Consolidation: Cure Or Disease?

The history of the corporation is full of transitory fashions in arranging large organizations. The holding company, the conglomerate, vertical integration-all have had their day. Now, taking advantage of an erosion in the clout of U.S. antitrust laws within the Bush Administration because of doctrinal reasons as well as the perceived threat of international competition, many U.S. corporations are embracing their largest, most direct rivals in strategic alliances and outright mergers.

It is possible that consolidations can improve the efficiency of U.S. industry. But for that to happen, the new combinations will have to avoid the practices that gave "combines" a bad name. They could exacerbate many of the worst problems of our business culture without solving any of them. Consolidations are notoriously the result of short-term, immediate needs. There is a danger that they may place an unhealthy emphasis on quick profits, risk-averse corporate cultures, financial bureaucracies, and price advantage instead of building the business.

On top of that, the motivation of many recent consolidations has nothing to do with making a better product-the foundation of any business. They have focused on cutting costs by closing manufacturing facilities, reducing the work force, and eliminating duplication in research and development. In short, they often hold a pencil-pusher's view of rationalizing businesses, and that is no way to generate growth, conquer new markets, or improve quality.

To compete internationally, U.S. companies need long-range planning, a commitment to quality, generous R&D, and a premium on risk-taking. If the consolidation movement puts a damper on all those virtues, it will prove to have been a disaster.