Back and bigger than ever

Welcome all of you coming back to a new term and the big business issues of the moment. What’s more, according to The Economist, big is back in fashion. After years of seeing small, nimble start-up firms prosper, making yesterday’s giants look like yesterday’s news, it’s been interesting to read how big business is starting to make a comeback.

Back in the 1990s, big firms were in retreat. Great names had disappeared and others only survived by massive cost cutting: IBM sacked 122,000 people, a quarter of its workforce, between 1990 and 1995. Everyone agreed that the future lay with entrepreneurial start-ups such as Yahoo!—which in late 1998 had the same market value with 637 employees as Boeing with 230,000. The share of GDP produced by big industrial companies fell by half between 1974 and 1998, from 36% to 17%.

Summarising the article, the main forces driving the return of larger firms include:

- The financial crisis has hurt the ‘venture capital’ market that so many smaller firms rely on the raise finance.
- Governments have been rescuing companies they consider ‘too big to fail’ (such as several banks, and General Motors). Recession is squeezing out smaller and less well-connected firms.
- New burdens of regulation on companies are expensive for big firms but can be crippling for smaller ones.
- Some booming industries are more friendly to firms with big ‘economies of scale’. Research in biotechnology is costly and often does not bear fruit for years. Natural-resource companies, whose importance is currently growing, need to be big—hence the mining industry’s wave of mergers.
- There is a heightened awareness of the risks of subcontracting. Toy companies and pet-food firms alike have found that their brands can be tainted if their suppliers (notably, from China) turn out poor quality goods. Big industrial companies have learned that their production cycles can be disrupted if contractors are not up to the mark. (Boeing, once a champion of outsourcing, has been forced to take over faltering suppliers.)

Another key point might be that firms are finding ways of managing diseconomies of scale. Companies have discovered how to be entrepreneurial as well as big. These giants are getting better at minimising the costs of size (such as longer, more complex chains of managerial command) while exploiting its advantages (such as presence in several markets and access to a large talent pool).

As the article reminds us, 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. But the days of dominant giants may be returning.