(FORTUNE Magazine) – THE BIG AMERICAN corporation is in wrenching transformation, affected by elemental forces rushing upon it from a powerful array -- global competition, technological change, highly mobile financing, daring entrepreneurs, ambitious shareholders, and, not least, the corporation's own history. These forces are as inexorable as the movement of continents, but far more swift: Such quick tests, such speedy punishments for failure, and such rapid rewards for success are without parallel in any other era. As restructuring, the primary instrument of all this change, has gained momentum, attention has focused on its more sensational features: the sudden wealth of the raiders, the debt-heavy buyouts, the bust-ups, and the disappearance from the FORTUNE 500 of famous old names, such as International Harvester and American Can, gone forever or unrecognizable. These dramatic changes in configuration have encouraged the belief that the big corporation is an endangered species (the cliche about dinosaurs usually enters at this point) and must shrink or die. That analysis fails to acknowledge the performance of big, established companies that have used restructuring to augment their strengths and skills and that, far from shrinking, have expanded the range and variety of their activities. Such companies possess ''size, scope, and management,'' the three qualities that Alfred Chandler Jr., the noted business historian at the Harvard business school, asserts were essential to the triumph of American industry in the past. They remain essential to corporate success today. Peace be on you, O ye dinosaurs: These companies continue to build size on size and diversity on diversity -- and they demonstrate the validity of the old maxim that being big is an enormous advantage. Their recent records have contributed substantially to the improved performance of the 500, which by many measures are on a roll (see the introduction to the 500, page D1). Despite all that good news, no golden age lies ahead. The role of the big industrial company in American society may be shrinking: The 500's sales as a percentage of the gross national product have been in descent since 1980, dropping last year to 42%. Employment has dropped similarly: Last year the 500 employed 11% of the civilian work force, less than in 1954, the first year of the FORTUNE 500. Restructuring, in so many places a source of rejuvenation, has paradoxically contributed to those declines. But paradox may don cap and bells: The lessening influence of the 500 in American economic life may not bode ill for corporate giants. When it comes to profits relative to the rest of the corporate world, the 500 have rarely if ever done better, in part because of restructuring. After- tax profits of the 500 in 1954 amounted to 39% of after-tax profits for all U.S. companies. That share grew over two decades, reaching 50% in 1973. Then the 500 began to lose ground, slipping to 41% in 1977, one of the poorest relative performances since the list began. The turnaround was more swift than the slow decline: The 500 took in 59% of all after-tax corporate profits in 1984, and last year their share leaped to 66% -- two-thirds of the profits of the whole American corporate universe. Credited with aiding and abetting is a group of select big companies in markedly different industries, but all distinguished by managerial talent and remarkable recent growth in profits. Gulf & Western and Borden are reformed conglomerates; Heinz is diverse with strong market positions; Boeing and GE are sui generis but stand as exemplars of how huge size, fine reputation, and long corporate experience, even in the age of restructuring, contribute to high profits. Collectively, these companies show that Chandler's size, scope, and management remain the most potent factors in the performance of big companies. Consolidation and diversification have proceeded concurrently with substantial success at Borden. The company was once what Chief Executive Romeo Ventres calls a ''smorgasbord of companies -- we had women's clothing, fertilizer, a phosphate rock mine, perfume, a fast-food chain . . .'' All that has been peeled off and the company's traditional strength in food reasserted. Part of that strength is a recently achieved championship position in pasta -- a business in which some advantages of size had been overlooked. Ventres came from Borden's chemical division and points out: ''In chemicals you make all your money by being very, very cost oriented -- that's all you've got to compete with -- and volume is what holds costs down. In food you aren't oriented that way.'' It turns out that you should be. STARTING FROM SCRATCH nine years ago, Borden has created a pasta operation that keeps 14 U.S. plants running 24 hours a day, seven days a week. The company buys 800 million pounds of durum wheat a year, more than any other buyer in the country -- with resultant leverage on price. Huge volume lets Borden save time and money by eliminating the need to shut down production lines to convert to turning out specialty pasta shapes. Instead, three or four plants produce these odd shapes and sizes full time. Lower costs translate into snowballing market share, which has grown from 6% in 1980 to 31% last year. Borden produces 17 regional brands (such as Prince and Gioia), as well as a national one (Creamette). Catering to regional tastes while enjoying national economies of scale, says Ventres, ''gives us the best of both worlds.'' Borden remains a multiple-business company: Chemicals, dairy products, and snacks are among the strategic areas designated for growth. And despite all the divestitures, the company is bigger than ever. Sales of $6.5 billion last year represent an increase of 30% over 1986, and net income per share was up 21%, to a new high of $3.62. Another food company, H.J. Heinz, has achieved leadership in vast numbers of products over the years; 54% of the company's sales come from brands with a No. 1 position in world markets. Heinz uses that advantage to augment its commanding position. Heinz ketchup, which Chief Executive Anthony J.F. O'Reilly calls the ''flagship product,'' has 50% of the market, but Heinz has never ceased to diligently apply its research abilities and longstanding connections with growers to increase that share. ''It is a mortal sin punishable by instant death at Heinz to say a market is mature,'' remarks O'Reilly, ''and it is also a sin, exculpated only by the chief executive officer, to change the label, change the bottle, or change the recipe for Heinz ketchup.'' But the company has in fact changed the recipe, after what O'Reilly calls an ''enormous amount of basic research, market testing, and R& D,'' switching from sugar to high-fructose corn syrup. Heinz further sustains its position in ketchup by spending heavily on marketing. As O'Reilly explains, ''This is a virtuous cycle of success, where greater marketing expenditures result in additional growth and future margin expansion, which in turn permit increased marketing expenditures.'' Heinz has successfully applied the same strategy to Weight Watchers foods and Star-Kist tuna and is trying it now on pet foods. General Electric (No. 6 on this year's list, with $39.3 billion in sales) persuasively demonstrates the power of size in all facets of its business. To choose one example, by vast investment and patient support over lean years the company has become the world's foremost seller of jet engines, displacing Pratt & Whitney a couple of years ago. GE's engine sales reached $6.8 billion last year -- enough to rank the engine division alone No. 62 on the industrial list. That achievement made possible a quite different one in a distant arena. In a major transaction, GE last year sold its consumer electronics business to Thomson SA of France and acquired Thomson's medical diagnostic imaging business -- a move that required French government approval. Frank Doyle, a senior vice president of GE, is convinced that the deal could never have taken place ''if GE had not for almost 20 years been a good corporate citizen'' in France -- as a producer, with a French company, of jet engines. GE's restructuring under Chief Executive Jack Welch has taken the company into other new pastures, the acquisition of RCA a couple of years ago being the outstanding example. Restructuring has neither narrowed GE's enormous scope nor slimmed its huge earnings and revenues: Both reached all-time highs last year. Those who argue that big corporations are fading away have to confront the performance of Boeing, the No. 1 commercial-jet aircraft builder in the world and a fine example of the concentrated, single-purpose corporation that, drawing on its past, seems equipped to endure for eternity. Each new model of aircraft demands enormous startup costs. But using a strategy that eluded onetime commercial-jet maker Lockheed, Boeing designed each model so it could , spawn new versions almost endlessly, eliminating the need to go back to square one. For example, the 747 has been through 13 different versions, each needing heavy investment in research and development but none nearly as expensive as it would have been had Boeing designed an entirely new aircraft. When Qantas, Singapore Airlines, and others wanted a jet that could burn less fuel than the old 747, fly over 8,000 miles without refueling, and be handled by two crew members rather than three, Boeing met the specifications by revising rather than remaking. Result: the new 747-400. One study indicates that the break- even point in commercial aircraft manufacture comes after 500 planes, sold over ten years of production. Producing the 747, Boeing deals with 1,500 subcontractors and keeps track of 4.5 million parts. It's hard to see, in that business, how small can be beautiful. Perhaps the classic example of the conglomerate that has made a successful transition to the new age is Gulf & Western. In 1983, Chief Executive Martin Davis took over a company with operations ranging through an arcane alphabet from auto parts to mattresses to zinc. Davis immediately became one of the first of the big-time divestors, stripping off company after company. But he also maintained a good deal of diversity, rebuilding around three areas -- entertainment, financial services, and publishing -- where the company already had a presence and where he thought the greatest promise of return lay. (The stripping moved Gulf & Western from the Industrial 500 to the Service 500 two years ago.) Davis decided what to get rid of and what to keep partly on his judgment about the company's managerial skills. ''Start with myself,'' he says. ''I was brought up in the entertainment business, and I understand the financial markets.'' As for publishing, Davis bolstered Simon & Schuster, a G&W subsidiary, by acquiring the big textbook house Prentice Hall. How did he settle on just three areas? ''A lot of it was gut feeling,'' he explains. ''Obviously, most decisions are made by instinct.'' Just as obviously, Davis's business instincts are excellent: Only an analyst who is also a part- time sadist could ask Davis for better performance. Net earnings at G&W have risen from $158 million, or $1.93 a share, in 1982, the year before Davis took over, to $356 million, or $5.76 a share, last year. Return on shareholders' equity, 7.6% in 1982, reached 17.8% in 1987.

Lots of evidence supports the view that this pattern of gains, the result of what might be called focused mass, will continue for many 500 companies. Stephen Coley, a partner at McKinsey & Co., thinks that the drive to make American companies more competitive in global markets is bound to favor the big corporation, especially in view of the dollar's decline. ''Scale will make a tremendous difference,'' Coley says. For all the criticism being directed at conglomerates, Coley's research shows that of the 25 companies on the FORTUNE 500 list that gave shareholders the highest returns from 1970 to 1987, 15 were in multiple businesses. Size, scope, and management are not about to lose their magic. As a possible side effect of the comeback by big companies, Edward Bowman, professor of corporate management at the Wharton School, believes that the appeal of the 500 as employers is growing among his students and that the attraction of Wall Street is lessening -- a trend also noticed at Harvard. (For another view, see the story that follows.) Amid all this lovely music, a note of caution should be sounded. Restructuring has become something of a management fad. American businessmen have always been susceptible to managerial fashions -- witness the conglomeration in the Sixties and Seventies -- and now seem insufficiently critical of those who, like orthopedic surgeons, forecast health and happiness after surgery, standing most to gain from performing it. Perhaps overlooked is an odd characteristic of restructuring: Even in the cases of the companies just cited, the upside could also be the downside. Explaining that requires a look backward. The basic problem that overcame the managers of conglomerates, explains Robert Kaplan, professor of accounting at Harvard business school, tracks back to Kaplan's own profession -- or, more accurately, to an excess of confidence in his profession. Governing by balance sheet and earnings statements, bearing down hard on quarter-to-quarter performance, the people from headquarters never knew what was happening, one might say, indoors. ''The accounting system just wasn't showing what was really going on,'' Kaplan says. ''Top executives relied on the financial signals for more than they are capable of providing.'' The key missing ingredient, he says, was an assessment of investments needed to meet the long-range goal of each business. Want of that nail brought the house down. Agrees Joseph Bower, a colleague of Kaplan's at Harvard: ''What was called scale was simply a conglomeration of units that weren't being managed.'' Present argument holds that restructured corporations will not tumble into the conglomerate pit because the managers are actually operating the ''core businesses,'' not just watching the books. But no one knows how to define core businesses or how many of them can be added before the company becomes that feared and hated monster, a conglomerate. Martin Davis's ''gut feelings'' about what his company could manage well have worked out beautifully; so, evidently, have Borden's new pasta line and Heinz's dash into dog food. But the question remains -- just which are the core businesses? GE acquires RCA, Eastman Kodak buys Sterling Drug -- who's in what core, and how long will the jury be out deciding whether the executives of these companies are operating managers of diversity or have slipped back into the conglomerate mode? Ennius Bergsma, a partner at McKinsey, points out that Dr Pepper went into what seemed like a logical extension of its soft-drink business -- a part of the ''core'' -- when it entered bottling. After the wreckage was cleared away, everyone saw that bottling just appeared to be an extension; it was really not part of the core at all. So it looks as though the only rule is ex post facto -- if it works, it's a core business. Harvard business school professor Michael Porter worries that under the flag of restructuring, the old conglomerate may be sneaking back: ''The siren song appears to be irresistible.'' OTHER TROUBLES with restructuring may surface. Most worrisome is the debt companies take on in some kinds of restructuring (see page 87). The quick generality is that when servicing debt becomes the major corporate goal and cash flow the leading measure of success, trouble is building. After Borg- Warner's leveraged buyout, engineered by Merrill Lynch, B-W chief James Bere lamented: ''Everyone now perceives the company to be very weak because of the highly leveraged balance sheet, and that's new for us. We were a stable company with a strong commitment to our employees. Now they say, 'We believe you,' but I wonder. Management is almost forced to take a shorter view of our work than we did in the past.'' From Samuel Heyman, the chief executive of GAF who profited hugely by buying into and selling out of Union Carbide, comes a comment that amounts to endorsement of restructuring but edges over into concern anyway. To avoid takeovers, Heyman says, companies can restructure too hastily. He says that restructuring ''must not be viewed as transitory, but rather as a permanent part of a company's response to shifting economic forces.'' Union Carbide was so eager to fight his takeover threat, Heyman thinks, that it failed to restructure as successfully as it might have. But the most threatening picture for big corporations appears on the broad social canvas. Big companies have been cutting costs by massive firings, often as part of necessary restructuring (although even free-marketers could be forgiven for petitioning the government to make the use of ''lean and mean'' a felony). GE, for example, reduced its work force by some 57,000 in 1987, losing 31,000 with the sale of its consumer electronics business to Thomson. E. Patrick McGuire of the Conference Board estimates that about a million middle managers -- educated, politically sophisticated people -- have lost their jobs in the past three years. In all, McGuire figures, some 40 million people -- families, suppliers -- have been adversely affected. He predicts that these legions will continue to petition their legislators, and the result will be a new wave of regulation of big business. McGuire points out that 28 states have already passed antitakeover laws. Soon, he says, corporations trying to close plants or acquire companies, possibly to dismember them, will have to file economic impact statements. Other laws will change employer- employee relations in the employee's favor through portable pensions, mandated severance pay (which already exists in Europe, making it cheaper for U.S. companies to fire Americans), and support for the idea that to fire someone violates an implied contract, leaving the employer liable for ''emotional damage.'' McGuire recites the argument: ''These are people who committed no sin of sloth or incompetence. They put money into a kind of corporate bank when they chose a career in a big company. Now the bank has been embezzled by the senior people in the company -- embezzled to please a paramour called Wall Street.'' One may have reservations about that reasoning, but it could be music on Capitol Hill. From Robert Reich, professor of political economy at the John F. Kennedy School of Government at Harvard, comes strong reinforcement of those arguments. Reich says that big companies, such as steelmakers, were once ''the anchor of communities like Youngstown, Ohio. Not only did they supply jobs, their executives were corporate statesmen active in community life and philanthropy. Local people looked at them and felt a high degree of loyalty and trust.'' Now that companies are firing people, leaving businesses, coming and going, and getting out of town, those left behind feel betrayed. Or enraged: In Scotia, California, many local people and environmentalists are furious because Pacific Lumber, a company recently taken over by Maxxam Group, stepped up the cutting of ancient redwoods. (Maxxam financed the $900 million purchase largely with junk bonds.) Bills to ban such cutting have been introduced in the California legislature. ''Some companies are forgetting that society determines what kind of responsibilities and privileges they are going to have,'' says Reich. ''Large corporations are losing their moral authority. Big-business bashing is going to come back into style -- mark my words.'' If that does happen, the business community may have to do some hasty rebuilding in Washington. Ray Hoewing, president of the Public Affairs Council, a Washington advisory group with 400 big companies as members, says, ''My overall sense is that there has been a kind of wavering when it comes to representation of big corporations in Washington.'' Hoewing believes that because the Reagan Administration was regarded as benign, and in an ironic twist because of the pressures of cost reduction, big corporations' presence in Washington shrank during the early Eighties. Now, he thinks, ''there seems to be no longer an outflow, but the companies coming in are middle range in size'' -- so big companies may still be underrepresented. Further, many issues in recent years, such as tax reform, have divided some trade associations. If business speaks with a weaker voice in Washington, it may suffer further from the apparently mediocre quality of business leadership on the national scene. No one appears to have replaced executives like Reginald Jones of GE and Irving Shapiro of Du Pont -- respected, politically savvy business statesmen who knew their way around the Hill. Further, Stephen Kobrin, professor of management at the Wharton School, thinks the political influence of American multinational corporations has declined in Washington, partly because of the decrease in the number of American executives working in affiliates abroad and the decline in U.S. international power generally. These companies have also lost influence, Kobrin believes, because they are unwilling and to some extent unable to further the objectives of U.S. foreign policy -- the shipment of pipeline equipment to the U.S.S.R. against the Reagan Administration's desires being a case in point. Exacerbating the possibility of a new burst of regulation and the prospect of diminishing clout in Washington, the 500 by some measures have also lost position in the U.S. economy. The 500's revenues equaled 37% of nominal GNP in 1954. The proportion rose as high as 60% in 1980, but last year's drop to 42% brought it down almost to the 1954 level. One reason for the drop is that prices of services have generally risen faster than prices of goods. The share of GNP going to manufacturing as a whole has not followed that pattern of slippage: manufacturing has stayed at around 20% of GNP for 30 years.

THE EMPLOYMENT STORY is similar. The 500 employed 12% of the civilian work force in 1954, and the proportion had reached 17% by 1973. Then the slope turned downward, and last year, in part because of restructuring, the 500 employed only 11% of the work force. This decline in employment share is partly explained by the nationwide shift from manufacturing to services: The percentage of the work force engaged in services has grown greatly since 1948 and now stands at 76%, while manufacturing's portion has declined from 35% in 1948 to 19% last year. Fewer people working for 500 companies, less share of the nation's economic life coming from the 500 -- yet all that may not in the long view be bad news. Despite restructuring layoffs, unemployment has continued to decline in the U.S., and the number of employed has continued to grow. That growth suggests that those displaced by restructuring may find new jobs with reasonable speed -- perhaps in small companies, now acknowledged as the major creators of jobs. At the same time, firings from restructuring may be expected to taper off, so that at least some of the business-bashing predictions of McGuire and Reich may not come true. With few exceptions businessmen have not been comfortable on the public stage, nor have they performed very well there; the interests of the business community may not suffer if executives spend less time in the spotlight and more in the office. In any case, corporate managers these days are loudly proclaiming that their highest loyalty is owed to their shareholders -- an old pitch, but never before made with such force by so many different bosses. Judging from the profit figures, many of these bosses should be feeling pretty good.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: The Shifting Clout of the FORTUNE 500 The 500 companies took an increasing share of gross national product for over 20 years. Now the pattern seems to be reversing. DESCRIPTION: Sales generated by FORTUNE 500 companies as percentage of GNP, 1954, 1962, 1973, 1977, 1984, 1987.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: The Shifting Clout of the FORTUNE 500 The group's share of U.S. companies' profits -- the nation's bottom line -- jumped last year. Restructuring explains a lot of that gain. DESCRIPTION: Profits of FORTUNE 500 companies as percentage of after-tax corporate profits, 1954, 1962, 1973, 1977, 1984, 1987.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: The Shifting Clout of the FORTUNE 500 The 500 employ a smaller percentage of the labor force than in 1954 because of increased efficiency and the rise of services. DESCRIPTION: Level of employment by FORTUNE 500 companies as percentage of civilian labor force, 1954, 1962, 1973, 1977, 1984, 1987.