FRtR > Outlines > American Economy (1991) > From Small Business to the Corporation: The American Free Enterprise System > Growing larger, growing leaner

An Outline of the American Economy (1991)


4/12 From Small Business to the Corporation: The American Free Enterprise System


11/12 Growing larger, growing leaner

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In the 1980s U.S. industry underwent a wave of restructuring as corporations tried to position themselves to better compete. Mergers, takeovers, divestitures, joint ventures -- firms rushed to use these and other procedures, usually to discard unrelated product lines, to marry or buy up competitors and to rearrange finances in response to changing economic conditions (including new and more formidable foreign-competitors) and in hopes of restoring growth and prosperity.

The tools of restructuring can be used to diversify or concentrate product lines. A merger is the fusion of two or more companies into one when both the merging companies wish to join together, as distinct from a takeover which occurs against the wishes of one company. Management's rationale when moving to diversify is that it is unwise to have "all its eggs in one basket." If the demand for one product slackens, another line of business can provide balance.

A firm becomes a conglomerate when it expands into the production and sale of products quite different from those with which it was initially involved. A conglomerate is a business organization generally consisting of a holding company and a group of subsidiary companies engaged in dissimilar activities.

In recent years, a number of conglomerates have found that they have over-extended themselves, financially or by moving into fields where they lack competency. As a result, they have moved to divest themselves of losing acquisitions.

Much of this corporate activity is a response to the diversification trend that swept U.S. corporations in the late 1960s and early 1970s. At that time many ambitious companies acquired unrelated businesses at least in part in response to the strict enforcement of antitrust laws, which tended to make mergers between companies in the same field difficult. Over time however, business leaders found that managing such diverse enterprises was often difficult, less productive and less profitable than corporations with more narrowly defined product lines.

Many recent mergers are concentrated within specific industries, particularly in retailing, airlines and communications. In 1986 alone, May Department Stores acquired the Associated Dry Goods Corporation; General Electric Company purchased the RCA Corporation, and the Burroughs Corporation purchased the Sperry Corporation (a combination that was renamed Unisys).

Many firms also have tried to improve the competitiveness of their products through joint ventures with competitors. A joint venture between rivals does not involve a complete consolidation of their operations. Because joint ventures eliminate competition between firms in the field in which they decide to cooperate, it poses some of the same problems of potential monopoly. But joint ventures also yield benefits. For example, when the Federal Trade Commission voted to allow General Motors (GM) and Toyota to carry out a joint venture, part of its reasoning rested on the idea that the joint venture would enable GM to observe and absorb Japanese manufacturing technology and therefore to become a stronger competitor.

In addition, many American companies are joining together to cooperate in joint research and development activities. In the past, cooperative research, usually conducted through trade organizations, concentrated on ways of meeting environmental and health regulations. But now product development and manufacturing processes are being examined. Many U.S. firms are beginning to think they cannot afford the time and money to do all the research themselves, especially when manufacturers in other nations are cooperating with each other. Some of the major research consortiums include Semiconductor Research Corporation (33 members) and Software Productivity Consortium (14 members). A spectacular example of cooperation among fierce competitors occurred in 1991 when IBM Corporation, the world's largest computer company, agreed to work with Apple Computer, Inc., one of the leading producers of "personal" computers to create a new computer software operating system that could be used by a variety of different computers.

Despite all of the mergers and consolidations that have taken place in American business in recent years, the size of the average company has been declining. The reason is the huge number of new businesses formed each year, particularly those with fewer than 20 employees. Many fail, especially in times of recession, but others take their place.

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