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Why Every Business Will Be Like Show Business

Study of the network of flexible small businesses that make up Hollywood's entertainment industry.

Once dominated by huge vertically integrated corporations, Hollywood has become the shining model of our industrial future -- a network of flexible small businesses that get things done in here-today-gone-tomorrow alliances. Here's what it means for your company

A storm is heaving the ocean off a Northwest "coast," tossing a large tanker toward the rocks. In moments there will be a major oil spill from its caved-in hull, all before the watchful eyes of whales swimming in their icy home waters.

At least that's what millions will see when Free Willy II hits the theaters this summer. In reality, though, this sequence in the film is being shot not in the northwestern Pacific but in an outdoor pool beside the venerable Los Angeles Coliseum, where the only real threat is posed by the ultraviolet rays of the warm Southern California sun.

"I'm not going to sink a 400-foot ship on real rocks," explains Doug Merrifield, the film's associate producer. "So this is where we do all the underwater sequences."

Yet the miniature seascapes, robotic whales, and other products of movie magic are not the only illusions at work here. The public will know Free Willy II -- the sequel to 1993's highly successful Free Willy -- as a Warner Bros. release. But the real creators of the film, responsible for everything from its special effects to payroll and security, are a host of small companies and freelance contributors who collaborate for only as long as the project requires -- and who are drawn from the loose network of specialists that today holds the real power in Hollywood.

"Over the course of any picture you depend on 20 to 30 outside vendors to get the job done," notes Merrifield, a 20-year industry veteran. "It's a question of getting the best companies that have the expertise you need."

In the case of the underwater-scenes shoot, much of that expertise is being provided by Cinnabar, a Hollywood props maker, and its cofounder, Jonathan Katz. Katz, like Merrifield, is no newcomer -- he got his start two decades ago building floats for the Rose Bowl parade. His company operates project by project. One day it might be working on a film, the next day on a commercial, the following day on a television special -- each project a different product for a different client, requiring not only very different skills but different workers. To Katz, that means running a different kind of company.

Management no longer involves creating an integrated, rigid operation that can consistently repeat its function, he says. Instead, the challenge at Cinnabar -- as at every company in a network economy -- is "to get a highly temporary alliance of creative individuals to work together in harmony." The need to maintain relationships with creative people, financial types, and business managers is the only constant. The competitive edge belongs to those who can bring together those contributors in the most timely and efficient manner -- as Katz has been able to do. In 1994 Cinnabar recorded a very profitable $8 million in revenues, up from $7.1 million the year before.

Katz's success with Cinnabar may not be the stuff that makes the gossip sheets or gets major showbiz media coverage. But in many ways the growth of his company and of thousands like it in the entertainment industry -- not to mention the very careers of freelancers such as Merrifield -- represents a trend that is transforming not only entertainment but all business. Hollywood's network economy isn't unique, it's just more evolved than most -- and as a result offers a picture of how, and where, companies in all kinds of industries will do their work in the years to come. Eventually, every knowledge-intensive industry will end up in the same flattened, atomized state. Hollywood just has gotten there first.

Coming Soon to an Industry Near You
The collaborative, fragmented, demanding network-economy world
The business forces that changed Hollywood have become almost commonplace -- regardless of industry type. How many company builders these days can say they're not confronting --

· demand for more and faster product development, mostly because of shortened product life cycles and increased distribution channels (such as cable TV and videocassettes, in the Hollywood example);

· intensified global competition; and,

· rising customer expectations, especially about improved quality and greater customization -- born in part from the explosion in choices.

Hollywood's collective response has been to mutate from an industry of classic huge, vertically integrated corporations into the world's best example of a network economy. Its mostly small, uniquely skilled companies collaborate to create specialized products that can't be easily copied. Drawing on a dense concentration of talent, network economies like Hollywood lead what Japanese writer Taichi Sakaiya calls the "knowledge value" revolution, and possess a critical -- perhaps even decisive -- edge against competing industrial regions that produce lower-cost but less differentiated goods. Industries in higher-cost developed countries that build Hollywood-like concentrations of skill may not only survive but thrive against the increasingly sophisticated onslaught from developing nations such as Mexico and China.