Huge problems for ungainly giants

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For corporate giants, it is one thing aspiring to be the number one, but quite another trying to keep such a position by learning a new dance. This week, John discusses the poor fortunes of the American business icons GM and AT&T.

Fortune favours the large, and consolidation among leading companies is inevitable. There is no more firmly held belief in popular thinking about business. In banking and pharmaceuticals, in oil and insurance broking, in the motor industry and telephony, the future is said to lie with a small number of large global players. Chief executives across industry have followed the maxim of Jack Welch, the former General Electric boss, that unless you are number one or two in your industry, you are dead.

There used to be a phrase for it – the aspiration “to be the General Motors of this industry”. Not any more. Last week, GM forecast another set of disappointing results: the latest in a 30-year history of disappointing results. The ratings agencies threaten to call its securities junk. The company’s market share today is lower than when Billy Durant, its founder, was slogging it out with Henry Ford almost a century ago. But it is not Ford, GM’s long-term rival, that has benefited from this fall but Toyota, Hyundai and, prospectively, Shanghai Automotive.

Still, GM survives as an independent company. No one much wants its assets and even less its liabilities: the United Auto Workers union, and the pension and medical benefits of retired employees. Another American icon will soon disappear altogether, as AT&T is swallowed by one of its offspring, SBC.

For most of the twentieth century, AT&T and GM were the most powerful companies in the US. They acquired these positions by overtaking the product of the greatest consolidation of all. For several decades, US Steel was the largest company in the world. It is many years since the company ceased to be a significant force, even in the steel industry.

The failures at GM and AT&T did not happen because these companies were big. GM ran into difficulties because it did not make the cars its customers wanted, because the company was slow to see how preferences were changing and because its production systems could not match the cost levels and reliability achieved by its Asian and European competitors.

AT&T used its market dominance to achieve technical excellence. Then deregulation removed its monopolies and the settlement of an antitrust suit removed its local franchises. Freed to pursue the opportunities it perceived in the convergence of telecommunications and computing, an inspired vision was marred by inept execution. In the company’s core telecommunications markets, it was repeatedly outsmarted by upstart rivals.

No, GM and AT&T did not fail because they were big. They failed because they were insufficiently sensitive to consumer requirements, because they responded too slowly to changing market structures, and because their organisations were too bureaucratic to see what nimbler competitors were doing. But all these things were direct consequences of their scale of operations.

We consistently overestimate the power and sustainability of scale in business because the advantages of size are technological and tangible, the disadvantages human and intangible. The disadvantages always seem avoidable – large firms need not become inflexible, divorced from their customers, overloaded by long chains of command and formalised decision procedures. Or so books such as When Giants Learn to Dance would tell us.

But giants do not often learn to dance and when they do the effort quickly exhausts them. The few long-lived giants are either companies that have changed a lot or are in industries that have changed little. General Electric has not so much learnt to dance as to shift venues whenever the band is playing the wrong tune. Its main businesses today, in financial services, aircraft engines and medical equipment, are quite different from the earlier activities that gave the company its name.

Exxon and Shell once relied on “nodding donkeys” to tap oil shale and sold petrol in cans at the roadside. Today they drill beneath the ocean and use modern retailing methods. But competition and market structure has been more stable in oil than in any other big industry.

These businesses are the exceptions in a world of which GM and AT&T are more typical. Aspire to be number one or two. But harbour no illusions that such positions are likely to be sustained.

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