First published in the Sunday Times on 12th April 2015.
At its best, capitalism is all about competition and consumer choice. This leads to innovation, improved value and quality, which are all noble ambitions. This is in contrast to the state, which is a matter of compulsory taxation and monopoly provision.
Big business lies somewhere between these two. Unfortunately, companies have a tendency to merge until they become, in effect, cartels, which always operate against the public interest. Thus I believe the endless consolidation of industries should reverse.
Huge companies can suffer from many diseases. Typically they are too big to manage. Frequently even the full-time executives, let alone the boards, have no idea what is actually happening. Look at the near-death in 2008 of the insurer AIG and Royal Bank of Scotland. Both enormous institutions had to be bailed out by unprecedented injections of taxpayer money — because incompetent leaders did not understand the businesses they were paid millions to run.
Small companies are nimble and can take risks that large ones cannot. This is partly because large organisations fear the reputational damage that might arise from any form of failure — so they become risk averse. Moreover, large companies mostly focus on big market segments, thus missing interesting growth opportunities. They talk about innovation but almost all of them do it badly. So they compensate by making acquisitions. Giant drug makers are paying insane prices for biotech firms because they appear to have lost the ingenuity and confidence to discover new drugs themselves.
In sectors such as financial services, logistics or even packaged consumer goods, large companies are under assault from start-ups of every description. Procter & Gamble, for example, is seeing dozens of venture-capital-backed, niche players attacking its brands. Barriers to entry are lower than ever: capital is plentiful, technology enables newcomers to undercut incumbents, and subcontractors are happy to service start-ups. Many will go bust, but fading customer loyalty and transparency of pricing means juicy profit margins will surely fade for the corporate establishment.
One of my objections to so many large companies is that they lack any real purpose, save carrying on for their own sake. In a word, they are soulless. Many large firms are conglomerates in all but name — lacking focus, accidents of history. The original drive has dissipated; their subsequent leaders are adequate administrators but incapable of initiating anything.
By contrast, new business has dynamism and vigour, thanks to the invention and energy of the founders. Meanwhile, big, old companies have to pay consultancies to come up with bogus “mission statements” so they can pretend that what they stand for has meaning. Too many staff in such corporations possess little passion for the project at hand: they are so remote from the overall undertaking that attachments are weak at best.
Surveys show that young talented people want to work for themselves or smaller companies, not multinationals. Big firms are by nature sclerotic, and beset by bureaucracy and office politics. They have assets, history, systems and so forth, but many are decaying, unable to adapt swiftly to technology and changing tastes. Start-ups are seen as exciting, less hierarch–ical, more in keeping with the times. After all, it is always better to be creating jobs than destroying them. Even Microsoft, once truly enterprising and still vastly profitable, is sacking 14% of its staff. Where is the pride and glory in that?
Economies of scale are a myth in many industries, especially newer sectors such as technology and services. In mining, car making and utilities, size is essential. But fragmenting markets, ever more diverse tastes and a growing desire for authenticity threaten the dominance of old brands. From Coca-Cola to McDonald’s to Budweiser, more sceptical and diverse consumers are turning away from the bland names. Retailers of every type are introducing own-label brands, even in premium categories.
Almost all politicians support entrepreneurs; most are more equivocal about big business. The public is even more sceptical, given the way so many big companies pay so little corporation tax, and the manner in which they bully suppliers and cosy up to government.
There is a belief that companies need to be huge to trade globally, and that there are efficiencies and advantages from real scale when trading internationally. In the modern era these are exaggerated. Indeed, small companies can be flexible when dealing with multiple territories, by adapting appropriately. Large firms must play safe, and remain uniform — witness how global brands are identical everywhere. Who wants such a dull world? Bring on the craft beers, the artisan foods, the challenger banks, the quirky upstarts. And bring on the disposals, demergers, unbundlings and break-up of monolithic corporations.