Are US Companies Disappearing?

In The Vanishing American Corporation: Navigating the Hazards of a New Economy, Gerald F. Davis says that forms of business organization we take for granted are rapidly disappearing and will not return.

A professor in the University of Michigan’s business school, Davis believes that this change requires a new way of thinking about corporations and new ways of meeting the challenges they face. A concept he calls “the responsibility paradox” represents only one such challenge, but it’s a big one.

You seem to suggest that the corporation we are used to was valuable in its day but has outlived its usefulness.
Let’s put it this way. Factories, where mass production was performed in one place, were a logical response to industrialism. This model was appropriate for enterprises that needed to concentrate capital and have lots of employees in one place. It was true even of companies like Sears that were retailers.

But it isn’t logical today?
A lot has changed, and the change has accelerated since the 1980s when one in three Fortune 500 companies was bought and split up. Under pressure from Wall Street, conglomerates like Beatrice Foods and Gulf and Western were busted up. Companies were made to question whether it made sense for them to be in so many different lines of business. Conglomerates were no longer efficient.

And layoffs followed?
Yes. This was the hollowing-out that took place, with the arrival of external vendors — a hollowing-out that has speeded up since the rise of the web. It’s easier now to find outside contractors to do a lot of the work that used to be done in-house. This started with firms like ADP doing payroll, but has led to outsourcing the actual production of the product. This led to what I call “Nikeization.”

What’s that?
Nike is such a great example of a company that handles the branding and the design but contracts out the actual production of its shoes. The value of the company is in its intangibles, its intellectual property. The trend is to shed the tangibles, to outsource that work. You don’t need to have your own factory now. You can find outside companies that can do it cheaper than you can, which is why Apple and HP don’t actually make their computers; someone else does. On the other side, because you don’t have to build your own factories, the barriers to entry into almost any line of business have collapsed. That’s why an upstart like Vizio can enter the TV business and challenge Sony. These new entrants can even use the same vendors that the established companies do, but they can scale up and scale down more quickly, giving them a competitive advantage.

This Nikeization is the future?
Yes. We’re not going back to the business organizations of the 1940s and 1950s. Even as recently as 1980, the biggest employers in the U.S. were GM, GE, Ford, Exxon, U.S. Steel and Sears. But today, the biggest employers are retailers like Sears, except they aren’t providing the kind of career ladders that the organizations of the 1940s and 1950s did. Walmart has as many employees as the 20 largest manufacturers combined, but a lot of those employees are part-timers.

Sometimes you hear politicians and pundits calling for a return to “strong labor unions.” They say unions were responsible for creating a healthy and stable middle class, where dad could work at the plant for 40 years, mom could stay home and they could still afford to send their kids to college. But in the world you are describing, that doesn’t sound realistic.
It’s not realistic. Labor unions (again, as we think of them) were the answer to the problems of the industrial age, when you had tremendously powerful companies that could run roughshod over workers. But that whole way of thinking about the relative power of business organization isn’t applicable to the world of today. Commentators on MSNBC can call for a return to industrial trade unions, but that’s just an example of the political class talking in terms that no longer make much sense.

What’s the “responsibility paradox”?
That’s when companies are being pressed to be more and more socially responsible at precisely the moment when they are least capable of meeting that expectation. Supply chains these days are so disparate that a company can’t possibly be responsible for everything that a supplier does, even when the company is sincere about its desire to do so. A company can’t reasonably be expected to be responsible for the decisions of government leaders where they do business. It’s asking too much, no matter how conscientious the company is. Of course, this touches on some of the challenges facing companies that are concerned about their reputations and being good citizens and all that. And I don’t know how to advise them. I don’t think anyone knows yet.

With that in mind, how do you engage employees as brand ambassadors and grassroots advocates when organizations are changing so rapidly and relying on outside vendors rather than employees?
That’s another important question I don’t have the answer to. It’s important because it gets to how we think about corporations and how they are changing. If you try to name the most powerful companies in America today, you might think of Google, Goldman Sachs and Walmart. But these three companies have almost nothing in common. Google has power, but it doesn’t employ a lot of people. Goldman Sachs has power because it pays its employees a lot of money, and there is a path from Goldman Sachs to being, say, Secretary of the Treasury. Walmart employs huge numbers of people, but they’re not paid the way Goldman Sachs employees are paid — and there is no path from Walmart to the Treasury Department.

And what does that tell us?
It tells us we need to get a more sophisticated understanding of what corporate power means now. And until we do, we’re just guessing.

Reach Davis at [email protected] or 734.647.4737.