Big Wins in Small Print

Tom Peters

Sperry finally succumbed to Burroughs’ advances, forming the world’s second largest computer company. The ink is barely dry on the agreement for Saatchi & Saatchi to acquire Ted Bates Worldwide, forming the world’s largest ad agency. The same week, Business Week‘s cover story, “The Super Dealers,” describes the shift to huge, multi-brand, car-selling firms. The article predicts that chains of super-dealers are the wave of our immediate future.

But read the fine print, which describes a vastly contrary trend—the bold victories of the smaller guys. Although Burroughs and Sperry are merging, Thinking Machines Corp. has achieved the first serious breakthrough in years in the super-computer arena. MIPS Computer Systems Inc has developed a “superfast microprocessor” that could give even IBM fits.

Beneath the bold print on the Saatchi-Bates deal is fine print that describes numerous advertisers bailing out of big agencies. Owens-Corning’s advertising executive contends, “The more bureaucratic an agency is, the less creative it’s likely to be.” And Gaines Foods’ president notes, “We like the deep involvement of senior people at these agencies.”

And inside the super-dealer cover story is a poll indicating that 61 percent of car shoppers prefer smaller, more intimate dealerships.

Specialty retailers such as The Limited are making big bucks and growing like crazy. Chains like Sears or Safeway are stuck with mega-stores, but increasingly break them up into tiny boutiques. Safeway’s new layout and lighting make the produce section look and feel like a separate farmer’s market.

Despite the conflicting evidence, I contend that small, or smaller, is the wave of the future. In some basic industries, like steel, there is a need to rationalize obsolete giant operations. But for specialists (such as Worthington Industries of Columbus, Ohio, and Nucor Corp. of Charlotte, North Carolina), mini-mills or even micro-mills are the future.

Renowned management consultants McKinsey & Company’s recent major analysis decisively concluded that most mega-mergers were disastrous. Frederic Scherer, the preeminent structural economist, observes, “On average, mergers decrease efficiency.” His recent study reveals a performance surge in more than 90 percent of cases when pieces of big firms are spun off into stand-alone companies. Economist Michael Jensen of the University of Rochester bluntly claims, “Diversification is just a code word for wasting shareholders’ money.”

A Business Week analysis of W.R. Grace & Co. concludes that since 1949, Peter Grace’s ceaseless buying and selling has resulted in a stock price that has under-performed the S&P 500 index by two thirds. Gulf & Western Chairman Martin Davis observes, “Bigness is no longer a sign of strength. Mass markets have splintered. Size lost its significance. Ranking on the Fortune 500 is no longer of consequence.”

It’s not just the mergers. Economies of scale in stand-alone, non-diversified firms are at issue as well. Specialty firms, targeting one corner of the market, are the superior performers in steel, chemicals, retailing semiconductors, health care, and financial services. Even packaged goods companies, long under the scale mystique, find that big is not all it’s cracked up to be. Says long-time London Business School professor John Stopford, “The secret of success in international packaged goods markets
has nothing to do with scale.”

The Strategic Planning Institute of Cambridge, Massachusetts, has used its vast data base to determine that market segments up to $100 million command a return on investment of 27 percent (before interest and overhead). That contrasts with an 11 percent return in markets that are $1 billion in size and larger.

In a recent edition of Foreign Affairs, Peter Drucker notes, “Since the early years of this century, the trend in all developed countries has been toward ever larger manufacturing plants. … This has been reversed with a vengeance over last fifteen to twenty years.” Drucker finds this reversal in export companies and in old industries as well as new ones. He sees it “even in Japan, where bigger was always better and biggest meant best.” Drucker adds, “The most profitable automobile company these last years has not been one of the giants, but a medium-sized manufacturer in Germany—BMW.”

An Economist April 1986 cover story chimes in, “Most of the things factories make now—be they cars, cameras, or candlesticks—come in small batches designed to gratify the fleeting market whims. The successful manufacturing countries in the 21st century will be those whose factories change their products fastest.”

Perhaps the major stumbling block to achieving smaller scale is psychological, especially for Americans. America is founded on the premise of bigness: open space; limitless frontiers. Virtually every small town in the U.S. lays claim to being the biggest at something or other: “Gilroy, California, garlic capital of the world”; or “Castroville, California, artichoke capital of the world.”

The jury is out, of course, on the Burroughs-Sperry merger. Still, I place my bet with an economist at the Securities & Exchange Commission: “Most industries in which we have competitive difficulties are not exactly filled with pygmy companies. You don’t put two turkeys together and make an eagle.”