1 October 2009

Pinto's Point

Decline of large companies

By Jim Pinto

Schumacher’s 1973 book, Small is Beautiful, was prescient. He sounded the alarm regarding globalization, asking how much further growth was possible. He was critical of a society that generates unbounded materialism, motivated primarily by greed and envy.
The old model, “Bigger is better” is starting to collapse.

Huge vertically integrated conglomerates were created to minimize transaction costs up and down the supply chain. Now distributed information networks do the same, more effectively, outside any single company. The web is globalization taken to the extreme. Projects can be open to the best of breed anywhere, creating virtual suppliers and workers that come together for one product, and then re-form for another.

In the old world, the opposite kept on happening. Corporations kept getting bigger. Wall Street giants kept doubling and tripling revenues in a decade. The pharmaceutical industry consolidated through hundreds of mergers and acquisitions. The Fortune 10, which includes Wal-Mart and GE, has more than tripled in size since 1990.

And then in 2008, it all came toppling down. The big financial firms were inflated by toxic debt. The big car companies crashed head-on into skyrocketing oil prices and plummeting consumer demand. Big Pharma ran out of blockbuster drugs. Wal-Mart kept closing stores, and GE stock plummeted because 50% of its profits had come from its financial holdings.

The large and disciplined organizations were powerful in the past only because the game changed slowly. With today’s fast and accelerating change, they become vulnerable. The new economy, rising from the ashes of the latest meltdown, favors the small.

Take another facet of big business, which has outlived its usefulness—executive salaries. The bigger the company, the higher its chief executive got paid. But, that does not extrapolate—the Exxon chief executive did not really “earn” his $500 million salary and bonus. The distributed ecosystem of small companies dispenses with the need to pay anything beyond what is earned by pure performance, measured largely by enterprise ownership.

Caused by large layoffs from big companies, “involuntary entrepreneurship” is now creating tens of thousands of small businesses and a huge market of contract and freelance labor. Many ex-employees will choose not to take full-time jobs again, even if they become available. The crisis may have turned our economy into small pieces, loosely joined; but, it will be the collective action of millions of workers hungry for change that will keep it that way and generate growth from large-company decline.

So now, in the graveyard of giants, we are witnessing the final march of corporate dinosaurs into the tar pits. This is not just the trough of a cycle, but the end of an era.

Related links:

• Wired - More Startups, Fewer Giants, Infinite Opportunity:
  http://www.wired.com/culture/culturereviews/magazine/17-06/nep_essay
• Wired - Beyond Detroit - On the Road to Recovery, Let the Little Guys Drive:
  http://www.wired.com/culture/culturereviews/magazine/17-06/nep_auto
• Schumacher's 1973 book - Small is Beautiful - Economics as if People Mattered:
  http://www.amazon.com/exec/obidos/ASIN/0060916303/jimpintocom/103-0805027-7623017

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.