31 August 2009 • 7:00 am

Size Matters – But is Bigger Always Better?

Economist illustration by by Jon Berkerly

Economist illustration by by Jon Berkerly

The cover story in the U.S. edition of this week’s Economist proclaims that “Big is Back” – that the era in which large companies were on the defensive and the small company model was ascendant is coming to an end. And it is true that big companies have had their share of challenges over the past several years. The U.S. telephone monopoly AT&T was broken up in a court-ordered divestiture in the 1980s. Giants such as Enron, MCI, and Arthur Anderson fell prey to management misbehavior, and formerly powerful financial behemoths such as Merrill Lynch, Bear Stearns, Countrywide Home Finance, and Northern Rock were victims of the implosion of the past few years, and General Motors and Chrysler are meek shadows of their former selves. In an interesting and telling statistic, the Economist asserts that the share of GDP produced by big industrial companies fell from 36% in 1974 to 17% in 1998.

The article cites several factors to support its expectation that big companies are coming back. The global credit crunch is choking off the supply of venture capital for start-up firms. Government bail-outs of large firms as well as their packaged bankruptcies are unfavorable to smaller firms lacking the clout of the big dogs. The regulatory burdens of the Sarbanes-Oxley act and the inevitable round of re-regulation in the wake of the crisis will weigh far more heavily on smaller firms than the large ones. And the era of outsourcing may have peaked with the product safety scandals coming from China, and Boeing’s supply chain-based factors in the much delayed roll-out of its new 787 passenger plane.

The central truth is that there will always be a symbiotic relationship between small and large firms; small firms are often the source of game-changing innovation, and large firms have amassed the capital and expertise to take those new innovations to the global market. The share of wealth generation in each of small and large firms may vary over the span of years and decades, but neither model is in any danger of obsolescence or extinction.

But firms obsess about size. Most small business owners are fixated on growth, either to become gigantic, or to be bought by a giant. Some business models depend on continued growth that ultimately must bump up against natural or regulatory limits. There will  come a day (perhaps already) when there is simply no need for more Starbucks locations. Other firms’ models become dependent on overwhelming market dominance (IBM once, recently Microsoft, and soon Google?) that history has proven to be unsustainable.

The ubiquity and maturation of information technology has enabled even the smallest firms access to the knowledge capital they need to create new value without necessarily getting bigger. Networks of companies are now able to create value in ways that previously only giant hierarchies could. So bigger may not always be better. While firms generally have no skill or appetite to voluntarily become smaller, there are plenty of cases of firms whose demise can be traced directly to their simply trying to be too big.

Despite the unfortunate history and corrupted meaning of the term “rightsizing,” a vital part of the strategic planning process is to manage the question of the right size of the future firm. And the answer to that question need not always be “bigger.”

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