Tuesday, July 22, 2003

Oligopolies: Inertia versus innovation Peter J. Solomon, one of the leading investment bankers in the US has some experience-based notions about the problems that mergers can run into. Solomon is a former managing director of Lehman Brothers Inc., and now heads his own investment banking company.  He is quoted in an article in Fast Company, as follows: The downside of getting bigger is becoming more bureaucratic. It takes a great management team to prevent this. Many mergers fail because it takes a lot of work to merge cultures successfully. People run out of energy, systems, information, or talent. When you reach a certain size, you can outgrow your ability to be innovative. But at that point you can rely on market force. And force can overcome innovation for a hell of a long time. Solomon makes several points that apply to the new oligopoly. It's a constant struggle for big companies to keep focused and they can be punished severely for biting off more than they can manage. That makes it more imperative than even to form intelligent, coherent oligopolies, rather than ill-assorted conglomerates. But, as Solomon says, the sheer inertia of a business juggernaut can make up for a lot of other faults. The bigger the company, the less fatal the mistakes. Only the most egregious errors can really hurt your competitive position in the two- or three-company oligopoly. True, your position can be slowly undermined and just occasionally a new trend can disrupt the market. But basically, the companies that have managed to get into a tight oligopoly are able to adapt through brute force, either buying off new competitors or setting up subsidiaries to compete with them. Only when the whole market is radically changed, as is happening now in the record industry, do these companies suffer badly. (They can also suffer when there are too many competitors, when a balanced oligopoly has not yet been established, such as in the cell phone industry and there is too much real competition.) Now, the company may not match analyst or stockholder expectations, but even that can be addressed through the crude management expedients of downsizing and dropping unprofitable products. While oligopolies often innovate in baby steps (Vanilla Coke, Mercedes SUV), and sometimes make major innovations (Sony, Apple), most of the time they let innovation (and the risks they involve) take place in small, desperate companies. Then they buy it out or copy it. That's one of the points of Clayton Christensen's book, The Innovator's Dilemma. The author shows that successful companies are far more likely to budget development dollars into extending already successful products and brands (low risk, almost certain return) than truly new products (high risk, unlikely return). That's just the nature of how institutions work, once established. For start-ups, rolling the dice is a way of life, and once in a while, there's a big payoff for the gamble. But Christensen shows how this process leaves established companies vulnerable to new thinking, new technology. That may have been the case, but most current oligopolies have learned the lesson. The likeliest exit for an innovator is to make a splash, and then get bought out by one of the big boys. 3:25:23 PM

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