Business roundtable; Is American business too big?

The following program is made possible through a grant from the nation's business. This is a business roundtable a program of current comment from leading members of America's business community. Today to Crawford Greenwald chairman of the board DuPont in the Morrison company and Donald F. Turner assistant attorney general Anti-Trust Division U.S. Department of Justice will explore the question is American business too big with series host Alfred L. C. Lee Dean of the Graduate School of Business Administration at Michigan State University. Our topic for discussion today. Is American business. Too big. Has been of concern to the American people for many decades. In 1890 the first federal legislation. The Sherman Act was the forerunner of a series of laws. Designed to curb concentration

size and other alleged abuses of business. It has been said that our public policy. In many respects in this regard. Has been based on a real or imagined fear of big business. Others have stated. That we are now in the grip of an economic and social ideology that leads many to prefer protection of the inefficient business firm to competitive vigor. Mr. Greene long. Is chairman of the board of the largest chemical corporation in the world. What do you think of this. Is American business to big. I think the short answer to that is no it is not too big. But I think we ought to try to define what we really mean by bigness. For example it upon company while it is the largest chemical manufacturer. On a value added basis produces about three tenths of 1 percent of our gross national

product and it is held at that percentage for the last 25 years. So the DuPont company against the American scene is not going to call. Better than absolute sense it is certainly very large. Well most of our antitrust division and Washington are you look at this question. Well I think I would first rephrase the question. As it is American business bigger than it needs to be. And Lance that would be a. Fair number of business firms probably are bigger than the big. Measured by an economic test namely. How big do you need to be to achieve maximum efficiency. Production distribution. Research and development and management. On that basis as I said I think the evidence is pretty clear that fair

number of American business firms are bigger than is necessary to achieve economies of the kind of describe. One studied by one of our top economists of 20 industries. Lead him to the conclusion that in 19 of those 20 industries. The four largest firms were considerably bigger. Than they needed to be measured by the tests that I described. For the sake of the argument we accept that point. Is that necessarily bad or against the public. The reason I rephrase the question let's agree that the question is American business. Carries with it an implication that there's something there ought to be done about it and to me. The to question a purely economic question is are some firms bigger than they need to be. Is a quite different question from the question as to

whether. This produces consequences that you want to do something about. And I don't think this produces consequences that from a matter of public policy we ought to do. Not that being say what I would say is that there are some situations where the business firms are bigger than they need to be but it's quite clear that the market in which they operate. Is workable a competitive therefore there is no point. To endeavoring to do anything about it. But there are other situations in which firms are bigger than they need to be and the industry is highly concentrated. And we have reason to believe that economic performance is less. Than what could be achieved by more competitive structure. And there there is economic reason to do something about it. I think. That still leaves the question as to whether.

Primary concern for me whether the current legal Arsenal available permit us to do anything about it. Beyond that whether we take steps to formulate new policies to expand our capacity to deal with these situations. I think in short. That there are some situations where business things or firms are bigger than they need to be. There's no evident. Reason to do anything about it you couldn't prove it. There are other situations where you could and some of those situations I think you would do well to do something. I think I would take this position. If a company grows in a competitive atmosphere as a result of its own abilities the excellence of its management fruitfulness of its research program seems to be that no matter how big it grows I should be applauded. And I think that in the other case.

If a company as you put it bigger than it needs to be and has let us say fact between is and I think the competitive process will take care of that more or less automatically and its share of its business will decrease if its management is not good enough to keep its growth a healthy one. In other words I fail to see really why absent some illegal act there should be any concern about size of business. Since I think that efficiency of management and the competitive market will act in a sense as a self regulating authority. Two points one should not. Grow by internal means simply being better than other people be a plug if there is no question of it should be. Boring the most extraordinary circumstances. I think it's perfectly clear that we have never endeavored to do anything about a company that grows in this

way and if its growth is entirely a predictable simply putting out a better product. To be more efficient. They're. Completely immune from the anti-trust laws. As I say barring extraordinary circumstances. I can visit a situation in which. A company buying internal growth might vertically integrate into areas on the basis of leverage in the primary market. That might later warn any crust attack but that's pretty unusual. No second. Your suggestion that even if a company has gotten too big and has grown slack and inefficient. You can trust the market to take care of this this may or may not be true. And you're also you also have to ask the question What is the kind dimension within which this may take place I suppose historically no monopoly survive

forever. But that does not mean you aren't paying a rather heavy economic price for a good many years when they have control of the market and the barriers to entry are such that they cannot be a challenge. The short of it is I think we have reason to be concerned about monopoly because very often it carries with the barriers to entry and the market does not correct it until perhaps years later when some new technological innovation destroys the base from its power. TURNER We were really talking about Monopoly we were talking about businesses that were larger than they needed to be. From the point of view of economy of scale of such matters. Now I simply take the position. That however that growth had been achieved this business it is bigger that it need to be. If it is in a competitive area. Then if it loses a sufficiency for some reason or another. It will lose its share of the market.

And under those circumstances there will be the self regulatory phenomena but you know we have rising nations of this well actually happening are some of what you have described is a situation which I endeavored to suggest you wouldn't do anything about I mean you don't have to that is if there are situations in which firms are bigger than they need to be. But they are operating Nevertheless in a market. Which imposes very severe competitive pressures on them so that any tendency to slacken efficiency will cause them to pay the obvious price. Really saying that assuming. A competitive market. The question of size really doesn't matter as a factor that would be for or against the public interest simply because the marketplace itself will provide its own regulation so that we're speaking really only of size attained. Let's say non competitive. And in situations in which the market is not as competitive as it like

you get into problems you are now. Trying to determine whether a market is competitive or not. The existence of one or two other producers. Some people think means you have a competitive market. In some situations this may be substantially true in others it is not. In other words the mere existence of competitive corps does not necessarily mean that a firm particularly say a firm with a very high percentage of market is in fact subject to effective competitive checks. It's a case by case question. Now I would really. Well let me put it this way. Any trust is concerned not with size in any absolute sense. But size in the relative sense that is size in relation to the market which for him operates and it is when. Relative size is great. When the market is highly concentrated when there is monopoly or near

monopoly. Or very tight oligopoly to use an economist's favorite phrase or very few sellers. In market circumstances where they can then behave like a single company controlling. That is what there is where the concern running says. If if the market is competitively structured as I said at the outset the fact that one or two firms are bigger than they need to be is not any cause for concern. I think there's a little question of how good it is to have how many competitors is a very difficult one to answer. Modify guy and I know of some industries in which there are three or four companies. Now I have no reason to think that the competition between them isn't just as keen as if there were 10 or 20 years I think it's very difficult and priori to say. That. 10 competitors are better than 5 and 15 better than 10 and so on is a matter of fact you certainly would get to the point in certain industries where and in addition to the number of competitors would lead to inefficiency. There are a number of products that we make

for example with five or six competitors where if the total sales of that product were divided let's say by 20. The efficiency of scale would be such it would be a real detriment to the customer and so I think one has to be very careful in saying what is the proper competitive mix in any particular so I haven't suggested otherwise I don't mind saying that a defining bigger than a firm needs to be in terms of economies. I suggest you know that this indicates when you ask the question how many competitors or what there can be you cannot answer the question elegantly without having some idea of what economies of scale are. But to be speaking of the nature of the business well it's not solely a little thing I don't quite understand what you mean. Well there are some businesses that.

Well you can have adequate competition with three or four companies. If they're really competing with each other. Irrespective of the economies of scale in my view. So long as they're all above the point where they can manufacture a product under conditions of high efficiency a given that it seems to be how can you say under certain circumstances three is too little in under circumstances 10 is too few. Well again I think one of the problems is that you sort of easily. Swept under the rug as how do you determine whether an industry is in fact adequately competitive. Any supposed to use a specific hypothetical. You have an industry of four firms. And each one of them is about twice as big as it needs to be in the terms that I use in terms of

any visible significance in visible efficiencies or significant economies. I would say it is preferable as a general rule that there be eight rather than four. I would not necessarily say that as a general rule automatically the criteria to do something about it. Very hard question I think for a number of reasons. You would endeavor to assess. And I'm speaking now as if you were sort of all powerful I mean you had the necessary legislative wherewithal to economically restructure if you thought you could. By and large if you felt that the industry was in fact pretty intensively competitive. If there was no evidence of the firms were over the course of time. Earning much higher profits than you would expect given the market conditions.

There seem to be a fairly active rate of innovation I don't think you do anything about it. On the other hand. If you're in doubt on that score. If you had the power or want to do something about it. Let me hasten to say I think you would approach any question of this kind very very carefully. Let's turn their discussion to another facet of this question. Bigness in American business. QUESTION Mr. Greenwald has been raised from time to time. About a really large sized firm as whether this can be managed efficiently or can a canny business firm get to the size where by the very nature of the managerial problems it cannot be as efficient. Well it seems to me that this is the heart of the problem and with all due respect to Mr. Turner is

concerned about. Larger than a company needs to be the question really is one of management. Of course the problem is paramount in any business large or small. But as a business grows it gets bigger and bigger and bigger the management problem becomes more severe. Now this is not to say it becomes impossible. We think in the deposit company for example that we've done a fair job of management over a period of years and have a framework within which we can grow a substantial amount more without getting into a management difficulty. But on the other hand certainly it's a major problem. And a subsidiary problem which I think is an equally great importance. Is how do you mean Taine an atmosphere even or a large corporation where the individual will feel that he has an important and essential part of that effort. In other words how do you set up things so that he doesn't get feel that he's lost in the crowd.

This is a this is a very important question it's one on which we work very hard. That is a question which is you know is being raised on a number of university campuses in his United States today. Should I go to work for a large corporation and get lost in the shuffle so to speak or should I go to work at a much smaller company. Well I might say this is. The rarest thing in the word discount. The thing that you need most is count of the people in the business such as ours or so just anyone. We spend a great deal of time searching it out. And. I think I can say at least from the men I've known that upon company and there are many great many over the years that there is no case that I can really say where a real college is going to reward. Stern when you think about this question of managerial efficiency.

I think Mr. Greenwald has highlighted the problem I think. If there is a popular misconception on the issue of size. The popular misconception. Is that the bigger you get the more efficiently management can be used. I think it's quite clear that this is not so. It may or may not be so that's what you have is in any kind of economic variable you reach. You know you curve the curve rises for awhile then starts to go down. And I have no doubt at all that there are American companies. Which have passed the point of increased efficiency and use of Management and run into what. The economists call control us problems and problems with bureaucracy. And with the result that the overall performance of the company probably declines or is less than it

would be if it were smaller now where that point is reached. Again like in most of these very hard to determine. And. I can think of a couple of examples where I think. Companies without doubt passed the point. Then I won't bother because it's really a question of size or is it a question that maybe they didn't have the right man in the right position or at the right time. I think it's both. I think it's both. I mean you. Obviously the caliber of the people you have as Mr. Greene says is of primary importance. And but my proposition is and I think understand Mr. Greenwald can agree that with any given the bundle of talent. That there is a point beyond which they will be

less well you get put together in a single organization. And if they're in separate organization you know I would not agree with that. I would put it this way. Good management is something that is not necessarily associated with what I mean to say is that I seem from very badly managed small companies. I seen some poorly managed large companies. I've seen so well managed companies and well managed large companies. I don't believe that there is any inherent connection. Between inefficiency in management and the size of the business. In other words this is a trick that can be learned. It's simply a question of organization and how one how one goes about it if one faces the problem and recognizes that size has to be. A.

Accumulated in a way that preserves excellent manhood I think that can be done. Yes but the question we're asking is a somewhat different one and that is whether there is never a point at which you get a downturn and to me the evidences question now. Well let me just use an example I think. Obviously I have studied of I would guess that if you merged General Motors General Electric and U.S. Steel and had precisely the same managerial talent there that you now have. That you would post some very very serious problems of business organization. Well there are ways of dealing with that and as you're quite right that management big companies have worked various techniques to resolve the problem including decentralization behaving as if you were not as big here and you are not I or think they can solve it all together. Almost attorney you people have said for many years that our oil reserves are going to give out and there's no doubt in the world that one fine day they

will. And by the same token I suppose that one could erect a corporate BMR. It would be impossible to manage. All I'm really saying is I don't think that point is yet been reached. Well I again. I hesitate to fall back on authority but one has to win and has personally started. If there are some pretty sophisticated studies and reflections by people who have looked at this matter seriously which indicate that in fact the point has been reached from time to time well there are situations. Yes but whether they've combined operations like they dispersed to diverse or whatever it is are simply a question of putting too much have been the thing we're really dealing with is a sin here at least so. Or is it subject to the deficiencies in the people that are tempted to do it. Now all I'm saying. Is I don't see any inherent reason why a business of

any size that we've encountered so far cannot be well managed if it isn't helping. It seems to me it's a deficiency in the latter question the question is as well managed as if. It were broken into smaller parts now if it were only and if it were true. That management as every source shows. If not continuing economies of scale at least never reaches a point of declining economy scale this would be the only economic resource of which this is true. And this seems highly unlikely to me. Any other resource you have. Any combination of factors of production and there is a point of Mac. Buying large where you reach maximum efficiency and beyond that you decline. People have done that if you build a plant that doesn't honor your clients and rather adding to that plank you go build another decline really or start my level a level for a while.

You can in any produce in a production system you can ordinarily you have you can have the option facilities in terms of increasing size as you would actually you know. That's because they sell they've been wise enough to build a new plans of adding on to the owner. I think the way I would make that point is this. That. The advantages of scale can be plotted as a curve that becomes asymptotic to. Some level of cost. Now you reach 90 percent of it. And rather than increase your facilities at one point to try to get from 90 to 95 you think it's more prudent to build another plant now building that second plant does not decrease the economy of scale it maintains it. If you build a third plant of the fourth plant or the plant all you do is maintain an economy of scale that's associated with a plant of that size.

But it doesn't go down it doesn't go down but the question is whether you could if you could continue to expand your capacity with one plant facility without breaching declining incomes or that's not going to do it that way this is one of Godels that's when you run into a hole. It's not really efficiency of operation it's simply a question of how many eggs you put in one basket. For example there is a simple question of the labor supply in any given area you can find enough people to staff a plant of 3000 you can't find enough people to staff a plant of six or let's say you have a hundred million dollars invested in this plant site and you think of possible catastrophes or strikes or fire or explosion and you simply say it's more prudent for us to. To build a second plant on the other hand if you would guarantee us. An adequate labor supply freedom from labor difficulty. Mill acts of God to destroy the planet then there really would be no reason not to increase the

planet ad nauseum. But we do this simply as a matter of prudence accepting a small decrease in the fish and sea in the interests of. Hedging your bets. Now the point is if you take another company that does the same thing. If we have six plants gentlemen we've reached the end of our time there's certainly been an interesting discussion and bringing out the various issues. With regard to his American business to big. I take it that we've got several areas of agreement between you two gentlemen and we've had some areas of disagreement. Apparently the area of agreement is that. There is an economy of scale up to certain point. A. One of the disagreements apparently has to do with regard to the determiners position. That at a certain point there are just efficiencies and Greenwald would not concur with this

but take it a point. It's an interesting fact that American business has grown continued to grow. And is in relation to the size of the economy that has developed basically in our country today. Participating in today's business roundtable where Crawford h Greenwald chairman of the board Iaido Kwanten amours and company and Donald asked Turner assistant attorney general Anti-Trust Division U.S. Department of Justice host where the program was Alfred L. Seeley dean of the Graduate School of Business Administration at Michigan State University. The topic for next week's Business Roundtable is business careers creative or organization man. Guests on the program. Well the Robert W. Galvin chairman of the board Motorola incorporated and Amory Houghton Jr. chairman of the board of the Corning Glass workplace to.

This program was produced by the Graduate School of Business Administration and the Broadcasting Services of Michigan State University under a grant from nation's business a publication of the Chamber of Commerce of the United States. Business Roundtable is distributed through the facilities of national educational radio. This is any are the national educational radio network.