Has big business lost the entrepreneurial touch?

Has big business lost the entrepreneurial touch?

HAS BIG BUSINESS LOST THE ENTREPRENEURIAL TOUCH? Advantages of size offset by inflexibility DEAN S. AMMER Mr. Ammer is director of the Bureau of Bus...

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HAS BIG BUSINESS LOST THE ENTREPRENEURIAL TOUCH? Advantages of size offset by inflexibility

DEAN S. AMMER

Mr. Ammer is director of the Bureau of Business and Economic Research, Northeastern University. His research cited in this article was supported in part by a grant from the General Electric Foundation, but the opinions and conclusions are entirely the writer's own.

The evidence is increasing that the profitability of big firms is beginning to lag behind smaller ones. The author believes that the advantages o f big business are no longer sufficient to offset its inflexibility. The bigger firm maintains controls that permit it to operate efficiently but inhibit innovation, and maintains an autocratic image that discourages young, adventurous talent. Businesses have attempted to deal with the problem through decentralization and adoption of the conglomerate style of management. A new solution-the Big Business Small Investment Company-seems to permit a big corporation to preserve the advantages of bigness and reacquire the creativity o f small business.

Over the years, the giant manufacturing corporation has been consistently more profitable than its smaller competitor. The margin of superiority has been greatest in Copyright, 1970, by Dean S. Ammer

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periods of recession and least in booms. For example, in 1966, the billion dollar manufacturer enjoyed a 14.3 percent return on stockholder equity against 13.0 percent for all manufacturers. 1 Consistent with past performance, the big business margin of superiority had eroded as the economy moved from recession to overheated boom. In 1961, it amounted to roughly 30 percent; the billion dollar corporation earned about 13 percent return while the average was only about 10 percent. This disparity in profitability has been known to economists for years and has been attributed to economies of scale and monopoly power. Berle and Means were among the first to suggest that our economy was increasingly dominated by giant corporations. Galbraith, probably the best known among contemporary critics of big business, cites current evidence that the 500 biggest manufacturers account for about two-thirds of the assets employed in manufacturing, and declares that " . . . big corporations do not

1. Estimates of profitability are drawn from appropriate issues of the Quarterly Financial Report for Manufacturing Corporations, Federal Trade Commission-Securities and Exchange Commission.

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lose m o n e y , " even when they are badly managed or when market conditions are not favorable? The idea that big business cannot fail to make m o n e y while small business has problems was incorporated into national policy before Galbraith wrote about it. Big defense contractors h.ave long been pressured by the Pentagon to give small firms preference on subcontracts. In addition, the federal government has supported small business with indirect subsidies as well as direct help through the Small Business Administration. Profit maximization has traditionally been accepted as a primary goal of both large and small business. Businessmen have sometimes had mixed feelings about the government role in aiding small business, but they have never really challenged the long-standing supremacy of profit maximization as a business goal. The goal of long-term profit maximization was most articulately expressed sixteen years ago by D r u c k e r J He pointed out that profits are essential to the corporation's primary objective of survival and that businessmen should look with suspicion at decisions that are not consistent with either short- or longterm profit objectives. For example, a decision to hire the marginally employable from urban ghettos can be defended in terms of profit over the longer term even if the immediate effect is adverse. Hardly anyone today would seriously challenge Drucker's hypothesis. A possible exception is Galbraith, who believes big business is run by a "technostructure" that is interested in stability and avoidance of risk taking at least as much as it is interested in profit. If profit still is a paramount objective, there is increasing evidence that big firms are beginning to lag behind smaller ones. It began to show superficially in the 1967-69 stock 2.

A. A. Berle and Gardiner C. Means, The Modem and Private Property (New York: The Macmillan Company, 1932); John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin Company, 1967). 3. Peter Drucker, Practice of Management (New York: Harper & Row, Publishers, 1954). Corporations

market boom. This b o o m was different; it was limited almost entirely to stocks in lesser companies. The great blue-chip firms that make up the Dow Jones industrial average never succeeded in breaking through to new highs. The stock market's relatively cool regard for big business is justified by trends in profitability. Giant business seems to have lost its long-touted advantages of e c o n o m y of scale and monopoly power. Billion dollar companies are presently earning a return on stockholder equity that is slightly less than average, although their profits continue to be more stable in periods of recession. However, the differences among size classes are so small that relative position changes frequently. In fact, size no longer seems to be a d e t e r m i n a n t o f profitability. Current data indicate that manufacturers, in general, earn a return of roughly 12 percent on stockholder equity, irrespective of size. Companies with $1 million to $5 million in assets may be a legitimate exception to this generalization; in three of the five most recent quarters, their return was markedly higher than average. Such an exception tends to support some of the conclusions reached in this article. American business folklore has always told us that a well-managed smaller firm can run circles around its muscle-bound big business competitors. But until recently the facts for the average firm simply were not consistent with the folklore. The huge firm might not have e c o n o m y of scale or monopoly power, but it almost always was managed much more rationally. Big business tends to be run by professional managers; many smaller firms are still guided largely b y entrepreneurial intuition. This, plus easier access to lower-cost financing, should be enough to give the big firm relatively higher profits. However, I believe that in our current economic environment big business' advantages are no longer sufficient to offset its inflexibility. I offer its declining relative profitability as partial proof of this

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Has Big Business Lost Entrepreneurial Touch?

hypothesis. Several giant firms implicitly accept the hypothesis, and are beginning to reshape their basic management structure to give themselves more flexibility. Others are approaching the problem through diversified acquisitions that should force the big corporation to behave more like its individual parts.

TWO M A J O R PROBLEMS There is at least tacit acceptance that business management is able to carry out existing projects quite efficiently b u t is essentially unable to innovate. Thus, the bigger firm has two real problems, one that is fundamentally internal and the other external. Internally, the management controls that permit it to operate efficiently inhibit innovation and, externally, the firm's image of an autocracy discourages the most adventurous future executives.

Inhibited Innovation Controls are not all bad, and should not always be deplored b y top management of big companies. Most top business executives, for example, would prefer to have middle and first-line managers who adhere rather strictly to c o m p a n y policies and procedures. They would like their managers to be resourceful but, in general, would discourage genuine originality. After all, an efficient business gets that way b y training its managers to react to operating problems in a rather uniform way. The critics are wrong to condemn all business management as essentially uncreative. But the charge is reasonably fair when applied to lower mid-management in large firms. To be effective, the middle manager must be able to meld his ideas with those of his colleagues. The emphasis is on teamwork, not on individual creativity. Rarely does a middle manager have a bright idea and impose it on subordinates and persuade his peers to adopt it. Instead, the

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original idea is discussed thoroughly. Everyone has a chance to contribute to it and what emerges is usually a consensus. The middle management business executive is not a conformist mouse, however. He has opinions, and in well-managed firms expresses them freely even when they are n o t accepted b y the boss. And an articulate manager will influence the consensus, but, in any case, he is b o u n d b y it even if he does not agree with it. Middle managers sometimes b e c o m e t o p managers, and their decision making is colored b y their past experience. In the end, they will provide leadership if they are effective. In most cases, the chief executive gives a yes or no on critical decisions. He listens to his subordinates and is influenced b y them, b u t the final decision is really his own. In the final analysis, business is not a democratic process. There is, of course, r o o m for considerable creativity at the top of the business enterprise. Somewhat surprisingly, it often comes from men who have spent their careers at the noninnovative tasks of middle management. In general, however, the successful top executive of a large corporation need n o t be imaginative. J u d g m e n t is a more appropriate skill. The successful corporation does not have to be brilliantly innovative to prosper. Its success rests mostly on adaptation rather than innovation. GM need not be smart enough to create cars that will also fly; all it needs do is to continue to produce efficiently its line of conventional products. Big business is incredibly good at producing products it has developed. It stumbles and falters only when it is called u p o n to do something that falls outside the scope of rational decision making. The automobile was an innovation when introduced on a mass scale b y the daring Henry Ford. A more rational Ford management fifty years later talk~exd itself into an Edsel, and, later, a Falcon, a Mustang, a Maverick and a Pinto-successful products no more innovative than the Edsel. But such a management would never be so irresponsible as old Mr. Ford who,

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in effect, committed his future to a product for which there was no tested market. Significantly, remarkably few of the obvious innovations of the past two decades have come from the largest corporations. The five biggest (on the Fortune 500 list) have prospered essentially by refining existing products. General Motors, Ford, and Chrysler have concentrated on autos; Standard Oil remains largely in the oil business; and General Electric has been a genuine innovator in nuclear power, jet engines, and, possibly, computers. Significantly, the big firms that have been reasonably creative and profited from the process have not usually been identified with anonymous professional managers. McDonnell is a bona fide pioneer entrepreneur in the aircraft industry, not a professiona! manager. IBM and RCA have passed from father to son. The Watsons and Sarnoffs do not control these firms, but their identification is almost as strong as that of Ford with Ford. Quasi-family firms like IBM and RCA have been able, under their strong-willed and individualistic chief executives, to do the irrational (and not always to the direct benefit of their shareholders). No rational professional manager would prohibit time studies as Watson did at IBM, nor would he choose to force his top executives to punch time clocks or to prohibit alcoholic beverages at press conferences. Similarly, a rational professional manager would probably not spend huge sums subsidizing opera for a public that preferred baseball as RCA did in the 1950's under General Sarnoff. Most of the genuine innovations of the past twenty years have either, been artificially nurtured by billions of dollars of government m o n e y or have come from what began at least as small entrepreneurial oriented firms. The photographic industry is an excellent example of this phenomenon. It is dominated by Eastman Kodak, a well-managed and highly profitable firm. Yet Eastman did not innovate the two most revolutionary products in its

field: copying machines and instant photography. Xerox and Polaroid began with limited resources but were somehow able to do what huge Kodak could not do. In addition, the big firm does not necessarily k n o w how to exploit a product. A classic case is the history of the transistor, developed in 1948 b y AT&T's Bell Laboratories. Western Electric, AT&T's manufacturing affiliate, successfully applied the transistor to telephone circuits and various military electronic devices, but almost completely ignored other applications. It t o o k smaller entrepreneurial oriented firms like Texas Instruments to see the broad future of the transistor and its technological byproducts. The life cycle of big business often begins with a period of rapid growth under an entrepreneurial oriented management, but is all too often followed by a period of stability and decline. With benefit of hindsight, it is easy to identify the cause of decline. In almost every case, management did not have the foresight or ability to find substitutes for products for which demand was stagnant or declining. The now defunct American Woolen Company (once the nation's biggest textile producer) might have prospered if it had been as flexible as Burlington Mills in adjusting to changes in demand. U.S. Steel (once the nation's largest industrial) gradually lost market position as its competitors provided most of the capacity for steel used in autos and appliances. Similarly, Allied Chemical lost its industry leadership because it was slow to follow DuPont, Dow, and others into synthetic textile fibers, plastics, and so on. Businesses that have lost position are usually associated with less-than-nimble managements. There is really no way to prove this, of course, but I am not the first to believe that big businesses with highly bureaucratic, centralized organizations are especially vulnerable to product obsolescence. The decision-making process is tortuous in such companies. Promotion is almost entirely

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Has Big Business Lost Entrepreneurial Touch?

from within the organization and reflects both merit and seniority. Rarely are any genuine decisions made b y anyone who has not been with the organization at least twenty years. By that time, the decision maker has become a homogeneous and predictable executive who is unlikely to veer from precedent.

Young Talent and Business Autocracy Much has been written about the alleged antibusiness bias of the Ivy League students. Decreasing numbers of their graduates go directly into business or enter graduate schools of business. This obviously reflects increasing opportunities in nonbusiness fields as well as any antibusiness feeling. Even more significant, top business graduates themselves, while hardly antibusiness, prefer jobs on the business periphery. While part of the antibusiness feeling is undoubtedly caused b y the student's dislike of the conformity he feels business requires, it should also be noted that the medical schools are also getting a smaller share of the top students even though they offer opportunities for would-be individualists to become self-employed. To the idealistic student, of course, business and medicine may represent money-grubbing activities, since both pay quite well. A study by MBA Enterprises showed that newly graduated MBA's from ten of the best known business schools were most likely to accept jobs in management consulting, banking, investment banking, accounting, and computer services. In contrast, businesses with a highly institutional image, such as railroads, find it almost impossible to attract the top business graduates. 4 Apparently, the feeling is fairly widespread, even among business graduates, that the environment in a big manufacturing firm 4. "Price Tag on MBA's Gets Higher," Business Week (Oct. 11, 1969), p. 13.

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will not encourage creativity. The MBA Enterprises study reports that one Harvard MBA commented: "I found the sameness of the self-styled 'fellows' at the companies I visited-a sameness that crossed industry lines-so depressing I resolved to seek some other way of life." Today's graduate is not much different from his father in wanting to think f o r himself and to get real responsibility as rapidly as possible. A tight job market puts him in a position to be more demanding and get away with it. Big manufacturers know they need a continuing flow of new graduates if their management ranks are not to become depleted, but they do not want to give responsibility to a young man whose judgment has never been tested. Thus, every big company is faced with the problem of inventing challenging jobs that will keep its bright young men occupied, happy, and out of trouble. Several top executives I interviewed agreed that the first to feel stifled in the big company environment are those recent graduates the company would most like to keep. The man with the potential to become an imaginative leader in his forties is almost certain to become rapidly bored with the make-work tasks assigned in his mid-twenties. Twenty years ago, such men simply stuck it out; they did not have much choice. Now job opportunities on the fringe of business have expanded more rapidly than those in business, and it is much easier to move around when one gets bored. The fundamental need for discipline and order has been noted as a major weakness in the big company's research and development. The relatively free and uninhibited environment of the university has often been compared with stifling, profit-oriented industrial research. Implicit in this criticism is the suggestion that a company cannot hope to grow unless it gives its scientists reasonably free rein. While business executives may have paid

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lip service to the idea of freedom for researchers, they wisely have not applied it to their labs. Practically, they can never hope to compete with the universities in offering opportunities for a scientist to pursue whatever happens to interest him. One reason for this is the university's' freedom of contract. The university-based scientist can sell his part-time consulting services to the highest bidder. He not only enjoys freedom b u t enjoys a higher income than his industrial counterpart. The industrial lab, in general, continues to focus on developments that will make money. If it is not a source of creativity in the economic sense, it may be the result of too much rather than too little freedom. Over the short term, the supply of scientists is relatively constant. Billions of government money showered on scientific research produces not only more pay b u t often less work and greater freedom to pick and choose among assignments. Thus it becomes increasingly difficult for the large private firm to keep its scientists working efficiently toward economically oriented research goals. Recent cutbacks in government-sponsored research, however, may force some scientists, b y economic necessity, to focus their efforts on grubbier, everyday problems. While the management of the research laboratory is more democratic than the rest of big business, it is usually autocratic compared to the university. Thus, the most creative scientists, like the top business graduates, are increasingly attracted to e m p l o y m e n t in nonmanufacturing-and, to an increasing degree, nonprofit-enterprises. When they do pop up in business, it is later in their careers. With a guaranteed university income, a creative scientist can turn entrepreneur with minimum risk. Advocates of democratic management say big business must loosen its controls if it is to attract and hold the more creative person. In practice, all business is more autocratic than democratic for good reason: it works. In a

democracy, all votes are equal. In business, the boss' vote is worth many times more than the votes of his subordinates. The most successful businesses may be run a little more autocratically than the less successful ones, and the fast-growing, smallish companies may be among the most autocratic of all. In a huge, bureaucratic enterprise, it may be possible to resist almost indefinitely an order from the top. For example, I was once employed in a very large corporation and received through channels an order from a vice-president five organizational levels above me. Along with m y chief and his superior, I thought this order was rather silly and, along with others, simply procrastinated. The order was finally carried out (inefficiently) only when an angry vice-president repeated it a third time. This would never happen in a tightly run small organization. The chain of command is shorter, and it is easier for a strong man at the top to impose his will. In general, the most successful corporations are run b y autocratic strong men, and the best of them are also willingly followed. Enthusiastic acceptance of orders is successful autocracy. It is not democracy. Thus, the big corporation would be welladvised not to take seriously critics w h o accuse it of not being democratic. Ideally, monolithic uniformity should be preserved in parts of the business where it is suitable b u t shaken out of the other parts. In general, those phases of the business that involve products with stable, established demand are relatively well-suited to a homogeneous style of management, while those that are new require a more flexible approach.

PAST SOLUTIONS Many well-managed big firms are conscious of the need for managements that are highly flexible in responding to new challenges and, at the same time, able to administer activities

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Has Big Business Lost Entrepreneurial Touch?

that will not change too much. They have also long been aware of the problem of the long chain of c o m m a n d that is a natural product of bigness.

Decentralization The approved solution for at least the last quarter-century has been decentralization. In theory, each division enjoys the flexibility of the small or medium-sized firm without giving up the financing and technical expertise of the giant corporation. But, more often than not, the manager of a decentralized division is different from the entrepreneur he is supposed to imitate. The president of a smaller independent firm is, in most part, his own boss. In contrast, the manager of a decentralized division almost always gets "help" from a headquarters staff. In some cases, the staff theoretically intervenes only when it is asked to; in o t h e r s - a l m o s t always in capital budgets and often in labor relations and other p r o b l e m s - t h e real decision making is at corporate level. Hard-and-fast guidelines may n o t exist, nor are they needed. The division manager has been with the c o m p a n y so long and knows his w a y around so well that he can intuitively sense which decisions he should clear in advance. The division staff also senses when it should go ahead and give advice on its own, and when it should consult with the corporate staff. For example, a divisional purchasing manager might want to clear a key decision with his boss, the division manager, and also discuss it with someone on the corporate staff. Even though he works directly for the division manager, the divisional purchasing manager also wants to keep his fences mended with the corporate s t a f f - i n the interests of his personal future if for no other reason. While decentralized big business may be as efficient as its typical small rivals, it is often much less responsive to change. Until the 1960's this did not seem to make much

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difference, either to the professional managers or to the stockholders. Management was considered more than adequate if it did a good j o b in the businesses in which the company traditionally belonged. For example, Dow Chemical was a stock market favorite of the late 1950's, with a price/earnings ratio of about 30, not because it was breaking into new industries b u t because it was doing a brilliant j o b in the chemical business. Investors n o w no longer prize conventional management skills quite so highly. Although D o w more than doubled its per share earnings b e t w e e n 1961 and 1968, its p/e ratio declined from 35 to 18. The investor increasingly is concerned with where the c o m p a n y can go. The bigger the c o m p a n y and the more basic its position, the greater its difficulty in growing more rapidly than the economy. To cite one extreme example, IBM has succeeded in boosting its revenue to $8 billion in the last decade, growing more than four times as fast as national income. This rate can conceivably continue in the 1970's, but, if it were to continue, sales would reach $200 billion per year b y 1990. And b y 2000, IBM might be bigger than the United States of 1970. Obviously, it will b e c o m e increasingly difficult for IBM to maintain the growth rate of the sixties. A smaller company has much more room to grow. Thus, b o t h for the investor and the young graduate, the ideal c o m p a n y is one that is well-managed and big enough to be well-financed b u t not so huge and so basic to the e c o n o m y that it cannot grow rapidly.

The Conglomerate Were it not for the Justice Department, the conglomerate style of management might be a potential solution. A c o m p a n y like General Motors, for example, would assume a more dynamic image if, in addition to its

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paramount position in automobiles, it also forged ahead with acquisitions in electronics, supermarkets, and a few dozen other industries. A few big long-established firms like ITT and RCA have expanded in the conglomerate style that was so fashionable until recently. In general, however, the big business executive, unlike the conglomerator, is operations oriented. He not only understands operating problems but has an outstanding record in this area. Even though GM could be called a pioneer in decentralization, the press reports that top GM executives personally make such detailed decisions as selection of the contours of a car's windshield may not be exaggerated. And it is possibly also true that they are the best qualified men in the organization to make such decisions. The manager of a conglomerate would be under no such illusions, and thus individual divisions could behave more like independent companies. While the conglomerate provides more of a go-go image and may be more nimble in its internal management, its capital rationing decisions still suffer from at least part of the structural weakness that afflicts the big corporation. Capital budgeting is, in practice, a partly political process masquerading under a pseudoscientific facade that fools almost all academicians and many practitioners. Discounted cash-flow tables, decision trees, and probability theory seem to give it the mathematical precision of a planned landing on the moon. But in most big companies, it can also be fairly compared to the operation of a big city political machine. In both big business and politics, those who work hard for the c o m m o n good are rewarded with plums. In business, the division manager who earns a high return on capital can expect a generous share of the capital budget, while another manager with a low ROI may get short shrift. Some controllers I interviewed in the course of an extensive research study described this pattern without apology or qualification. Others hedged, but finally agreed that the manager who is a

proven winner can usually get what he wants. In a loosely controlled conglomerate, the probability that the rich will get richer in the capital budgeting process is probably even higher than in the conventional corporation. A manager of a division who brings in 10 percent of the profits can make, if he chooses, an extremely strong case for 10 percent of the capital. And a management that depends on its division managers for all of its operating decisions would hesitate to challenge him. This part-political, part-economic process of capital budgeting is so widespread it must work. But it is probably an additional barrier to innovation. It almost certainly tends to award a disproportionate share of total resources to projects and to managers whose past records have been good. But capital goods are used for future production. Ideally, the capital budget should be directed toward projects with a future rather than a past. In a big corporation, too much m o n e y may be spent on a profitable product that has reached maturity in its life cycle and not enough on a young product that is struggling along in its adolescent phase. We have already suggested that the would-be innovator does not fit into the typical big business bureaucracy with its long lines of communication and autocratic style. If he overcomes these hurdles, he may then become frustrated by a capital budgeting process that tends to reward proven winners and discriminates (usually quite rightly) against the high-risk type of venture. Unfortunately, there is still another hurdle to overcome for the would-be entrepreneur in big business who works for a salary: money.

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Has Big Business Lost Entrepreneurial Touch?

An entrepreneur who does a rather bad j o b of managing his o w n c o m p a n y with a few hundred employees is often comparatively overrewarded. An extreme example of this p h e n o m e n o n was the president of a small foundry I visited in Michigan in 1964. The depreciated value of the foundry was a mere $50,000 (mostly because the owner had spent almost nothing on new equipment in the last thirty years), and the president's executive duties permitted him to work half-time as a molder on the foundry floor. Nevertheless, his annual income was roughly equal to that of the president of AT&T. American business folklore portrays the would-be entrepreneur as a fellow w h o starves in a garret until he is finally able to parlay his meager saving into the fortune he so richly deserves. If this were still true, it would be much easier for big business to get in on the action. It could offer the entrepreneur a $25,000 per year j o b during the stage of struggle and then raise him to $100,000 when his ideas began to bring in big profits. In the new economy, however, life is rarely that spartan for a talented entrepreneur, even at the more trying stages of his career. Wealthy investors are not only eager to get in on the ground floor of a Xerox or a Polaroid, b u t they have also discovered that the nontechnology industries can be equally lucrative if the right entrepreneur can be found. Thus, there is ready capital available even t o d a y for anyone with a new twist on running a drive-in restaurant, an ice cream parlor, a motel, or a supermarket. It is safe to predict that not only would big business fail to attract the nontechnology entrepreneurs who succeed in such enterprises, b u t would reject them as applicants for even lower level management positions.

NEW SOLUTION: THE BBSIC Fortunately, while big business may not stimulate the imagination, it is pragmatic and adaptable to almost any social, legal, and

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economic environment. Several billion-dollarplus companies have embarked on programs that promise to create an environment for mutually profitable coexistence with would-be entrepreneurs. The basic idea did not come from the big business community; the source was, most inappropriately, Congress and the federal government. The Small Business Administration and the small investment companies that it has spawned were created b y Congress primarily to prevent small business from being swallowed up and overwhelmed b y big business. Small business is now doing very well, thanks in small part to government efforts. But the small business investment companies, originally invented to help struggling y o u n g firms get the capital they need, have apparently not fully achieved the expectations held for them. Those that are publicly owned have, in general, yielded handsome profits for their original investors. But the idea is not such a good one that new SBIC's have been created on a basis independent of public support. However, individual entrepreneurs have been able to tap limited numbers of wealthy investors to set up what are SBIC's except in name and in their freedom from the SBA. The entrepreneur's interests ~re entirely financial. The investors who back him expect that he will be able to invest their funds in high-risk smaller businesses much like an SBIC. The corporations being created may wind up controlling or even absorbing their successful portfolio investments. But their financeoriented chief executives will never really make operating decisions. The men in charge of the businesses will continue to run as partners with the investment c o m p a n y on w h o m they rely for capital. And, of course, unlike the salaried executive in the billion dollar corporation, the most successful of them can easily b e c o m e multimillionaires. Several billion-dollar-plus corporations are trying the same formula, setting up wholly owned subsidiaries that are, in effect, small business investment companies. The idea

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again is to search for small businesses that n e e d capital. T h e r e is one difference: these giant firms are consciously searching for n e w industries to enter. T h e y are n o t i n t e r e s t e d in b u y i n g up p o t e n t i a l c o m p e t i t o r s b u t w a n t c o m p a n i e s t h a t will serve as springboards to entire n e w industries. T h e e n t r e p r e n e u r w h o runs the small firm will get capital he needs to e x p a n d b u t will r u n the business m u c h as if it were entirely his own. T h e r e will be n o direct association with the p a r e n t e x c e p t as an i n t e r e s t e d s t o c k h o l d e r . T h e fledgling firm will n o t be subject t o c o r p o r a t e policies; it will be free to hire and fire w i t h o u t the n e e d to w o r r y a b o u t the c o r p o r a t i o n ' s labor contracts. Only w h e n the small c o r p o r a t i o n grows to a m o r e m a t u r e stage will it b e d r a w n into the c o n v e n t i o n a l big business structure. At this p o i n t , the e n t r e p r e n e u r w h o f o u n d e d it w o u l d p r e s u m a b l y be m o r e t h a n willing to sell his e q u i t y and, if he is still y o u n g enough, to create some n e w enterprise.

The Big Business Small I n v e s t m e n t C o m p a n y is tangible r e c o g n i t i o n t h a t the skills n e e d e d to f o u n d a new business are quite d i f f e r e n t f r o m those n e e d e d to o p e r a t e a big enterprise successfully. E n t r e p r e n e u r i a l skill and o p e r a t i n g skill can coexist u n d e r the same c o r p o r a t e u m b r e l l a o n l y in a s t r u c t u r e where o n e has almost n o influence or c o n t r o l over the other. T h e BBSIC has n o t existed long e n o u g h (the first one is a p p a r e n t l y less than t w o years old) for a n y o n e to measure h o w successfully it bridges the gap b e t w e e n innovation and bureaucracy. But the a p p r o a c h is the first t h a t seems to p e r m i t a big c o r p o r a t i o n to preserve the advantages o f bigness and to reacquire the creativity o f small business. Ironically, the t w o billiondollar c o m p a n i e s t h a t are already doing so are a m o n g those that suffer the least f r o m the curses o f bigness; h o p e f u l l y , their a p p r o a c h will find imitators a m o n g the least innovative big firms t h a t n e e d it m u c h m o r e t h a n t h e y .

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Entrepreneurship, at least in all nonauthoritarian societies, constitutes a bridge between society as a whole, especially the noneconomic aspects of that society, and the profit-oriented institutions established to take advantage of its economic endowments and to satisfy, as best they can, its economic desires. What talent will be attracted into entrepreneurial activity, how well this talent will perform its function, and, to a considerable extent in modern societies, e~)en how the national product will be shared-all of these questions are determined by the combination of social and technical forces, most of them changing with more or less rapidity, and all having initial impingement upon, or receiving impetus from, the entrepreneurial actors. Nothing that I have learned since 1946 has led me to alter the view which I expressed then: namely, that to study the entrepreneur is to study the central figure in modern economic development, and, to my way of thinking, the central figure in economics. --Arthur H. Cole, Business Enterprise in Its Social Setting

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