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It is tempting to call the savage storm raging through business an overdue comeuppance for a few depraved CEOs. Or the fallout from a decade of market mania. Or the inevitable result of an accounting system that is laughably out of date. None of these are unreasonable explanations.

But the real problem is both more complex and more troubling. It is this: Big companies are broken. Nearly a century old, the modern business organization is nearing the end of its useful life. And the strategies that are being adopted by the leaders of these companies—even the honest ones—seldom get at the real issues. "The old model is dying," says Shoshana Zuboff, a high-profile professor at Harvard Business School. "It's time to invent something new."
 
The now-maligned startup frenzy of the 1990s was one effort at invention. For a time, big companies were terrified by the prospect of radical challenges to their power. And justifiably so, says Gary Hamel, perhaps the world's most influential strategist. "All the recipes that companies were using to prop up their share prices were running out of steam." But when the dotcoms died, old-line companies took away the wrong message: "They said, 'Silicon Valley did some cool things. But it collapsed, so we don't have to worry about it.' "

Big business has retreated to what it understands. And what it understands is getting bigger. James B. Lee Jr., vice chairman of J.P. Morgan Chase, put it this way to Institutional Investor: "Bigger is not better. Bigger is absolutely mandatory." That is the prevailing logic today: Size is not the result of success. Size is a precondition for success. Unless you are ubiquitous enough to rule at retail, muscular enough to squeeze suppliers, and global enough to operate in every corner of the world, then you do not have the resources necessary to stay in the game. And if you can't stay in the game, then you can't win.

But the logic is flawed. Economists have understood this since at least 1931, when a Frenchman named Robert Gibrat penned Inégalités Économiques. Gibrat's basic observation was that there was no relationship between a firm's size and its expected growth rate. Later research refined this conclusion. It wasn't that size had no bearing on growth. Big companies were more likely than smaller ones to survive over time. But having survived, the biggest grew the slowest.

The evidence is all around us. Start with James Lee's bank, now the country's second-largest financial-services firm. In September 2000, when Chase Manhattan announced its merger with J.P. Morgan, the company's shares were selling at $52. Today, they hover around $30, and the press is filled with reports of the company's miscues. Getting bigger has not helped Chase Manhattan get better. Nor has it helped other big companies. As the Wall Street Journal recently reported, the share prices of the 50 biggest corporate acquirers of the 1990s have fallen three times as much as the Dow Jones Industrial Average.

Sure, size counts, especially in addressing complex problems that span geographies and functions. But bigger doesn't make a company better at serving customers. Bigger isn't more rewarding to work for. Bigger doesn't innovate. Bigger, per se, isn't better. Better is better. Instead of resigning ourselves to a business world populated with plodding giants, why not imagine something more constructive?

As it happens, four of the business world's smartest thinkers have taken up that challenge. Hamel, chairman of Strategos and coauthor of Competing for the Future (Harvard Business School Press, 1994), is touting his notion of "the post-industrial organization." In The Strategy Machine: Building Your Business One Idea at a Time (HarperBusiness, 2002), consultant Larry Downes sets out an approach to strategy where information is the basis of competitive advantage. Meanwhile, Zuboff and her husband, business mogul James Maxmin, argue that the system simply can't be fixed. They propose a version of capitalism that flips the relationship between producer and consumer on its head. They call it "distributed capitalism."

The ethical storm will pass, but the bigger problem with corporate America won't. Incremental strategies, regulatory patches, or a rebound in the economy can't solve this one. Here's what might.