Future Shocks

Why tomorrow's marketplace may be murder on small companies

It's easy to get carried away with the entrepreneurial revolution of the past decade. More and more start-ups. More and more new jobs -- and new products -- created by young, growing businesses like those on the Inc. 500. Meanwhile, the Fortune 500 continue to thrash about, fending off raiders with one hand and scaling down operations with the other. The marketplace of the future, so it seems, belongs to small companies.

Before you get lost in such a reverie, however, I recommend consideration of Technology and the American Economic Transition, a report issued earlier this year by the U.S. Congress's Office of Technology Assessment (OTA).

Now, I'm not recommending that you actually buy and read this turgid tome. The only people who will get through it are those (like me) who figure the chore is part of their job description. But I do urge that you ponder its analysis of where the American economy is heading. Unlike a lot of government agencies, the OTA has a reputation for solid scholarship. And the trends it has spotted -- particularly the advent of information systems that give their owners dramatic competitive advantages -- have life-or-death implications for small companies.

The report focuses on the networks of companies and markets that produce given "amenities' -- food, housing, and so on -- and scrutinizes the structural changes taking place in each one. An example of structural change? Take the movie business. Years ago, the big Hollywood studios were textbook examples of "standardized industrial mass marketing." They had the stars under contract; they owned the production facilities where the movies were made and the theaters where they were shown. Today the studios have become financiers and facilitators, assembling ad hoc teams to produce products marketed through outlets ranging from theater chains to cable TV operators. "Almost in spite of itself," says the OTA, "the motion picture industry has come to be a model of 'flexible specialization.' "

In general, the changes chronicled by the OTA fall into three categories. Markets -- even whole industries -- are fragmenting faster than ever. Foreign competitors, far from resting on their laurels, are sweeping into sectors of the economy that once seemed safe. Most important, the business world is undergoing a new kind of have and have-not split. The dividing line: whether a company can gain access to complex new information networks that provide up-to-the-minute data on customers, suppliers, and operations.

Fragmentation. Like the movie studios, big manufacturers are giving up on vertical integration; they're farming out everything from parts production to janitorial services. Health-care organizations are delivering fewer services in the hospital and more in the freestanding clinic, the storefront office, even the patient's home. For years, small companies have profited from this fragmentation of markets. But big companies downsized partly to protect themselves from recession; what will happen to all the new suppliers in the next downturn remains to be seen. Even in good times, what's to prevent an industry from reconcentrating after the initial burst of entrepreneurship? The nursing-home business grew rapidly in the 1970s, thanks in part to the trend toward shorter hospital stays. By 1983, the OTA points out, the five largest chains already controlled nearly three-quarters of the beds.

Ever-greater international trade. In the past two decades, imports rose from 5% of gross national product to more than 12%. But plenty of industries, mistakenly thinking themselves protected from foreign competition, have lulled themselves into it-can't-happen-here complacency. Examples include financial services, publishing -- even home building, a business long dominated by small developers and contractors. "Even U.S. residential construction firms must now compete with foreign producers," points out the OTA, "as appliances, building components (ranging from kitchen cabinets to door knobs), hand tools, and even entire housing units are being imported." Worse, such nations as Sweden and Japan are pioneering in the efficient production of high-quality, factory-built homes, a branch of the industry that's practically nonexistent here. Eventually "Americans could find themselves assembling foreign products with foreign tools and adding little value other than site preparation.'

Information networks. Some new information systems link together whole industries; others are the brainchildren of individual companies. Examples of the former: in food retailing, checkout-station scanners can now provide wholesalers and manufacturers with up-to-the-minute information about what's selling and what's not. A system called the Universal Communication Standard, now under development, will allow food marketers to exchange even more data electronically, permitting them to do away with invoices, purchase orders, and so on. In apparel, the so-called Quick Response Program linking retailers, wholesalers, and manufacturers has shortened transportation time, lowered inventory requirements, and generally improved both the speed and efficiency with which garments are moved from factory to sales floor. Such networks, says the OTA, are likely to proliferate. A point-of-sale financial system allowing retailers to debit customers' bank accounts is now being tested in Florida. In France, the 2 million households with Minitel computer terminals can tap out their own travel and lodging reservations anywhere in the country.