Economics 9708/43 — October/November 2017

Big is bad

At its best, capitalism should be all about competition and consumer choice. This leads to innovation, improved value and quality. It is in contrast to the state, which is about compulsory taxation and monopoly provision.

Big business is somewhere between capitalism and the state. Unfortunately, companies tend to merge until they have as much power as a cartel and operate against the public interest. Huge companies are difficult to manage; full-time executives do not know what is happening – as has been witnessed by the recent collapse of large banks that required support from huge amounts of taxpayers’ money to survive.

Other large companies are conglomerates, lacking focus and any real purpose save carrying on for their own sake. They pay consultancies to devise ‘mission statements’ to give a pretended meaning to what they stand for. Staff feel detached from the overall undertaking.

Large companies miss interesting opportunities for growth in small markets. They talk about innovation but do it badly and so compensate by making acquisitions. For example, giant drug companies are paying large prices to acquire drug development firms because they have lost the confidence to discover new drugs themselves.

Small and medium-sized companies, by contrast, can adjust and take risks that large companies cannot. In sectors such as financial services and packaged consumer goods, large companies are facing competition. Barriers to entry are low, capital is plentiful and technology enables newcomers to undercut prices of established rivals.

Surveys suggest that young talented people want to work for themselves or smaller companies, not multinationals beset by internal management politics. New businesses have dynamism and vigour. They are more productive and more innovative. Fragmented markets and ever more diverse tastes of consumers threaten the dominance of the old brands. Economies of scale are a myth in many industries, especially newer sectors such as technology and services.

There is a belief that companies need to be huge to trade globally and that there are efficiencies from scale when trading internationally. These are exaggerated in the modern era. Small and medium-sized companies can be flexible and adaptable. With an improving economy and falling oil prices, smaller businesses have a great opportunity for improving profits and maintaining prices. Large firms remain uniform with dull, identical brands everywhere. It’s time for the craft industries, the food specialists, the new banks and the break-up of the dominant corporations.

Source: Sunday Times, 12 April 2015