of the U.S. Economy A VAST NUMBER OF BUSINESS FIRMS EXIST WITHIN THE UNITED STATES

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1 1Industrial Landscape of the U.S. Economy 15 This chapter investigates selected characteristics of the U.S. economy. One conclusion of this chapter is that giant firms dominate the U.S. economy. These giant firms have not always dominated the U.S. economy, but they rapidly rose to prominence after the widespread appearance of capitalism in the late 1800s. The economic system of capitalism seems to naturally lead to the growth of giant firms. A VAST NUMBER OF BUSINESS FIRMS EXIST WITHIN THE UNITED STATES About 40,000,000 businesses existed in the US in 1997, the most recent year for which good data exists. The number of businesses of different types in the US appears in Table 1-1 below. Table 1-1 Number of firms by IRS form filed, 1997 Proprietorship Individuals 16,886,602 Non-farm Sole Proprietorship 16,317,000 Partnerships 1,758,000 Corporations 4,710,000 TOTAL 39,671,602 A single individual owns most business firms. Such businesses are called proprietorships. Over 33,000,000 proprietorships existed in the US during Some of these businesses filed tax forms that identified them as a business

2 156 Industrial Landscape of the U.S. Economy (16.3 million); others who engaged in businesses reported their income on tax forms for individuals (16.9 million). Many if not most of those reporting business income on an individual tax form operated part-time, and very small, businesses. Other businesses are owned by a group of individuals, known as partnerships. Still other businesses in particular most of the large ones are corporations. In a corporation, the shareholders sometimes millions of them collectively own the firm. As can be seen in the above table, most businesses in the US operate as proprietorships. The number of businesses in the United States 40,000,000 is striking compared to the total population in the same year: 200,000,000. That is, there were 20 businesses per 100 people in the United States. We are truly a nation of businesses. MOST BUSINESS FIRMS IN THE UNITED STATES ARE SMALL Most firms in the United States are small. More precisely, most businesses earn only a very small amount of income from their business activities. One indication of the numerical importance of small businesses appears in Table 1-2. This data is based on total business receipts for businesses that reported their income on IRS tax forms for businesses (this excludes businesses who reported their income on individual s tax forms). The numbers reported are the percent of businesses that earned business receipts within certain dollar categories. The data in the table were estimated from data appearing in various IRS reports on business income. Table 1-2 Annual Business Receipts Percent of Firms Under $25, % $25,000 to $50,000 9 % $50,000 to $100,000 7 % $100,000 to $250,000 9 % $250,000 to $500,000 6 % $500,000 to $1,000,000 3 % Over $1,000,000 5 %

3 Industrial Landscape of the U.S. Economy 157 About 61% of firms in the US made less than $25,000 in total sales in And, 77% of firms made less than $100,000 in a year. Only 5% of firms sold more than $1 million in goods and services in the year. This suggests that most firms in the US are very small. As 60% of firms made less than $25,000 in sales, the total profit (sales minus costs) earned by these small firms was much smaller As most businesses who report business income on tax forms for individuals (and excluded from the data above) are smaller than businesses that use tax forms for businesses, this finding that 60% of firms made less than $25,000 in sales in likely an understatement. The true percentage might as more like 65%. If we limit ourselves to corporations the least used of the various forms of business ownership we can gain more details about the size of firms (who are corporations) and the relatively few numbers of these firms that are large. Table 1-3 indicates the number of corporate businesses within certain asset classifications. Assets are the total value of the physical capital owned by the firm. Table 1-3 Returns Asset Size (million Dollars) Number Percent $ 0 1 4,251, % $ , % $ , % $ , % Over 90% of corporations owned less than $1,000,000 in assets. Although to most of us this is a huge number, this represents for most firms ownership of a relatively small building and a modest amount of physical capital within it. The US is a nation of many businesses. Further, as seen above, the overwhelming majority of these firms are very small. Most of these small firms are stuck in highly competitive industries. As you drive down a commercial street, most of the firms you see to the right and left of the road are small firms battling in highly competitive industries. A VERY SMALL NUMBER OF GIANT FIRMS The table above indicates the relative rarity of giant firms in the U.S. economy. Just over 9,000 corporations own $250,000,000 or more in assets and, so,

4 158 Industrial Landscape of the U.S. Economy quality as giant. These 9,000 corporations make up just 0.2% of corporations. That is, only 1 out of 500 corporations quality as being giant. Further, most if not all of the giant firms in the US are corporations. A better measure of the rarity of giant firms is the percentage they make up of all businesses (corporations, partnerships, proprietorships) in the United States. As a total of 40,000,000 businesses exist in the United States, giant firms likely make up only 0.02% (or 9000/ ) of the firms in the United States. This is 1 out of 5,000 businesses. On a numerical and percentage basis, giant firms are truly rare in the United States. GIANT FIRMS DOMINATE THE U.S. ECONOMY But, despite their rarity, giant firms dominate the US economy. With a few moments thought, you could list a dozen or so of these giant firms (Ford, Microsoft, Proctor and Gamble, Viacom, Intel, and so on) that have a very high profile and that sell lots of stuff each year to U.S. consumers. Consider the manufacturing sector of the U.S. economy. In recent years this sector has had about 300,000 firms. To put this large number in perspective, consider the following. This book averages about 300 words per page. Therefore, it would take about 1,000 pages to get to 300,000 words in total. That would be a long book with a lot of words. If, then, each manufacturing firm in the US were represented by a single word, the list of firms (words) would fill 1,000 pages. Consider, for a moment, the largest 500 manufacturing firms in the U.S. economy. If each of these firms was represented by a single word, a list of these 500 firms would take less than 2 pages of these textbook: the largest 500 firms would require only about the first page and a half to be listed in a 1,000 page book. This represents about 0.17 percent of manufacturing firms in the United States. Table 1-4 presents information about the importance of the largest 500 manufacturing firms in the U.S. economy. As can be seen, these 500 firms dominate the manufacturing sector. Although these 500 firms represent far less than 1% of manufacturing firms in the U.S., they account for 61% of sales and 74% of profits earned in within this sector.

5 Industrial Landscape of the U.S. Economy 159 Table 1-4 The Largest 500 Manufacturing Firms Sales Profit % of total Dollars % Dollars % 500 largest 0.2% $2,370 billion 61% $61 billion 74% 299,500 smaller firms 99.8% $1,521 billion 39% $21 billion 26% Source: Statistical Abstract of the United States, 1996, Tables 863 and 865 Large firms similarly dominate most of the other sectors of the U.S. economy service, mining, and retail. This does not imply that other (small- and medium-sized) firms are completely unimportant for the U.S. economy. It merely suggests that large and giant firms are the most important economic actors in the U.S. economy. These relatively few firms gain control of 75% of the profit (that is, surplus) generated within the US economy and the decisions they make about how to use this surplus has major consequences for the evolution of the U.S. economy. And, along with this giant surplus comes major power in the political and cultural arenas. Politicians must pay attention to the concerns of these giant firms because the economic health of the US economy depends largely on the decisions made by these few (but giant) firms. Further, part of the surplus going to these firms is used to shape the cultural landscape of the US economy. The decisions made by these giant firms about what advertising campaigns to carry out, what media to support (magazines, websites, TV shows, newspapers, and so on), and what cultural institutions (museums, symphonies, and so on) has a major impact on the evolution of culture within the United States. 1 Consequently, if one wants to understand the U.S. economy and the world of politics and culture one needs to start by studying these giant firms that loom over the millions of small and insignificant firms within the United States. The following table presents another way of looking at the importance of large firms in the US economy. 1 The profits earned by giant firms understate the true value of the surplus these firms generate. In accounting profit is determined by subtracting off investment expenditures, advertising expenditures, and many other expenses that are really part of the surplus.

6 160 Industrial Landscape of the U.S. Economy Firms Employment Enterprise Size Number Percent of Total Number Percent of Total 1-99 employees 4,800, % 40,091,449 36% employees 81, % 15,637,643 14% employees 8, % 5,662,057 5% 1,000-2,499 employees 4, % 7,629,355 7% 2,500-4,999 employees 1, % 5,904,452 5% 5,000-9,999 employees % 6,064,760 5% 10,000 or more employees % 29,715,945 27% Total 4,898, % 110,705, % US Census Bureau, Statistics of US Businesses, 1999 data As can be seen, 98 percent of businesses employ less than 100 people. On the other hand, less than 1,000 firms have 10,000 or more employees. But the above table also indicates the importance of a relatively large number of giant firms. Firms with 10,000 or more employees make up only 0.02% of firms in the US but employ 27% of employees. DEVELOPMENT OF THE U.S. INDUSTRIAL LANDSCAPE The dominant position held by giant firms did not appear because of government decree. Nor did it appear by accident. Rather, it appeared by the normal workings of capitalism. AS THE RESULT OF COMPETITION As discussed in a previous chapter, competition leads to winners and losers. The winners expand while the losers get smaller and, eventually, exit the industry. In later rounds of competition, some of those who were previously winners lose out in competition and exit the industry. Over time the number of firms surviving (as the winners of past competitive battles) in the industry declines. As these winner firms become fewer in number, they become more concerned with reducing competitive aggression within the industry and with keeping out new entrants. Over time, competition leads to a reduction in the number of firms in an industry and the firm remaining in an industry attempt to reduce the level of competition that they face. It if often the case, though, that a handful of smaller

7 Industrial Landscape of the U.S. Economy 161 firms survive as niche firms who have been able to survive in the fringes of the industry. AS THE RESULT OF ACQUISITIONS OR MERGERS Sometimes firms grow in size by purchasing rival firms from within the industry. The targets of acquisition are often rival firms that have become weak and are looking for another firm to buy them out. These weakening rivals might have brands, production facilities, marketing channels, or expertise that the acquiring firm seeks. The acquiring firm, as a result of the acquisition, becomes larger and sometimes a better competitor. A merger, on the other hand, involves two distinct businesses (with different owners) joining together to become one. In merger, it is most often the case that both firms are doing well financially. They believe, however, that a combined firm would do even better than the two firms individually. The partners in a merger are sometimes in different industries. Such firms hope that the different lines of businesses that they engage in might be complementary. Often, though, the merging firms are within the same industry. For instance, two steel firms might join together. Such a merger reduces the number of firms within the industry and the newly merged firm is larger than before. Sometimes industries were quickly transformed from one in which many small firms competed to one in which a small number of giant firms dominated via the process of mergers. The classic case of this is when hundreds of small steel firms merged together over a short time to form one giant steel firm, U.S. Steel in the early 1900s AS THE RESULT EXPANSION INTO OTHER INDUSTRIES A firm can expand into a new industry in various ways: they can merge with a firm in another industry, they can acquire a firm in a different industry, or they can open up a new business in a different industry (by opening a subsidiary). In this case, a steel firm might merge with a communications firm. Such a merger between firms in different industries is termed a conglomerate merger. The resulting conglomerate is larger, of course, than the firms that existed before the merger. Conglomerate mergers can lead to firms with huge size. Sometimes firms in one industry expand into a different industry. Say, a steel firm opens up a firm in the plastic manufacturing industry. This happens frequently when firms realize that if the stay put in only a single industry, the rate at which the firm can grow is limited by the rate in which this single

8 162 Industrial Landscape of the U.S. Economy industry grows. If this firm expands into other industries, it might be able to grow faster than before. But as the new subsidiary of the firm grows, the firm becomes still larger than before. Again, a giant firm can result for this activity. AN EXAMPLE OF A GIANT FIRM Many giant firms exist in the U.S. economy. One typical giant firm is Altria Group, Inc. This is the new name for what was once called Philip Morris Companies, Inc. Altria is one of the largest firms in the United States. It is a holding company that owns the following subsidiaries: Philip Morris Incorporated, Philip Morris International Inc., Kraft Foods Inc., Nabisco, and Philip Morris Capital Corporation. 2 Altria recently sold its wholly-owned subsidiary Miller Brewing Company to South African Breweries (SAB) in exchange for 36 percent of the stock shares of the combined SAB-Miller company. Below I will include Miller brands as being part of Altria. Among other things, Altria is the largest tobacco company in the United States, the largest branded food and beverage company in the United States, and the second largest beer company in the United States (though its partial ownership of SBAMiller). Altria sells about $80,000,000,000 of good each year and earns about $13,000,000,000 in profits. It employs almost 180,000 people and sells 200 countries worldwide. The firm is also one of the largest donors in U.S. politics, typically donating about $10,000,000 annually to the Republican and Democratic Parties. Some of the major brands sold by Altria appear in Table 1-5. Only the best known of these brands are listed. For instance, only a few of the over 500 cheese products produced by the Kraft subsidiary of Altria are listed I the table. Note the wide range of products Altra produces along with the fact that many of these products are well-known market leaders. The firm has great economic power. This is hard to notice, however, because Altria operates under a number of different names: Philip Morris, Kraft, Nabisco, Miller, and others. It also provides a wide range of different brand name products that, in the minds of most consumers, are superficially competitors. For instance, you might find in your local grocery store a range of different frozen pizzas. But only close 2 Altria recently sold stock for Kraft in an initial public offering (IPO). Altria however owns 98% of the combined voting power of Kraft stock.

9 Industrial Landscape of the U.S. Economy 163 scrutiny would reveal that many of the choices you have in the pizza section are actually produced by a single firm, Altria. What percentage of people knows, for instance, that DiGiorno pizza, Tombstone pizza, Jack s pizza, California pizza, and Delissio pizza are actually products of a single firm. Although these products are substitutes, they are not really competitors. Further, Altria companies are often dominant sellers in many of the markets in which they sell. For instance, its Kraft subsidiary controls about 40% of the U.S. cheese market. It sells about $9 billion dollars of cheese in the US each year. Companies that Altria controls dominate other markets in a similar fashion. 3 One reason that Philip Morris has not changed the name of, say, Nabisco is because Nabisco is a well-recognized and well-thought of name brand. Name brands are one very powerful tools of product differentiation that can increase the value of a product line. An addition reason for not replacing the Nabisco name brand with another name is that the individual consumer might have to think twice about buying, say, Marlboro Oreos. SUMMARY Millions of firms operate within the U.S. economy. A vast majority of these firms are small and operate as proprietorships. The lifespan of most of these firms are short and they rarely each significant profit rates. A very small number of firms in the U.S. are giant firms. Although they are few in number, these economic giants have great economic, social, and political power. 3 For Kraft, Making Cheese Fun is Really Serious Business, Wall Street Journal, June 2, 2002, page B1.

10 164 Industrial Landscape of the U.S. Economy Table 1-5 Tobacco Grocery Convenient Meals Snacks Marlboro Miracle Whip DiGiorno pizza Oreo Virginia Slims Cool Whip Tombstone pizza Chips Ahoy Parliament Post ready-to-eat cereals Jack's pizza Fig Newtons Merit Cream of Wheat California Pizza Kitchen Nilla Benson & Hedges Cream of Rice Delissio pizzas Nutter Butter Basic Jell-O dry packaged desserts Kraft macaroni & cheese dinners Stella D'oro Cambridge Kraft salad dressings Taco Bell meal kits SnackWell's A-1 steak sauce Stove Top Oven Classics meal kits Ritz Crackers Beer Kraft and Bull's-Eye barbecue sauces Lunchables lunch combinations Premium Miller Genuine Draft Light Grey Poupon Oscar Mayer and Louis Rich cold cuts, hot dogs and bacon Terry's and Toblerone chocolate confectionery products Miller Genuine Draft Shake 'N Bake Boca Burger soy-based meat alternatives Wheat Thins Miller Lite Stove Top stuffing mix Cheese Nips Icehouse Beverages Minute rice. Better Cheddars Foster s Maxwell House Honey Maid Grahams Miller High Life Tang Cheese Teddy Grahams crackers Leinenkugel s Starbucks Kraft and Cracker Barrel natural cheeses Planters nuts Olde English 800 Yuban Philadelphia cream cheese Life Savers Mickey's Gevalia coffees Kraft and Velveeta process cheeses Creme Savers Milwaukee's Best Capri Sun Kraft grated cheeses Altoids Red Dog General Foods International Coffees Easy Cheese aerosol cheese spread Gummi Savers sugar confectionery products Hamm s Crystal Light Knudsen. Triscuit Magnum Kool-Aid Cheez Whiz Handi-Snacks Sharp s nonalcoholic brew Tang Breakstone's cottage cheese and sour cream Balance Bar Jell-O