Bigness Has Not Delivered the Goods
I thought Honda was doing well. And Toyota and Nissan have been flourishing since 1970. The three have caused a revolution in Detroit, and all across America, because of their continued stalwart performance.
But I obviously missed something. Because Chrysler is buying AMC—according to the New York Times, "to expand its share of market by a few important percentage points."
That suggests Chrysler is too small to compete. But Chrysler, before it gobbled AMC, was over twice Honda's size, 15 percent bigger than Nissan, and only a bit smaller than Toyota. Why the desperate need to acquire a cripple to add two share points? I think Chrysler would do better to concentrate its investments on improving the cars it's making. According to pollster J.D. Power & Associates, Chrysler barely avoided last place in 1986 on Power's widely respected Customer Satisfaction Index, finishing just ahead of GM and far behind Ford and, of course, the Japanese. Relative midget Honda topped the list.
The day Chrysler swallowed AMC, USAir ate Piedmont. Before the matchmaking of the last six months, American, Delta, USAir, and Piedmont had been the only major airlines to avoid big mergers. They also happened to be the four most profitable U.S. airlines last year. American had 24 times more profit than the industry's largest company in 1986—United (or Allegis or whatever it's called). Little Piedmont made six times more money than United, even though it was one-fifth its size.
The logic of all these combinations or possible combinations strains the mind. For instance, BusinessWeek recently quoted General Electric's top strategist as saying that nine out of ten acquisitions "are a waste of time and a destruction of shareholder value." The same article also reports that GE is thinking about buying $16 billion United Technologies, or any of a number of like-size firms.
Well, maybe if Chairman Jack Welch keeps acquiring, GE will get as big as the other two-letter "G"-word—GM, excoriated on the cover of the very same BusinessWeek: "What Went Wrong." It chronicles the bumbling and catastrophic loss of market share of the free world's largest industrial enterprise.
When will we learn? This flurry of agglomeration coincides with the publication of The Bigness Complex, a long-overdue scholarly assessment of the failure of size in American business. Author-economists Walter Adams (former Michigan State University president) and James Brock claim: "Bigness has not delivered the goods, and this fact is no longer a secret." After reviewing several hundred studies, they conclude, "Scientific evidence has not been kind to the apostles of bigness and to their mythology."
They cite, for instance, a 1930s consultant's report on U.S. Steel, describing the firm even then as "a big, sprawling, inert giant ... with inadequate knowledge of its domestic markets and no clear appreciation of its opportunities in foreign markets ... with less efficient production facilities than its [smaller rivals had." Another 1930s report, frightening in its prescience, quotes the legendary Alfred Sloan of GM, "Sometimes I am almost forced to the conclusion that General Motors is so large and its inertia is so great that it is impossible for us to be leaders."
My only serious gripe with the book is its failure to take into account today's technology and manufacturing trends, which are pressing toward ever smaller economic unit size. As Gordon Forward, president of mini-mill and micro-mill steelmaker Chaparral puts it, "The big is coming out of manufacturing in this country." Forward's relatively small firm may well be the lowest cost producer of steel in the world today.
Bigness has two supposed advantages: efficiency (low cost due to large scale) and innovativeness (the resources necessary to take big risks). Neither pans out in practice. For instance, a classic study by economist Joe Bain in 1956 found that there were no substantial cost advantages for multi-plant companies in any of 20 industries analyzed.
As for innovation in the big firms, Brock and Adams conclude: "Reality and the available evidence show that despite all [the] theoretical advantages, small firms ... are far more efficient innovators than industrial giants." Further, "There is no significant tendency for corporate behemoths to conduct a disproportionately large share of the relatively risky R&D or of the R&D aimed at entirely new products and processes. On the contrary, they generally seem to carry out a disproportionately small share of the [risky] R&D."
They cite, among others, a National Science Foundation study that calculates that small firms produce 24 times as many innovations per R&D dollar as the largest firms. Another study reveals that larger firms typically spend three to ten times more than small ones to develop similar new products.
Adams and Brock aptly demonstrate the confusion about scale, excerpting from an interview with GM Chairman Roger Smith in the Detroit Free Press, concerning the source of innovative information-processing systems for his Saturn small-car project: "Where is all this great stuff coming from? It's not really coming out of IBM ... it's coming out of little two-and-three-man companies, because they're finding out that forty guys can't do something that three people can do. It's just the law of human nature."
That statement by GM's Smith not only makes him look foolish, but also casts considerable doubt on recent moves such as those by Chrysler and USAir. But somehow, I bet that 80-year-old Soichiro Honda would nod in sage agreement with Smith's remarks. Perhaps he'd even venture a smile.
(c) 1987 TPG Communications.
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