Are America's Corporate Giants a Dying Breed?

By John Greenwald

The bigger they come, the harder they fall. Such corporate Goliaths as IBM and General Motors once dominated American industry. Now they hemorrhage billions of dollars in a single year. What happened? Like the dinosaurs that once roamed the earth, they failed to keep up with the times. "Nothing is forever," says Louis Lataif, dean of the Boston University School of Management. "None of us today could name the 50 largest companies in America in 1900, but everyone alive at the time thought they would all go on forever."

Yet the turmoil that grips GM, IBM and other behemoths including Sears and American Express, is more than a matter of size and the inevitable cycles of change. Many giants manage to avoid hardening of the arteries. Du Pont, which is nearly 200 years old, remains an industry leader in synthetic materials. Philip Morris started as a tobacco shop in 1847 but is now a $55 billion-a- year company that sells everything from beer to breakfast cereal. General Electric managed to grow from light bulbs to jet engines, and Motorola from car radios to microchips.

Giants begin to falter when their managers, swollen with arrogance and complacency, allow themselves to lose touch with their customers. This happens most often at firms that maintain a rigid, top-down management style. "Big companies find that the challenges of keeping up with what's going on in the marketplace become infinitely greater as the companies get larger," says Walter Scott, a professor at Northwestern University's Kellogg Graduate School of Management. "The layers of management and perks isolate executives too much."

GM is an example of a firm that grew so rich and powerful that it became oblivious to the signals of changing times. Despite the oil crises of the 1970s and the Japanese challenge of the '80s, GM never put its heart into developing smaller, high-quality cars. It took a new division, Saturn, to develop GM's first winning U.S. small car. "When you're on top of the heap, there's a disdain for change, a disdain for new ideas," says Lawrence Hrebiniak, a professor at the Wharton School. "It just goes with the territory, because you are No. 1."

Some Goliaths have stumbled by getting hooked on growth and expanding far afield from their core business. Sears took its eye off retailing in the 1980s to venture into stocks and bonds and real estate. As Sears diversified, highly focused retailers ate its bread and butter. Wal-Mart offered low prices, while Nordstrom boasted personal service. Now, with its flagship Sears stores in trouble, the company is getting back to basics by selling its Dean Witter brokerage house and most of its Coldwell Banker real estate firm. Sears is not the only respected name to get burned in the financial-services business; Westinghouse is painfully extricating itself from a fling in that industry that has cost it about $3 billion in losses.

Sometimes big companies need full-scale crises to force changes in their old habits. Ford came back from near bankruptcy in the 1980s by cutting costs and creating teams of workers and managers to design and build new cars. Such teamwork produced the Ford Taurus, which now vies with the Honda Accord for the title of best-selling car in the U.S.

To remain atop their industries, some large companies are trying to act more like flexible, small firms. GE holds regular sessions in which employees are invited to make suggestions for improving everything from products to packaging. It's not just talk; the bosses are expected to respond. Today's management buzz word is "horizontal structure," meaning that power is spread across a company rather than held by a few top managers in the traditional, vertical style. "The large companies in this country were built on a model that copied the military," says Margaret Blair, a Brookings Institution economist. But today, with global competition transforming the marketplace almost daily, Blair says, the old structures are too ponderous to work.

The real task for giant companies is to make change a welcome aspect of corporate life. "Doing well means continually challenging the premises of your business," says Kellogg's Scott. "It means having a vision and being restless and discontented with the status quo." If those guidelines sound daunting, the dangers of standing pat are painfully clear. Says Raymond Miles, a business professor at the University of California, Berkeley: "The world used to wait for the next IBM computer or the next Chevy. But no one is waiting now."

With reporting by Kathryn Jackson Fallon and Jane Van Tassel/New York