Large companies and small companies use technology to mimic each other. Who's getting the bigger payoff?
American Express and Maurice Badler Fine Jewelry, a small New York retailer, face the same challenge when they plan a direct-mail promotion: making sure the expensive bait isn't wasted on prospects who aren't likely to nibble. But the two companies are in the same bind for opposite reasons. Badler, a small company, doesn't have a huge customer base from which to cull prime targets for its high-priced jewelry catalogs. American Express, on the other hand, has too much information. Its millions of customers represent all possible combinations of economic status, location, and buying preferences. How can it sift through all the data to find just those customers ripe for, say, a Caribbean-vacation package promotion?
The solution for both companies is technology. Badler purchases demographic databases, which are loaded onto PCs and then searched for households that can afford its offerings. The result is average revenue per order of about $1,000 -- more than five times what an average catalog order brings in -- plus a $15 profit per catalog that places Badler's catalog among the most profitable of U.S. consumer catalogs.
American Express, meanwhile, dumps its vast sea of customer information into powerful mainframes that churn through the data to pull out the names of customers who, for instance, live in cold-weather climates, have charged airplane tickets to vacation areas, and have a few thousand bucks in available credit.
Companies of all sizes have turned to information technology to become more effective. But small companies and large companies invest in technology to overcome different obstacles. Small companies want to erase the advantages big businesses have always had: large national or even international sales forces that can call on tens of thousands of customers; armies of managers that can bring vast stores of market research and expertise to bear on product development and marketing decisions; highly automated factories that produce goods at the lowest possible cost; and horizontal integration that makes it possible to offer a broad range of products and services.
And large companies? They're using technology to cut through the layers of personnel that isolate top managers from the action in the real world and bog decision making down to the point where markets change faster than plans can be implemented. And they're using technology to offer more customized personal service.
Put simply, small business and big business are fighting a looking-glass war to see which can better use technology to act like the other while continuing to retain its "natural" advantages. An organization that combines the sophistication and muscle of a giant company with the nimbleness and personality of a tiny company would be formidable indeed.
Consider two more examples:
( Fisher Marantz Renfro Stone Inc., a small New York architectural-lighting design firm, didn't have the staff to send out designers to clients to review preliminary designs -- common practice in larger firms. So the company set up an audio-conferencing and on-line document-sharing system that allows designers and customers miles apart to look at, discuss, and modify blueprints on a computer screen.
( GTE's expertise is distributed over 106,000 employees in 29 states and nine foreign countries. But a manager looking for insight into a customer can often put a finger on exactly the right information by firing up a "groupware" program that gathers up, organizes, and makes accessible all the different information that's available on the company's computer network.
Both sides claim to have won skirmishes. But who's winning the war to get more out of technology?
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Who Wins on the Flexibility Front?
Erik Brynjolfsson, an MIT Sloan School of Management professor who has been analyzing the relationship between information technology and productivity, reasons that if smaller companies have an edge in profiting from technology, then large companies would find that as they reduce their size they would get more out of technology and thrive. The result, he predicts, would be a Darwinian shrinkage in average company size.
Well, that's exactly what's happening. Brynjolfsson's research found a strong correlation between the growth in the 1980s in the U.S. manufacturing sector's information-technology investment and a decrease of 20% in the average number of employees in industrial companies. One of the reasons, says Brynjolfsson, is that smaller manufacturing companies are in a better position to use technology to turn out products in smaller, faster, more customized runs, an edge that is increasingly proving decisive. Large Fortune 1,000 companies shrink to get the same benefits from technology as their smaller competitors.
Economist Stephen Roach, at New York investment bank Morgan Stanley Co., has taken a similar look at service companies. He notes that a near $1- trillion investment in information technology by U.S. service industries in the 1980s failed to increase productivity. It wasn't until the 1990s, when large service companies began to shed employees, that productivity gains turned up. Presumably the reason is that smaller companies can better put technology to use by offering more flexible services more efficiently. The figures again suggest that the smaller the company, the larger the payoff.
It's not hard to see why. Consider the movie industry, where a small production company like Pixar Animation Studios relies on small bands of programmers armed with computer-animation tools rather than on the legions of actors, crews, and conventional animators that a large studio would have unleashed -- and ends up producing last year's runaway hit Toy Story. If computer animation becomes the standard means of producing movies, most studios are going to get smaller. Perhaps, then, downsizing isn't so much about the replacement of workers by automation as it is about companies driving toward the smaller scales at which automation works best.
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Whose Culture Embraces Technology?
That smaller companies seem to be getting more out of technology than larger companies probably reflects, at least in part, a difference in attitude between small and large companies. Small companies tend to apply technology to augment their existing capabilities -- to raise speed and quality on the factory floor, for example, or to get a better handle on who their customers are. But large companies seem obsessed with increasing the efficiency of existing performance -- to provide the same services with fewer employees, for example, or to cut out layers of managers without impairing decision making. In the end big companies may reduce their costs, but they don't turn out better products or service. We see large retailers install inventory-management systems that improve inventory turns and eliminate stocking clerks, without worrying about who's going to answer customers' questions. And we see large car-rental agencies rely on bus-based computers to allow them to shorten the time they need to keep a car on hand waiting for a customer -- as they also eliminate the employees who check customers in -- without considering the fact that customers finance those efficiencies by cooling their heels curbside in a bus.
