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The Gap Between Large and Small Companies Is Growing

Understanding the "why"

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. While we’ve seen numerous startups of the last thirty years not only disrupt businesses but become the mega-corporations of today, we wondered whether this disruption is accelerating with the momentum of digital revolution. 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.

Contrary 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. And part of the reason for this growing corporate divide between big and small firms is the growing R&D expenditures of large firms. 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.

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 percent and bottom 30 percent of firms, by market value of equity), listed on U.S. stock exchanges. 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. This gap, in 1981 dollar value, reached almost $3.5 billion in 2017. In 2017 dollars, this gap amounts to $8.8 billion. Since we examine median values, this difference is not driven by the runaway success of a few companies like Apple and Amazon. When we also examine the large and small companies separately, we find that the former are getting bigger while the latter largely stagnate.

Please select this link to read the complete article from Harvard Business Review.

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