Sonia Marciano - Bigger Isn't Always Better

[Music] hi everyone I am going to talk to you from the vantage point of a person that's been teaching in business goal for 20-plus years so I can tell you not just where I think we are but how I believe we got here and I'll tell you why I wrote this talk a few months ago I was on this six train I saw two women who didn't know each other me and hate each other almost instantly and it was anecdotal but it occurred to me we are so divided that we can meet and have contempt in the shortest time possible and because I fundamentally believe that business drives causes everything I wanted to connect the dots what does enterprise and how its operating today have to do with how pissed off we are at each other so let's see if we can connect those dots Oh check the box start with a cat video and I came up with a new title getting clobbered bigger isn't always better with getting me in trouble so but the big are getting bigger so here is audited data in 1978 so 100 largest publicly traded firms earned 48 percent of all the income earned by all publicly traded companies that number was fifty two point eight percent in 95 and it is now over 85 percent 85 percent of all income earned is earned by the 100 companies not not exactly true in fact today there's half as many publicly traded firms as there were not too long ago so we have under four thousand twenty years ago we had greater than eight thousand and maybe a more pointed way to put it is twenty eight firms twenty eight firms earn half the income earned by the entire S&P 500 so it is fair to say we have more wealth concentrated in fewer firms than ever before and so that's something unprecedented where we can say can we learn from history it's hard when something is unusual so the top four companies and and and wanting to diversify away from just talking about the Google Amazon Facebook issues ecommerce 58% of share is for firms in hotels 77% of hotels share is for firms airlines 70% do you you know that hopeless feeling I fly a lot when something goes wrong and you look at the gate agent and you just think I have no hope Pharma 62% and quick service restaurants 44 percent of share is just two companies McDonald's and Starbucks some industries don't even have four players it can list four and you know who they are right who are the four players in Google space or in Facebook space or in Amazon regarding ebooks and I'm not cherry-picking here because there's academic papers that look at all industries and here's a summary seventy-five percent of all US industries became more concentrated over the past two decades meaning there's really no industry that isn't kind of paying some sort of cost for what's changed what's changed that's caused all of this concentration firms and industries with the largest increase in constant raishin have and here's what's really important to us and again what we're trying to explain is how we feel okay so what's relevant to us there are higher profit margins these firms are making more profit on every unit they sell so profit margins are up there they're enjoying positive and so called abnormal stock returns and their M&A deals actually make money there's a whole bunch of course notes people who teach strategy had to throw away the ones that talked about deals mostly destroying value it's just not really true in recent history market power right this thing we call market power the thing we're supposed to be somewhat shielded from by any trust laws etc is becoming a very important source of enterprise value so this is an enterprise value created just by innovation just by creativity it's also being created by the fact that there's a unprecedented insulation from competition in today's environment so this stunning increase in concentration can be linked to how we feel economically but also socially and also philosophically and although corporate profits are high right this is a very weird coincidence of feelings corporations are generating more wealth than ever before and simultaneously half of all undergraduates think socialism is a better form of economic organization than capitalism so don't have to look far to find evidence of the volume of corporate profits so Harvard Business Review stated that corporate profits are at an all-time high but we need to look at the array of corporate profits and this array of corporate profits I'm going to show you there's many analogies to this in corporate profits what we see in corporate profits we see in other arrays like earnings of actors etc so we'll talk about that in a second but in addition to the level of profits what's really different today is the distribution of profits in the mid-1990s around five percent of firms had a return on invested capital it's kind of like a standard measure of robustness in business school it's the ratio of income to the amount you invest to earn that income and in the 1990s five percent of firms had income over the amount they invested to earn that income of 50 percent which is by the way an extraordinary number in 2016 this percent increased to ten percent so that sounds good so now ten percent of firms have a ratio of income to invested capital of over 50 percent amazing it's the bottom 85 percent of companies that for me ring alarm bells the bottom 85 percent of the distribution has taken a step down so it's this gap between the top and the middle that's just enormous and I want to kind of dry out a few reasons why this gap is increased and this gap between the middle firm and the top firm the gap between the middle earner and the top earner the gap between the average person who's a member of sag and Leonardo DiCaprio you know that's what we want to talk about so I remember this slide I used this slide in like the first year I taught only I had to change the heading so I could show using data when I first started teaching in 1994 I could show using data that as corporate profits went up there was a huge net positive effect on the entire ecosystem meaning all stakeholders on net went up and usually every stakeholder benefited so the net was all good as long if corporate profits went up it floated a net all boats and often it's loaded every boat and so I use that to be really somewhat dismissive about thinking about you know corporate social responsibility its responsible to just make profits and then everyone's blow boat gets loaded it's all good anyway I'm going to blame the 80s I hope you have something against the 80s to but in the 80s that's when we really uh shirred in this absolute a capital centric way of thinking and it took a long time for it to take full root and it took I think until relatively recently for us to kind of see the effects so capital was relatively uncompensated you you you know you're young and spry can see by looking at you so I'm glad we're I'm glad we're bringing up the past year capital was shockingly young compensated like in the 60s and 70s they were an aside economist for instance we had Adam Smith and then we didn't have anybody talk about how capital got treated really shitty and told the 70s maybe like the 60s and the 70s nobody really thought about it there were these managers and they ran companies that were enormous and they didn't own the company this separation of ownership and control was like a really big deal and it was kind of ignored at some point Wall Street noticed that capital was kind of getting the worst slice so there were there was Enterprise it was like the only source of prosperity I'm giving you the money so that you can make this enterprise happen and yet me the provider of capital is kind of doing relatively bad so this was kind of like the tip of the iceberg just does anyone know who this guy is oh good raise your hand if you know okay good this is what I'm talking about right I'm so glad to have this retro view this is our Ross Johnson he was the CEO of RJR nabisco and he became the poster oh you thought I meant is this James Gardner ah no it's it's James Gardner playing or Ross Johnson so Ross Johnson became the poster guy poor thing in a way because he was one of many so he was the poster guy for corporate excess and this is what got Wall Street all in a tizzy anyway watch did you see the hatchet job in Business Week RJ R low stock price tobacco company declining performance second of extravagance I love this CEO at Ross John routinely presses $50 bills into the heads of lying stewards I saw that $50 bills Jesus been years since I took that look hey you let him all you on about the stock ross lanten premiers hit the market yeah where are we on the test results Oh week 10 days the latest they're going to be great press me they damn well better be so let's see how the premier plays out um Ross like personally endorse this project at at our junior you spent 1.2 billion in 2017 dollars and this about some bottom line one of all the groups we tested the response to premier was just about uniform mmm-hmm they all said they tasted like like was the consensus yes sir they all said that nobody liked them fewer than 5% we haven't even talked about the smell what they say that was like a fart yeah you're not serious they really said that we've got an awful lot of farts are you serious tastes like and smells like a part they just need a few adjustments oh mighty ed I don't have to tell you what writing on these goddamn things and what the hell wrong with a draw you need next to sent alone since to take a drag so this was kind of kind of a low point for capital and then capital got attacked together investors and academics pointed out that if you levered up companies if you infuse them with a lot of debt it made management pay attention to earnings between 82 and 89 57% of all large US firms were restructured that's stunning so much restructuring in such a short period of time they were either takeover targets or they restructured on their own these deals were called LBOs and lvo boards these were people with a high a lot of skin in the game actually sat on the boards now and LBOs gave managers equity stakes so all of this would ultimately culminate in a lot of game changing a lot of a lot of operating companies very very differently so Business School professors were all really really happy I thought this was all good Steve Kaplan of booth is one of many great proponents of this type of restructuring and he could show you how much enterprise value was created simply by giving capital more say and how capital was deployed debt disciplined managers who previously ignored shareholders firms reversed all these ill-advised diversifications they eliminated excess capacity all good all value creating in addition to restructurings you had two things one is the business press actually started writing articles about bad management and you had equity based compensation that became the norm 15 percent of CEO pay was equity based in 75 raised to 45 percent by 1995 and then 65 percent of CEO pay was equity based compensation by 2015 now armed with equity and also managed by capital globalization and investing in new technology makes eminent sense so it's going to change what's going to be real now is that economies of scale the returns to being bigger are going to be exploited extensively so to pursue the promise of globalization and new technology we need big fixed investments in IT automation we need scale to spread the cost regulation so I would love to take a poll but I don't want to take time but I will tell you about some corporate debt I did last year I went to a firm that is an online trading platform and we were talking about what things were a share of revenues and so I asked like typically what share of revenues is your marketing what share of revenues is labor and I asked my usual questions and they said you left out one of the most the biggest share of revenues what could that be and they said regulation we spend 21 percent of our revenues on regulatory compliance that was stunning to me 21 percent of revenues and they told me the very good news was if they were able to make some of the acquisitions they planned they could get it to be below 17 percent as a share of revenues so acquisitions as a path to amortize regulatory compliance that's not necessarily value-creating reasons for economies of scale but quite possibly globalization and new technology is value-creating I'm not so sure I love the idea of regulations being the reason we grow so what do we got beyond scale economies we know there's some suspects we've talked about them enough today that exhibit these true sort of like new economy attributes increasing returns are like economies of scale on steroids because as your share grows the product gets better and your cost gets lower and it becomes rather impossible to compete with you so that's Google Google is simply better because it's bigger so just to recap where we are so far we have wealth concentrated in very few firms we have wealth concentrated in very few firms for some very good reasons one is that IT and globalization are very generous to capital they deliver very high return on investment and since capital has a seat at the table thanks to the restructuring of the 80s capital says go you know both guns blazing metal pedal-to-the-metal global eyes invest in new technology it makes firms bigger it also makes firms more efficient it also makes firms less in direct competition with other firms they're able to rise raise their profit margins this is all excellent for capital and then simultaneously we do have new economy firms these are firms where size makes the product better and size also makes the cost lower so we have economies of scale and we also have the so called network effects network effects however are deepened through economies of scope set another way economies of scope are deepened through network effects we kind of get both so just to use the same guys this this is only a partial list of the businesses they're in this is this is insane that we could do this this easily so let me just talk about acting for a minute there's like a hundred and twenty five thousand members of sag this the Screen Actors Guild one hundred and twenty five thousand members and the average member has an income or the average of the group is supposedly fifty two thousand dollars a year so the average income in sag is $52,000 a year only there's a problem almost nobody insect makes fifty two thousand dollars a year that is a completely vacant spot in the earnings distribution there are a zillion actors that make less than a thousand and then a handful of actors like Leonardo who I just I don't know why I'm picking on the poor guy today but seventy seven million seems a little detached from the amount of value created for society but it's very correlated it's very correlated with the amount of value he creates for the corporations that monetize his content and these corporations are also the same entities that are like in all of these these businesses so let's stop for a minute and figure out what's going on so last year during the prime time hour you had about fourteen hundred television shows to choose from that crazy so on the one hand there is a proliferation of choice and there is a proliferation of content and there isn't you know just only a hundred companies there's millions of attempts happening but what's happening is with those 1,400 attempts the hit rate is lower than ever and that's creating risk aversion and that means we're using all the information that all the data that's being generated by these companies we're using all that information to keep telling us that we should just put Robyn right in our next show or Leonardo DiCaprio or every time you turn something on you're like that's the guy that's also in right and you see the same guy in four different shows it's like where we're getting to this point where we proliferate but earnings are so concentrated and this is really the problem associated with what's happened so the blue line is the increase in productivity of the small percent of firms at the top and the gray line is everyone else the blue line is one woman on the sixth train and the gray line is the other this data tells me this economies of scale and economies of scope do make firms produce income much more efficiently and also make the products better the product is better because it's calling information from data I'm not having to take as many chances and what I buy and what I try you're able to spread six costs really really effectively when you have really really high share but it's creating this tremendous I fornication between the middle and the top globalization also weirdly and oddly coincided with a greatly reduced to any trust enforcement so I'm going to give you just a little bit of taste on this there's a lot of data on this but here's the thing the way I'd put we have globalized and become incredibly more tribal as a result as a result of globalization Sony make that clear so us any trust agencies pursued an average of 16 cases a year between 1970 and 1999 in 2014 they tried to pursue three but they didn't have the energy I was between 2000 and 2014 per year and in the year 2014 they pursued zero additionally the completion rates for M&A transactions have been increasing over time and antitrust regulators in the US and Europe are now less likely to block mergers than ever before in history so why is this and the reason is if you're a country and you have a global winner in your boundaries you win so as a u.s. any trust enforcer the last thing I want to do is stymie Google's global possibilities if I'm an EU antitrust enforcement agency the last thing I want to do is stymie a B InBev's global possibilities so as each of these any trust authorities is sensitive to the value to their own country of having a global winner they've also simultaneously so they've enriched or increased the prospects for wealth nationally but if you look inside of these countries they have fewer competitors than ever before see that the contrast so we can win globally but within the u.s. boundaries we have people who are literally feeling more have or have not than ever before and and there's no real way a to have their back without reducing our global prospects the blue line is wages and salaries as a share of GDP the orange line is corporate profits as a share of GDP so this is the punchline we give capital a seat at the table because it's true Ross Johnson was blowing through all of their money making cigarettes that tasted like and smell like a fart that was not right that said capital took his seat and said we're not going to let you waste our money anymore they made sure projects had a return on investment and look it did my capital is doing better but when capital does better the other constituents potentially don't all have their their boat floated another point two decades ago the wage gap in the US was primarily because there was a gap between people within firms so like the gap between the CEO and somebody working a more lime job today the gap is contributed to more by the differences in wages between firms that's something right so you know there was a time when you could say this is about what an account manager makes now when you make that assumption it's possible you have no idea how big the gap in the same job description is among a very small set of firms so we've got kind of two things driving a very serious wage gap the within firm issue but also the across firm issue and so going back a slider to it it's this right this matters so much we never saw this before so here's a little anecdote that just pisses me off I thought I'd with you in 2014 Apple and Google settled a massive I was going to put in parens 64,000 people were part of this suit a massive lawsuit involving allegations that they conspired to keep wages in Silicon Valley low by agreeing not to poach each other's workers unsealed documents reveal that Steve Jobs once emailed Eric Schmidt after a Google recruiter approached an Apple employee Schmidt Samara Lee had the recruiter fired and directed the individuals manager to make a public example of his termination and inform Jobs the late CEO forwarded Schmidt's email internally with a smiley face so I do understand they're competing in each other's product markets but I think it's clear they also have conversations that ultimately lead to us being aggravated with each other and maybe not directing that aggravation at the right source so what did I expect you to do with this slide I guess just look at the firm and I didn't even I didn't update it recently enough but because it's the top few have moved up even more but ten years ago if I put this slide up you would take this sort of like graceful downward slope and market values you wouldn't go down a few rungs and then fall off a cliff which is what you see now so any which way you look at it there's this gap so let me summarize what I teach in strategy and let me tell you why I slightly apologized for it in hindsight what I would always say my strategy course was firms have painful growth in the beginning and if they organize correctly and make all the right choices they have a beautiful growth spurt in the middle and then if they reach maturity it gets painful again and the key to enterprise value is what I call scarcity selling a prod that is rare and how satisfying it is relative to your competitors and substitutes so it's having a rare customer experience relative to the alternatives you must have scarcity and if you have scalability then you're a WOW factor firm that's a WoW if you're scalable meaning you can grow your share and lower your cost or grow your share and keep your cost constant Wow that is really going to contribute to enterprise value your product is rare your production process is scalable and then the holy smokes part is added by what if your skull pible what if you could add lines of business and M you had like the Midas touch every business you added to a portfolio of businesses added value to every other business and the reverse this is why content is primarily produced by only six media companies because they have this scale and scope to withstand the enormous failure rate of cultural content and when they do have a home run they can monetize the hell out of it through all of this scale and scope so I advocated I I begged for these three things scarcity scalability and scope ability and we've gotten that in spades and where's it gotten us well the ATS in addition to having some questionable fashion choices brought us a new form of corporate governance that gave capital too much of a seat at the table capital centricity did create wealth we see it right the numbers are really high but it definitively shifted bargaining power away from employees and away from customers business and social justice are inextricable scale and scope is definitively a double-edged sword it's some I can't I can't say enough good about it I can't also be scared enough about it here's when you know that ecosystem I showed you of customers and capital and and stakeholders generally when firms actually compete it does float everybody's boat it turns out don't hate capitalism hate the absence of direct competition competition direct competition is really is really a tremendously valuable force the reason corporate earnings are more concentrated than ever is changes in the nature of firms but some of the reason is regulation and that's just a big yuck of a reason and some of the reason is less antitrust enforcement significantly less so I'm going to remember somebody I think has a lot of good things to say and I don't hear him quoted enough these days this is just good stuff he said we can have democracy in this country or we can have commerce he actually said wealth but commerce concentrated in the hands of a few but we can't have both so on that I think I have good news the good news is that there is truly new way to create more with less I do think as this technology takes over more and more of what we do there is a tremendous displacement of people but I do think that what history shows us about that is people always get reincorporated doing jobs we can't imagine will exist like a hundred years ago if you had predicted to your mother that your grand great grandchildren would be writing video games that wouldn't have made very much sense so those jobs are in the pipeline but to get there I think we have to run our companies differently and I think we have to run our lives with a lot more awareness about the big forces thank you so much now we don't run [Applause] [Music]

Channel: Gartner for Marketers

Views: 7,938

Rating: 4.8504672 out of 5

Keywords: L2inc, Brand strategy, sonia marciano, nyu, stern, school of business, business school, mba, business strategy, strategy, management, competition, nyu stern school of business, digital research, digital marketing, brand strategy, marketing, technology, market share

Id: 7Q5u4yNs_w8

Length: 35min 48sec (2148 seconds)

Published: Wed Jul 26 2017