Thursday, December 11, 2008

Smaller is times of crisis at least

So the big guys get the girls. I guess that's true...somewhat. But in times of economic crisis, they certainly don't get profits - not when they are unhealthy-big instead of bulging-muscle-big. Large corporations have all the advantages when times are good. They have the capital to invest in R&D. They spend more on advertising and marketing then a Saudi prince on crack, and they are able to consolidate their market shares by simply bullying smaller firms out of competition (mostly by legal means). Problem is, that's WHEN things are rosy.

The opposite side of this equation is the paradox of largess. The bigger you get, the slower you get, the less flexible you are in the face of crisis - be it a revolution in market demand, exogenous economic shocks, or a widespread collapse of the financial system. When times get bad, the massive capital investments and organizational inertia that comes with being BIG become a serious detriment to survival. In the words of Ross Perot who sat on the board of GM in the 1980's:

"At GM if we saw a snake crawling around, we would call in a snake consultant. Then we'd organize a Snake Committee. We'd sit on the issue for a few years and think it through. And when we'd realize that nobody's been bit so far, we'd decide that it doesn't pose a serious problem and let it roam freely."

This is unfortunately what we are witnessing today with the Big-3 automakers in the United States. Due to their gargantuan capital investments in current business models, leading to hierarchical organizations meant to manage empires and billions in invested capital, they have become sitting-ducks in the face of deteriorating global economic prospects.

Either way you cut it, bailout or not, the Big-3 will have to undergo tremendous changes to survive, and that will require shedding the surplus fat. The diet? Most likely, some combination of lower wages for employees, plant closures, and most importantly, a new organizational structure that would allow for more flexible responses to uncertain times.

Our globalized era is for the strong and fit, not the slow and wobbly.

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