In theory, tying into a marketwide information network can put small companies on a par with larger competitors. But who owns the systems? Most of the small airlines that started up in the wake of the 1978 Airline Deregulation Act proved unable to compete, thanks partly to major airlines' domination of computerized reservation systems. Even today, according to a recent Wall Street Journal article, travel agents book 75% of all flights on systems owned by United Airlines or American Airlines. The two giants (and three smaller systems) take in about $1.80 per passenger for the flights they book -- some $530 million a year, all told, paid by their competitors.
In other industries, information networks are still in their formative stages. But there's no law requiring supermarkets, for example, to cut small specialty suppliers in on the same electronic information they supply to Kraft Inc. In the future, trying to compete without such access may be like trying to do business without a phone or a computer.
Proprietary information systems within companies can also erect barriers to competition. A fast-growing segment of the trucking industry is the highly specialized less-than-truckload market -- in which, the OTA points out, the top 10 companies now control 60% of shipments and 90% of profits. The big companies' edge lies in the fact that they can "operate sophisticated, computer-based communication and dispatch systems," which make the difference between profit and loss. The Limited Inc., the giant clothing chain founded by Leslie Wexner, has developed a network that feeds sales data from in-store computers to the company's headquarters, which then places orders with suppliers and gets hot-selling merchandise back into stores within 60 days. Such systems can't be bought off the shelf; they require years to develop and fine-tune. Think back to the experience of John McCormack, whom Inc. named the "hottest entrepreneur in America" last January. The market information provided by McCormack's elaborate computer system helped his company weather -- and even prosper in -- the brutal recession that hit Texas a few years ago. McCormack had been developing the system since 1979.
If there's a common thread to the trends chronicled by the OTA, it's this: the stiffening of competition that we've seen in recent years is only a foretaste of what's to come. That foretaste shook things up, opening up niches for companies that were sufficiently fast on their feet. In the next round, bigger players will wise up -- and begin to capitalize on advantages such as the power to shape new information networks.
Unless entrepreneurs wise up too, the revolution they are conducting will be yesterday's news rather than tomorrow's.
BOOK OF THE MONTH CLUB
Does Japan's strength lie in its big companies -- or in its small ones?
If the U.S. is to win the economic competition with Japan, how should our economy be organized? Japan's strength, say such pundits as MIT's Charles H. Ferguson and former U.S. trade negotiator Clyde V. Prestowitz, lies in its giant industrial combines, which can manufacture and market on a global scale. The implication: we too should encourage the growth of large and powerful companies.
But the Japanese economy we've been hearing about may not be the one most responsible for that country's rise as an economic power. According to David Friedman's The Misunderstood Miracle (Cornell University Press, 1988), Japan's success in world markets stems not from its big conglomerates but from the proliferation of small, flexible manufacturing companies.
Friedman, a lawyer specializing in Pacific Basin business matters, begins with some striking statistics. Between 1954 and 1977, a period when Japan's economy was rising to a preeminent position, the number of manufacturing establishments exploded, from 429,000 to 720,000. By 1977 Japanese industrial firms with fewer than 300 employees accounted for roughly 70% of the industrial work force (as compared with 40% in the United States).
The reason for this tilt toward small companies, says Friedman, is that the giants were forced into becoming assemblers and marketers rather than vertically integrated manufacturers as in the United States. Nissan, for example, originally set out to "mimic the factory practices of General Motors as closely as possible," emphasizing long production runs and low costs. But its cars were shoddily made and didn't sell. As the company tinkered with production techniques, it came to rely more on subcontractors, who themselves learned to turn out high-quality, sophisticated parts. Nissan also began pursuing a strategy of constant product innovation, including annual design changes "much more thorough" than Detroit's. Its production network therefore had to be kept as flexible as possible.
Nor was Nissan alone, observes Friedman. "The large assembly firms -- Nissan or Toyota in autos, for instance, or Matsushita in electronics, Mitsubishi in machinery -- increasingly relied on small specialist producers... "Overall, the portion of value added by large companies declined from 51% in 1954 to nearly 40% in 1977.
Tersely written in academic style, The Misunderstood Miracle is unlikely to make the best-seller charts. But it underscores the significance of the fact that small U.S. companies have been increasing their share of employment in nearly every industrial category. This revival of small-scale manufacturing may be the best hope for restoring our own beleaguered industrial base.
Contributor: Joel Kotkin
