I had to comment on this due to the large amount of misinformation in this thread.
Many people think that companies should be kind, and pay more than the market wage for their workers. This is false and unreasonable. Companies try to minimize their costs, including wages.
Now if in some industry, some company is making huge profit margins, and paying low wages, what is the cause, and what is the solution? In economics, profits go down until they reach 0 or close to 0. Why? because if there are huge profit margins, more firms come in, to compete. Therefore in all industries, profits go down to a lower level.
Now why doesn't this happen in practice? The answer is artificial barriers to entry. Political agreements and regulations benefiting the big companies. So what is needed here is an easier path for new companies (Which are people after all). This will always ensure that profit margins stay low, and wages approach the true market rate.
The solution is not donation. Why would a company pay 9 dollars to a worker who is willing to work for 8? Why aren't YOU donating money to poor people in Africa? The answer is not minimum wage either. This distorts markets. If you want to alleviate poverty, in a more economically reasonable way, do it though universal income.
Your intuition is correct, but unfortunately, it doesn't actually work that way, because on a per-employee basis, big business is ~4x more efficient.
That is, for every $1 in revenue an SMB brings in, big business brings in $4. (These numbers are averages, but the basic relationship holds across industries.)
I personally do not see how SMBs can compete when they are paying 4x more for labor.
The reason big business is so efficient is IT investment, and the problem with IT investment is that you need to be big in order to really take advantage of it. The amount of improvement SMBs get for a proportional amount of investment is low. You have to spend a lot to get anything, really, and SMBs just can't afford that.
So, to recap: big business profits stay high because SMBs actually can't force prices downward, due to the huge imbalance in labor costs between SMBs and big business.
If we could get the same IT advantage to SMBs at a cost that is proportional to their revenue, then the dynamic you expect to be occurring would, in fact, happen.
Big Businesses also have larger overheads, internal bureaucracy and are generally show on the uptake. A small and nimble SMB can surely take advantage of this?
After all, most of the tech startups are in some way small businesses and don't seem to have any trouble innovating against the lumbering tech giants.
Not a great comparison. Capital investments needed for IT production are actually much smaller than other industries, and IT just doesn't really scale well at all with respect to company size. Large and small companies alike are limited to the talent they can attract and pay for.
You seriously believe that IT investment is the sole reason for large companies being more efficient? How about the fact that they can make large investments in general (for example, build a pipeline or a nuclear power plant), at the scale where few competitors exist?
You seriously believe that IT investment is the sole reason for large companies being more efficient?
Of course not. For one thing, large companies typically have far more efficient financials. For example, revolving loans are common to smooth over cash flow bumps and due to their size they can demand long payment terms (120 days or longer to pay for stuff). There's definitely an advantage there.
Large businesses also have a regulatory advantage, since they write the actual regulations that govern themselves (at least in the United States).
Nevertheless, IMO while these are significant, I don't think they are the overwhelming reason why big businesses have 4x the revenue per employee. Regulatory overhead is real, but it's not 4x, and better financials certainly help with profitability, but I don't think they're responsible for bringing in 4x the revenue per employee, either.
I honestly think IT is the thing that counts the most (Amdahl's Law) if you want to see SMBs become competitive, at least on a revenue per employee basis, with the Global 2000.
It's not just lack of IT investment that hurts SMBs. Even when they do invest in IT, they use it differently than the Global 2000, and that difference is, IMO, why SMBs are relatively inefficient, and why gains from IT haven't trickled down to them.
But hey, I could be wrong. It is, after all, just my opinion after studying the problem. YMMV and all that.
> How about the fact that they can make large investments in general (for example, build a pipeline or a nuclear power plant), at the scale where few competitors exist?
Sure, that helps, but revenue is regulated by law in the two cases you mentioned. And the Global 2000 is not primarily made up of companies doing large capital investments in infrastructure. Furthermore, the 1:4 relationship exists across industries. So we're not comparing apple's to oranges here. Even within the exact same industry the Global 2000 has a 4x advantage in revenue per employee.
Like I said, I don't think you can explain a 4x advantage in revenue per employee solely with better financial management and regulatory efficiencies.
I want to capitalize on my argument on huge barriers to entry being a major factor. In industries with such barriers (huge initial investment required) there's always only a limited number of players, and usually no one is interested in "spoiling the market" by selling their products with too small margins. Some of that are just natural dynamics, while sometimes explicit, illegal under the table deals are being made (where prices across the whole industry are being set).
Consider your statement in the light of looking at the 10 largest corporations in America on a decade by decade basis. Go back a few decades, and I bet you won't even recognize the names.
Again and again, small companies have displaced can't-fail big ones.
It's interesting, although the Dow Jones index is sort of arbitrary in its choices; it's certainly not the "largest corporations" as you stated, although of course some of the largest will end up in it.
In fact, I'm not really able to find what it is that actually determines what companies are in the Dow Jones Index. If you know or find something I'm curious.
So let's look at the 10 biggest public American companies as calculated by Forbes in May of 2013:
1) J.P Morgan
2) General Electric
3) Exxon Mobile
4) Berkshire Hathaway
5) Wells Fargo
6) Chevron
7) Apple
8) Walmart
9) Citigroup
10) AT&T
Yea, I am going to have to disagree with your premise, that the top companies from decades ago have been replaced by bit players considering at least half these companies predate WWII and the rest came about not by competition, but by market evolution.
And at least half of those companies have received large bailouts from the government or are getting access to natural resources on the cheap ($1/year leases).
Many people think that companies should be kind, and pay more than the market wage for their workers. This is false and unreasonable. Companies try to minimize their costs, including wages.
Now if in some industry, some company is making huge profit margins, and paying low wages, what is the cause, and what is the solution? In economics, profits go down until they reach 0 or close to 0. Why? because if there are huge profit margins, more firms come in, to compete. Therefore in all industries, profits go down to a lower level.
Now why doesn't this happen in practice? The answer is artificial barriers to entry. Political agreements and regulations benefiting the big companies. So what is needed here is an easier path for new companies (Which are people after all). This will always ensure that profit margins stay low, and wages approach the true market rate.
The solution is not donation. Why would a company pay 9 dollars to a worker who is willing to work for 8? Why aren't YOU donating money to poor people in Africa? The answer is not minimum wage either. This distorts markets. If you want to alleviate poverty, in a more economically reasonable way, do it though universal income.