Lately, financial journalists, economists, and executives alike have embraced a creed once espoused solely by whimsical ecologists: Small is beautiful. Big companies, they say, are dinosaurs. Their tiny brethren create most new jobs and lead in quality and innovation. Unless giants such as General Motors, IBM, and Kodak can duplicate the agility displayed by the little folks, they'll never regain their edge.
Well, anyone committed to the vision of a world led by small, nimble companies would do well to read Bennett Harrison's Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility. Through his own research, corroborated by the research of others, Harrison, a professor of political economy at Carnegie Mellon University, effectively demolishes the notion that small companies are the font of either job growth or innovation.
Moreover, Harrison writes, at least some large corporations have discovered how to become less rigid, more entrepreneurial, and less hierarchical. The worldwide growth of networks of corporate cooperation inspired--and to some degree driven--by the Japanese keiretsu, mean, in Harrison's view, that it is the corporate giants that will survive and dominate. Companies such as Nike, Ford, and Motorola may hire others to build their products or may produce them in scattered locations, but thanks to a web of links tying together suppliers and customers, they will cede little else. Writes Harrison: "Production may be decentralized, while power, finance, distribution, and control remain concentrated among the big firms."
Harrison's most original work comes in his opening chapters, in which he attacks--with obvious relish--the notion that small companies create most new jobs in the U.S. Not only is that not true, Harrison asserts, but the research that first supported the claim was highly questionable. That was the work of David Birch, then a Massachusetts Institute of Technology researcher, who said in 1987 that 88% of the jobs generated between 1981 and 1985 had been spawned by companies with fewer than 20 employees. State and local governments, Birch posited, should promote the birth of as many new businesses as possible.
But Birch's research was flawed, says Harrison, because the early data he used exaggerated the incidence of startups and because his analysis covered too short a period. In addition, Harrison argues, Birch's failure to recategorize companies once they grew or shrunk "systematically inflates the relative importance of the little guys."
Using the more common definition of small companies as those with fewer than 100 employees, Harrison finds that the proportion of Americans working for small companies and individual establishments--slightly more than 50%--has barely changed since the 1960s. And the share of manufacturing jobs in small businesses, he reports, has hovered at around 20% since the early 1960s.
The "lion's share of job creation over time," Harrison argues, "is contributed by a tiny fraction of new firms." Dun & Bradstreet Corp., he reports, found that among the 245,000 businesses begun in 1985, 75% of the employment gains made by 1988 occurred in just 735 companies, or .003% of the group. And all of those 735 companies had more than 100 employees from the start. Moreover, adds Harrison, the employees of big companies "enjoy on average systematically higher wages, better benefits, and greater job security than their counterparts in small firms."
And what of the notion that small companies produce more innovative products? Such claims, Harrison finds, are based on new product announcements in trade journals. But small companies, which are often seeking venture capital, are more likely than large companies to run such advertisements--and what constitutes a new product is always a source of debate. The most advanced equipment, Harrison notes, is more likely to be found in large plants than small.
The argument is more than academic. The notion that small business drives job growth and innovation has inspired countless economic-development campaigns nationwide that involve building business parks and incubators for entrepreneurs. Instead, Harrison writes, government should address issues that are also of importance to large corporations, including infrastructure improvement, workforce training, and "the encouragement of collaboration among rivals."
In such collaboration, Harrison believes, lies the salvation of giant corporations. Rocked by the economic upheaval of the early 1980s, he notes, businesses in Europe--and to some extent, businesses in the U.S.--have embraced a new form of organization defined by the network. While slimming down and focusing on what they do best, companies are drawing closer to customers and suppliers to slash costs, shorten design times, boost quality, and innovate more quickly. Big companies are also working together more closely, both to learn from one another and to reduce the costs of entering new markets and creating leading-edge products. Witness GM's Fremont (Calif.) joint venture with Toyota Motor Co., which is turning out Geo Prisms and Toyota Corollas that post better quality ratings than cars built in Japan.
Harrison cites Italy's Benetton Group as a prime example of the network at work. His account of how the clothing maker organizes output into design, high-tech manufacturing, and unskilled piecework makes fascinating reading. In addition, Harrison provides one of the most lucid, straightforward descriptions of the keiretsu that I've yet read.
Despite his upbeat assessment of the future of large enterprises, Harrison is anything but optimistic about the U.S. While a few companies--notably Ford, Chrysler, and Motorola--have adopted the new model, he writes, "the reality is that too many companies still do not seem to get the message." Instead, they're fixated on quarterly profits and are too distrustful to cooperate with other companies. So, they "take the low road" to cost-cutting--slashing wages and jobs, not boosting productivity and modernizing processes.
The spread of business networks is not without problems, Harrison also points out. He reasons, for example, that networks will exacerbate wage inequality. Workers at large companies, who are in such core jobs as design and high-skilled manufacturing, will pull in good incomes, while less skilled workers in largely nonunion factories and offices of subcontractors, won't do as well. This "labor market dualism," Harrison writes, threatens to rip America's social fabric by dividing the country into the working poor and the relatively well-off.
It's no surprise that Harrison, co-author with Barry Bluestone of 1982's The Deindustrialization of America, which said American manufacturing was declining largely because companies were moving output overseas seeking cheaper labor, should focus on the problem of rising wage inequality. But the weakest part of Lean and Mean is his discussion of how to deal with it. He calls for increased unionization, which might work, but he never tackles the question of how to bring that about. And Harrison often lapses into academic prose. But those are minor failings in a book that so ably challenges the accepted wisdom.