no longer discrete. They overlap and crisscross each other. No industry or company can be fed out of one technological stream. However brilliant its work, even AT&T’s magnificent Bell Labs can no longer supply everything the telecommunications industry needs, nor can IBM’s equally magnificent labs supply all the software or semiconductor designs that IBM’s computers need. Health-care products, competing with one another, now come out of organic chemistry and pharmacology, genetics and molecular biology, physics and electronic engineering.
Conversely, one technology no longer feeds only one industry. Much of what the research labs of the big companies are now discovering finds its major application outside of the company and even outside of the industry—in the case of Bell Labs, for instance, outside of telecommunications. Above all, “industry” is becoming a very fuzzy term indeed.
Twenty-five years ago, computers and telephones were separate industries. Now AT&T has decided that telecommunications leadership requires acquiring a major computer company—NCR, a century-old maker of cash registers and a leader in computerized office equipment. Twenty-five years ago, copiers, printing machinery, typewriters, and computers were separate industries, each with its own technology and its own markets. Xerox now offers a machine that is a copier, high-speed printer, word processor, and fair-sized computer all in one.
Similarly, the assumptions on which the big retails have been operating no longer hold. There is increasing segmentation in all markets, and increasing overlap and crisscrossing between them. No one, for instance, in the office-furniture market could tell any more what is industrial, wholesale, and retail.
Big businesses are not going to disappear. On the contrary, we will need quite a few big businesses, some even bigger than anything we have today. Information and money are becoming increasingly global. New challenges, such as the environment, demand the kind of transnational work that only very big enterprises can perform. And there are many products and services that can be supplied efficiently only by big organizations: building a big power plant or a pipeline; producing passenger jets; making paper; running long-distance telephone service, or making automobiles and trucks that can be serviced throughout the world or at least across a continent—the list is endless.
Global competition in high technology almost certainly requires bigness. The competitors threatening America’s global position in high-tech industries, whether semiconductors, computers, factory automation or high-resolution TV, are not lonely garage mechanics. They are multibillion-dollar giants. And the only American companies that have successfully fought them so far are very big companies—IBM, Intel, Motorola, and Xerox, for example.
The challenge, therefore, is for the corporation to learn how to be competitive despite being big. This means becoming market-driven. It means building into the company’s system an organized abandonment of yesterday’s products and technologies. It means organizing the whole business around innovation. Big businesses will have to become not only better but different. “Synergy” will be out. The more clearly a business (especially a big one) is focused on one product range or on one market, the better it is likely to do.
Another implication: Whatever diversification a big business needs—e.g., to gain access to a different technology or a different market—is better achieved through strategic alliances, such as partnerships, joint ventures, and minority participations, than through acquisitions or grass-roots developments.
Finally, decentralization is no longer enough for a multiproduct, multitechnology, multimarkets company; the various units have to be set up as truly separate businesses. This is what GE, for instance, is trying to do in setting up 13 “Strategic Business Units.” One might go a step further and organize the big business the way GE’s European counterpart, Siemens in Germany, is organized: as a “group” in which each business is a separate company with its own CEO and board.
The Right Size
Big diversified companies of tomorrow may not even have “central management.” They may emulate the two most successful builders of large business empires in the past two decades, the American investor Warren Buffett and the Anglo-American Hanson PLC. Both operate as “investors” that “supervise.” They make sure that their individual businesses have the right plan, the right strategy, and the management they need. But they do not “manage.”
Still, bigness will no longer be desirable in itself. It will have to serve a function. For 100 years superior performance went with being the biggest in a given industry. From now on it will increasingly mean being the right size. And in most fields this will mean being midsized—as the leaders in American exports of manufactured goods already are.
The shift from the big to the midsized enterprise as the economy’s center of gravity is a radical reversal of the trend that dominated all developed economies for more than a century. It has been all but ignored so far by economists, politicians and the media. One of its implications is that to be competitive despite being big is fast becoming the new management challenge.
[1991]