SMALL BUSINESS VS BIG BUSINESS DRIVER

SMALL BUSINESS VS BIG BUSINESS DRIVER

When we examine the main driver of enterprise performance and growth – the rate of investment in tangible and intangible (R&D, brands, technology, human resources, etc.) assets – we find a dramatic increase in the gap between how much large and small companies invest in intangibles. The widely touted nimbleness and creativity of small enterprises isn’t evident in the data. So, almost two-third of small companies can’t cover their expenses, despite the booming economy. Moreover, the gap in the fraction of companies reporting annual losses widened too: while 10-15% of the large companies reported annual losses in recent years, that number is an ominous 60-65% of the small companies. In fact, both the median return on operating assets and the median profit margin of the small companies turned negative during 2015-2017.

Inspecting the two groups separately clarifies that the large companies are getting more profitable, whereas the small ones suffer from chronic unprofitability. The difference in median return on operating assets was 15% in the 1990s, but has recently doubled to 30-35% - an enormous gap in profitability of operating assets. The performance gap between the large and small increases too. When we also examine the large and small companies separately, we find that the former are getting bigger while the latter largely stagnate.

Since we examine median values, this difference is not driven by the runaway success of a few companies like Apple and Amazon. In 2017 dollars, this gap amounts to $8.8 billion. This gap, in 1981 dollar value, reached almost $3.5 billion in 2017. It is evident that from the mid-1990s, the size difference between the large and small increased continuously and rapidly, except for during the recession years of 2008-2009. In the chart below, you can see the annual, inflation-adjusted difference between the median market values of the largest and smallest public companies (the top 30% and bottom 30% of firms, by market value of equity), listed on U.S. Our results support Lou Gerstner’s thesis that the elephants are not basking in their past glory, but can indeed dance and are even becoming nimbler. And part of the reason for this growing corporate divide between big and small firms is the growing R&D expenditures of large firms.

In particular, we wanted to see whether large established corporations are being increasingly displaced by new technologies, or whether they’re actually leveraging digital and other new technologies to innovate and grow.Ĭontrary to the popular notion, we find that large corporations are more and more likely to maintain their dominant positions, while small corporations are less and less likely to become big and profitable. While we’ve seen numerous startups of the last thirty years not only disrupt businesses but become the megacorporations of today, we wondered whether this disruption is accelerating with the momentum of digital revolution. Research and news headlines are replete with the idea that traditional large companies can’t innovate, and that smaller digital companies will render many larger ones extinct.

Small business vs big business