Chicago Boyz

                 
 
 
What Are Chicago Boyz Readers Reading?
 

 
  •   Enter your email to be notified of new posts:
    Loading
  •   Problem? Question?
  •   Contact Authors:

  • CB Twitter Feed
  • Blog Posts (RSS 2.0)
  • Blog Posts (Atom 0.3)
  • Incoming Links
  • Recent Comments

    • Loading...
  • Authors

  • Notable Discussions

  • Recent Posts

  • Blogroll

  • Categories

  • Archives

  • The Idea that Bigness Automatically Wins in Business

    Posted by David Foster on January 11th, 2012 (All posts by )

    …still seems to have a remarkable number of adherents.


    Business Insider
    has an interview with a 32-year-old Brit who is cofounder of Huddle, a startup aiming to compete with Microsoft’s SharePoint. While I didn’t read the comment thread, up toward the beginning there are at least 3 comments from people mocking the idea that a startup would be able to succeed against a product which (a)comes from a very large company and (b)is successful and growing.

    Well, let’s see. Up through the early 1980s, IBM’s position in the computer industry looked unassailable…indeed, IBM’s dominance was so complete that the computer industry had often been referred to as “IBM and the Seven Dwarfs.” Who would have guessed that a couple of startups called Intel and Microsoft were about to start grabbing market share from IBM in a big way?

    Up through at least the 1970s, Sears Roebuck & Co. was a colossus of the American retail industry. Who would have guessed that Sears–along with many other large retailers–would have found itself losing out to a bunch of guys from Arkansas?

    The steel industry was long dominated by the giant integrated steel companies, especially Bethlehem Steel and U.S. Steel. Both of these companies went bankrupt–but for smaller and more nimble firms such as Nucor, focused on mini-mills and continuous casting, the story was very different.

    I haven’t looked at Huddle in any depth, and don’t have a considered opinion about their future. But I do know that many SharePoint users are less than happy with the product, and I do know that small and focused companies often have considerable advantages over larger and more complex companies. Sometimes these advantages, intelligently applied, will suffice to dramatically overcome the also-very-real advantages of the larger firm.

    The belief that the-big-guy-always-wins seems surprisingly resistant to historical experience. J K Galbraith, in his book The New Industrial State, asserted that large firms would simply become larger and more vertically-integrated and would control demand through advertising, making themselves fairly unassailable. This was in 1967–in view of the history of the last 45 years, people today have much less excuse for such beliefs that Galbraith did

    Why is the big-guy-wins theory still so widely held?

     

    24 Responses to “The Idea that Bigness Automatically Wins in Business”

    1. Percy Dovetonsils Says:

      “Why is the big-guy-wins theory still so widely held?”

      Behavioral economics gives a good explanation: people extrapolate recent past trends into the future. Microsoft was a juggernaut in 1998, so of course it’ll drive Apple out of business in the future – right?

      (I was just going to write, “But the current trend of increasing crony capitalism could indeed result in truly entrenched firms,” but then I’d be extrapolating the recent past into the far future, wouldn’t I?)

    2. Bill Brandt Says:

      I think it depends on the industry, too. How much capital do you need to compete, and is your product/service a game changer? Certainly that can be said for Intel and Microsoft (who have had a symbiotic relationship – each has benefited from the other)

      General Aviation aircraft – far more difficult to penetrate – even Cirrus – which produced a game changer aircraft – made of composites mainly – was just sold to a Chinese company. Their planes offer the performance of a retractable because of revolutionary designs. Not surprisingly most of the innovation in small GA aircraft is from the home built market – where FAA certification isn’t necessary (that can cost millions and years) – before you can sell the first plane. That is why most production GA aircraft are evolutionary rather than revolutionary – the Cessna 172 goes back 50-60 years as most GA aircraft.

      If you want to introduce the next VW to the world – better have a few Billion to play with – Most auro start ups die froim lack of capital and dealers. You have to find dealers willing to invest their own money in your product to sell it.

      Funny story on the origins of Mercedes-Benz in the US. After WW2 (before they had a negligible presence) – but after WW2 they were sold by Studebaker dealers – and when Studebaker went bankrupt they realized they had to start selling though their own infrastructure. They asked the best dealers if they wanted a franchise and many refused – who wanted to start investing $$$ in inventory and parts – and service training – for a little known make in this country? But some of them did accept – like the Portland OR dealer – Rasmussen – he was a Studebaker dealer before 1964.

      Having been in the computer software industry since the early 80s, though I am astounded at the companies that have come from nowhere, become industry leaders – and disappear. The cost of production isn’t that much (particularly for software) and the marketplace rewards innovation and price/performance.

      Wang Computers (core memory – the predecessor to semiconductor – was invented by An Wang) – a migrant from Shanghai – Lotus 1-2-3 (which themselves improved from Visicalc),

      Digital Computers, all gone.

      At one time they were all powerhouses.

      Much of the software was superseded by Microsoft – who buried Netscape (1st good browser), Lotus 1-2-3 (Excell), Wordperfect (remember them?) – Word – came down to capital and market share.

    3. David Foster Says:

      Capital intensiveness of an industry matters, yet high capital requirements by themselves don’t always provide a defense against disrupters. It’s hard to think of anything more capital-intensive than an integrated steel company; even their mini-mill competitors required quite a bit of investment.

      The rise and fall of Wang Labs is a very interesting story. There’s a good book on the subject, Riding the Runaway Horse, by Charles Kenney, which focuses especially on the relationship between An Wang and his star executive John Cunningham, who was “like a son” to Dr Wang…until he wasn’t.

    4. veryretired Says:

      The quotation from Galbraith actually lays out the major reason why so many people have this belief—it is based on the collectivist claim that large companies can acquire so much control over their markets that they can stifle any potential competitors.

      I remember very clearly hearing this argument repeatedly while in college, and seeing it later many, many times. It is based partly on the assertion that advertising is so seductive and powerful that the average person cannot possibly resist it, and partly on the running conspiratorial claim that big companies just buy up technology that threatens them and bury it.

      These types of arguments are popular among the “elite”, as liberals always imagine themselves to be, because, obviously, they are too smart and informed to be taken in, but all the helpless schmoes out there in flyover country are easily gulled, and, therefore, need protection from the evil corporations and their advertising lackeys.

      It’s basically the same argument used against the railroads and other big companies to justify the beginnings of the anti-trust movement, with variations depending on the idiosyncracies of the industry involved.

      These totally unsupported assertions have so percolated through our culture that they are part of the CW that everybody knows, even though they have been thoroughly disproved by events time and time again.

    5. Bill Brandt Says:

      At one time, though the 1970s, my uncle had the biggest construction company in his state. He specialized in water and sewer plants.

      Starting in the mid 70s he started losing bids to a lot of “Mom & Pop” companies – companies that were small, they rented equipment they needed, hired who they needed, and when the job was done – the equipment went back and they layed off people. In addition to having a huge capital outlay in equipment that just sat in the yard when not used, my uncle didn’t have the heart for mass layoffs – some of his people had been there for decades.

      Point is, small and nimble – in this case – beat out large.

      In the case of Intel – how much capital do you think would be required to come out with a new processor? I am sure easily 100s of millions – not to mention the factories needed to produce it.

      In Intel’s case 2nd place AMD had tried to get a foothold for decades – but by now – with the market mature – it is hard going to #1.

      But when Intel started there were maybe a few other companies – Fairchild semi conductors? -trying this.

      Steel companies – again small and nimble – and probably no union workers – is winning out.

      So I think it is a combination of factors – but it is not an ironclad rule that “big always wins over small”.

      David – sounds like an interesting book!

    6. Michael Kennedy Says:

      One consequence of Obamacare is the consolidation of medical practice into corporate vertically integrated entities. I don’t think the US citizen will accept this. Canada is growing private practice in spite of the fact that it is technically illegal. I suspect that the entrepreneur doctor will come back on the service model. It will be tough for the young graduates with big loans for a while. Health insurance may collapse as a business model. It hasn’t been real insurance for years; it is prepaid care. When the Mayo Clinic says it won’t accept Medicare in Phoenix anymore, you know the model is in trouble.

    7. Bill Brandt Says:

      Michael – if I could pay some Drs or hospitals on the side to get services I would do it now. I’ll bet it would be at least 2/3rd less.

      In fact a Dr – or hospital administrator – just wrote a book on why medical costs have skyrocketed, and (in listening to an interview) – it is government interference.

      If you tell at least half the patients that the taxpayer will pay for your hospitalization, and then tell the Drs and hospitals that you will pay less than their costs for that service then obviously the difference has to be made up somewhere.

      Wish i could remember the name of the book, but I suspect that i am preaching to the choir ;-)

    8. David Foster Says:

      Bill…indeed very expensive to set up a chip factory. One approach to being in the business without billions of dollars is to be a “fabless” semiconductor company; ie, you do the design and control the product identity and marketing, but contract out the actual manufacturing to a “semiconductor foundry”, which is basically a contract manufacturer of chips.

      Another approach is represented by ARM, which doesn’t sell chips at all but rather licenses the designs as intellectual property. Systems using their designs are used in several cell phones, air conditioning systems, TV set-top boxes, etc.

      So as a more general principle, companies that are hard to assault directly because of capital investment requirements can frequently be assaulted indirectly.

    9. Robert Schwartz Says:

      Truly, the actions of free men acting in free markets (misnomered capitalism by Marxists and other anti-liberals) are a “perennial gale of creative destruction”.

      The doctrine of the pseudo-keynsian socialist “economists” was articulated by Galbraith in his 1958 manefesto, “The Affluent Society” which argued that the giant corporations of the day, such as GM and ford, had liberated themselves from market forces by the use of advertising which could overbear their customers’ wills, and that only the Federal Government could save us from them.

      In fact, the 1950s were a holiday from history when the US was alone as a functioning free market (sort of) economy, and the rest of the world was either struggling to overcome the destruction of the war, or the even more destructive rise of Soviet Russia. We can now see that no one is exempt from the perennial gale.

    10. renminbi Says:

      It is remarkable how someone like Galbraith could ever have been taken seriously, isn’t it?

    11. Bill Brandt Says:

      David – good point about subcontracting everything. I remember reading about someone building their dream supercar for sale, and it is in effect letting subcontractors build all the parts.

      I think, for that scenario to work, the product must be so different and so much better than what exists in the marketplace as to justify the necessarily higher price.

      And then you worry about patent infringement. There are so many creative ways to “reverse engineer” electronics – make it superficially different – and you tie up your resources in seemingly endless litigation.

      As one wag said, “A patent doesn’t protect your product but gives you a license to sue”.

      Read an interesting article on Elon Musk – a true Howard Hughes like character – got – I think – $250 million from his sale of PayPal to Ebay – helped develop the Tesla electric car – and then started SpaceX – the private company based out of a huge former 747 fuselage hanger in Hawthorne, CA – he is revolutionizing rocket design and production – choosing to redesign his own parts rather than pay 20x-`100x for the part from established contractors.

      But the point is he refuses to patent anything – knowing that the Chinese will just copy him.

      Here’s the article –
      http://www.airspacemag.com/space-exploration/Visionary-Launchers-Employees.html

    12. charlie Says:

      @Robert Schwartz: “Truly, the actions of free men acting in free markets (misnomered capitalism by Marxists and other anti-liberals) are a “perennial gale of creative destruction.”

      True that. The best books I have seen — readable and insightful — that explain the business trajectories being discussed here are Clayton Christensen’s Innovator’s Dilemma and Innovator’s Solution.

    13. David Foster Says:

      I reviewed The Innovator’s Solution here.

    14. Percy Dovetonsils Says:

      For another take on this, look at the list of the original components of the Dow Jones Industrial Average:

      http://tinyurl.com/7mh94oh

      Only General Electric remains on the list. So much for massive companies setling into trenched, unassailable dominance. (And here I thought that equity in U.S. Leather was a sure-fire winner for the long term…)

    15. Bill Brandt Says:

      @Percy – and here Kodak – a former “bluest of the blue” chip – is on the verge of bankruptcy – couldn’t adapt to the digital age.

      Just finished reading one of the best autobiopgraphies I have ever read – The Garner Files

      About James Garner – he talks about those great ads with Polaroid and Martiette Hartley – again was a Blue Chip – and now – gone.

    16. Robert Schwartz Says:

      “J K Galbraith, in his book The New Industrial State, asserted that large firms would simply become larger and more vertically-integrated and would control demand through advertising, making themselves fairly unassailable.”

      I was wrong, I credited that theory to “The Affluent Society” (which is a truly execrable book, no doubt about that) not TNIS.

      The thesis that advertising could could put the proles under mind control has been a staple of leftist Marxist ideology since the “Frankfurt School” brought forth the claim that the Nazis had taken over Germany by creating “false consciousness” in the proletariat, who, if they had correctly understood the social and political order, would have become revolutionary Communists and conducted a communist revolution in Germany.

      It was the ultimate sore looser theory. But, it has provided a generation of leftist buffoons, like Thomas Frank (“Whasamatta U Kansas”), with an excuse as to why ordinary Americans won’t listen to them.

      Galbraith’s theory was schlock Marxism, not economics, and it deserves a trip to the composting bin, not a decent burial.

    17. Michael Kennedy Says:

      “David – good point about subcontracting everything. I remember reading about someone building their dream supercar for sale, and it is in effect letting subcontractors build all the parts. ”

      When my kids were small I built a pool for my then home. The pool contractor was an interesting guy. His name was Hy Pezner. He had been a furrier in New York City but retired to California. After a couple of years of doing nothing, he got bored and opened a pool supply store. He told me that he listened to customers’ complain about their pools all day. Finally, he decided he could do as well and opened a business. He subcontracted all the work but he did the estimates and supervised the subs. He built the best pools in Orange County at the time (1970s). The inspector told me that every Hy Pezner pool was far beyond the code for quality and materials. Hy probably built 2/3 of the pools for doctors I knew and nobody ever complained about his pools. When he came out to do the estimate, he showed me how my next door neighbor’s pool had flaws, like the tile not being in level lines.

      He was a good example of an entrepreneur on a small scale. He didn’t need the money. He just wanted to have something to do and he did it better than anybody else in an unfamiliar business. The next door neighbor’s pool had been built by one of the big companies building pools then.

    18. Michael Kennedy Says:

      “Michael – if I could pay some Drs or hospitals on the side to get services I would do it now. I’ll bet it would be at least 2/3rd less. ”

      The problem is that Medicare will not let doctors do both styles of practice. To do a cash practice, you have to quit Medicare completely. The prices are well below the “retail” price you see on insurance forms. That is because of the large discounts that the insurance companies and Medicare require. The insurance company prices are trade secrets. If you have a 20# “copay” , for example. The contracted price the insurance company pays the hospital may be less than your “20%.”

      An ER doc I know broke his arm playing tennis. He went to the best ortho doc in his area. The ortho doc had quit all insurance and Medicare and accepted only cash. The busiest hip replacement surgeon in Orange County a couple of years ago did only cash practice and he charged about what Medicare paid, around $1750.00 for a total hip. If you Google “retainer practice” you will find a bunch of these cash practices. The cost in Tucson is around $100 per month for all ambulatory care, including house calls, etc. These are mostly the older docs who don’t have debts from school but there are quite a few models now. I read about a couple of GPs in Virginia who charge in 15 minute increments for time.

      I was a little surprised to see even general surgeons going to the all cash practice model. You don’t need those billing people and you don’t have to wait two years to get paid.(Medicaid)

    19. Bill Brandt Says:

      Michael – I think I mentioned this before but I had a late distant cousin who was a renowned neurosurgeon.

      She was killed in a traffic accident a few years ago and when another cousin, the executor, went through her finances she was surprised to find 100s of thousands in A/R never paid by the insurance companies.

      As anyone in business can say A/R can kill you.

      She would do an operation, bill the insurance company and apparently they would pay in installments – and she was supposed to send another bill – which – since she was trying to maintain her own bookkeeping, was a mess. Slow paying, pays far below “retail” and on top of that you have to continually remind them to pay. Most of her A/R had to be written off.

      No wonder our system is such a mess.

      I’m going to save your post – the hip replacement – would that include rental of the O/R and the support staff?

    20. sol Says:

      I live in Pittsburgh and I can tell you the big steel plants are gone. Regulated out of business. The support industries are gone. It happened in the 70s and 80s. The workers are gone.

      Sears started out and grew using mail order catalogues. Then it built stores in the outer edge of the city in the 40s and 50s. The ghetto has expanded to swallow the 50 year old Sears stores. WalMart builds in the exurbs and it will be many years before the ghetto reaches them. Kodak died of mismanagement even though it invented the digital camera. Xerox invented the mouse. IBM “invented” the PC. But these companies were too heavily regulated to reinvent themselves.

      Government is a cancer that kills an economy. Free markets grow fastest in the absence of government. There is nothing a government provides that a free market cannot provide for itself. Malls now have their own “security” forces because local police are unreliable. Merchants resolve differences through arbitration because courts are too expensive and too slow. Notice that malls usually have almost no windows on the outside walls. They are fortresses. All businesses have their own fire sprinklers and most fire departments in the suburbs are volunteers supported by local merchants.

      The industries that grow the fastest are those with the little or no regulation. Those with the highest regulation are very expensive and totally lacking in innovation (schools, mortuaries, automobiles). Growth comes where there is no regulation.

      We expect the big companies to survive because politicians convince us that big companies threaten us and therefore ought to be regulated.

    21. Michael Kennedy Says:

      ” the hip replacement – would that include rental of the O/R and the support staff?”

      No, that’s just his fee but you can keep your insurance for the hospital bills. With time, I suspect the whole model will collapse. That’s a lot of Obamacare’s raison d’être. Banning pre-existing condition rules will kill the health insurance industry. They are mostly an administrative service organization model anyway. They want out of the insurance business. They are happy to manage claims as long as the feds pay the bills.

      Bad management of A/Rs is common with docs, especially surgeons. We are too busy and don’t pay close attention. I joined practices with a guy when I quit the trauma surgery business and learned that he had $400,000 in delinquent A/Rs. My office was pretty efficient. I had two full time staff and one part time who only came in when I saw patients. My previous practice was a five surgeon group with 14 employees. The monthly gross of my practice was 1/2 of theirs. A vascular surgeon friend who started in practice with me in 1978 and left to start his own practice had an office girl embezzle 1/2 million from him before he found out. She later said it was just so easy that she got tempted. She had previously worked for me and left to help him start his own office. I don’t think she could have done that with me because I split up the collections and billing. There are warning signs that anybody who has run a business knows about. Not taking vacation is one.

      Still, the embezzlers are often model employees and surgeons aren’t in the office much anyway.

    22. PenGun Says:

      How can I put this. A large part of the economic problem you now face stems from your massive bail out of the “too big to fail” financial industry.

      Feel free to believe whatever you want but really your country is owned by those large corporations.

    23. Michael Kennedy Says:

      How can I put this. A large part of the economic problem you now face stems from your massive bail out of the “too big to fail” financial industry.

      Certainly that is true of the debt problem. The economy will not recover until Obama and his cronies are gone. His policies are killing us. That was true also of FDR but Tojo and Hitler came along to save him. I don’t think the Islamists are going to do that. Besides which, the country is far less fixable by spending now.

    24. PenGun Says:

      “Certainly that is true of the debt problem. The economy will not recover until Obama and his cronies are gone. His policies are killing us.”

      I hope you understand it was Bush and his crew who put you in the crapper. Obama has little to do with anything other than continuing the policies and direction he chose. It’s the same people, Summers et al, who are advising Obama.

      hi ho.