Company size: Big is back

The Economist: Company size: Big is back

Corporate giants were on the defensive for decades. Now they have the advantage again.

... Today the balance of advantage may be shifting again [Toward big firms]. To a degree, the financial crisis is responsible. It has devastated the venture-capital market, the lifeblood of many young firms. Governments have been rescuing companies they consider too big to fail, such as Citigroup and General Motors. Recession is squeezing out smaller and less well-connected firms. But there are other reasons too, which are giving big companies a self-confidence they have not displayed for decades.

Of course, big companies never went away. There were still plenty of first-rate ones: Unilever and Toyota continued to innovate through thick and thin. And not all start-ups were models of success: Netscape and Enron promised to revolutionise their industries only to crash and burn. Nevertheless, the balance had shifted in favour of small organisations.

The entrepreneurial boom was supercharged by two developments. Deregulation opened protected markets. Some national champions, such as AT&T, were broken up. Others saw their markets eaten up by swift-footed newcomers. The arrival of the personal computer in the 1970s and the internet in the 1990s created an army of successful start-ups. Steve Jobs and Steve Wozniak founded Apple Computer in 1976 in the Jobs family’s garage. Microsoft and Dell Computer were both founded by teenagers (in 1975 and 1984 respectively). Larry Page and Sergey Brin started Google in Stanford dorm rooms.

But deregulation had already begun to go out of fashion before the financial crisis. ...

The article goes on to address other reasons for the shift but I think the article highlights something I think is grossly misunderstood. It is common wisdom that in general big corporations want  deregulation. It frees their grubby little hands to pursue more profit.

In reality, regulation is often an asset to big corporations. (It is not true in every industry or for every firm but it is frequently the case.) Regulation creates a barrier to entering the industry from newcomers ... that is, it limits competition. The big existing firms take a financial hit in their compliance efforts but their is a disproportionately higher impact on smaller firms and newcomers. Furthermore, since the regulations are crafted by a handful of people in D. C., money spent on lobbyists and cozy relationships with lawmakers is much less risky than having to compete against innovative newcomers. Yet the ones in the public square who rail against the presence of big corporations are frequently the same ones calling for the most regulation. Regulation of business is essential but attempts to mange industries through legislation generally favors big corporations.

Comments

[Leadership Connextions International]

Have you read Seth Godin's book, Small is the New Big. He makes a pretty interesting case that the world of the Internet is creating a "long tail" of opportunities for niche markets that small organizations can provide in a way that large organizations cannot. He also is skeptical about the change capacity of these large organizations to keep up with the accelerating global world.

[Michael W. Kruse]

Haven't read Godin's book yet but I know the gist of it. I think he is probably right. In fact, I suspect the days of the big multinational conglomerates are coming to end. May be a generation or two but I think its coming.

[Jesse Blocher]

I don't share your confidence about the end of large multinational organizations.
Check out this article by Simon Johnson on Big Banks and how they look suspiciously influential in the government:
http://www.theatlantic.com/doc/200905/imf-advice

He draws on his experience in the IMF dealing with smaller countries financial crises. The parallels are eerie. There is no real proof, obviously, but I think that large corporations are most likely here to stay.

However, for a bit of optimism, I'd like to point out that most research has shown that recessions are prime breeding grounds for the next set of transformative companies/ideas. Because venture capital gets more picky, lesser ideas are not funded and thus there is less noise. Apple and Microsoft were both founded during the economic trauma of the late 1970's.

[Michael W. Kruse]

It will be interesting to see what happens. I'm thinking like 2040 and beyond (Far enough out no one can call me on it.) :-)

As communication technology continues to improve and the open source approach takes over more and more of what used to be intellectual property issues, I think many of the advantages that these vertically integrated and globally expansive firms have will fade.

Looks like an interesting article. I give it a look.

I think your are right about the recession given birth to emerging new companies.