Yet, in working for a very big company for years, I have seen first hand some limitations that can significantly penalize them. Despite bailouts and policy that appears to be big-corporate friendly, smaller businesses will have an evolutionary advantage in the long run. Stay with me for a minute!
Big organizations are inefficient. You need more layers of management and supervisors, more trainers, more policies, more communication, more controllers, more of everything. You can visualize this by imagining a pyramid: the larger the base, the much larger are the amount of cubes needed to federate the base under a single apex. Big organizations create their own wasteful work. Two examples:
1) Training. I've been part of the deployment team for a major ERP update (it was the second in three years). Needless to say that we really didn't need a new one (but someone elsewhere in the company did). How would you convince a group of people who don't need change to embrace it? Have some trainers and change-leaders from within. So off I went for a train the trainer session at the headquarters. Let me summarize: You deploy an ERP change that is not wanted nor needed, through people that don't know anything about ERP and need to be trained to train! Brilliant!
2) Communication. I saw a good presentation from a communication specialist about how, in an era when employees are bombarded with communication, the role of direct managers is to re-communicate what is important (yes, again... but differently!) and help employees filter the rest. Guess who's sending all this communication in need of re-factoring? Well, all those additional managers we talked about, the CEO, the success cheerers, the reply-to-all-ers, the initiative leaders, the training leaders, the change agents...
Don't get me wrong, both examples show good management practices. The problem is that they are the right thing to do... in a big organization. And it is sadly wasteful. I'd be interested in hearing your own examples... leave a comment!
Another big problem is decision making. When the company is big because you have big capital expenses, fine. Your can produce more beer at a cheaper unitary cost: buy bigger tanks, advertise in major sport events. But when the company is big because of product scope then you have to be very careful. Are you saving costs? Yes, some: the support functions of the value chain (IT, HR, Management...), if you are lucky you have common distribution, more savings. But there is a catch: decision making and trade-offs. Let's suppose you have three product lines A, B, C. Who's to decide what's best for product A? The manager of A! Great, here we go with one manager for each product line. Wait a minute, what if A can cannibalize some sales from product B? Ok, let's put managers A, B and C under Big Manager. Big Manager will take care of A vs. B. Now A, B and C all need R&D resources... how will we allocate them? Have a manager of R&D that negotiates with manager A, B and C to allocate the resources depending on what Big Manager says the priorities are. Hold, product C needs investment now and promises to give excellent returns when product A and B will be obsolete. Big Manager said it was priority 3. Lets do some internal politics... I stop here for sanity, but trust me, I could go on! My point is the following: maximizing shareholder return in big companies is not easy and, most often than not, management will end-up with sub-optimal solutions.
Above paragraphs are just a fact: there are advantages and disadvantages in being big. There is an optimum between economies of scale and diseconomies of scale called ideal firm size, and the balance depends on the cost structure, organization efficiency and synergies in the product portfolio of the company. I said earlier that small businesses will have an evolutionary advantage. Why is this optimum leaning towards smaller-sized companies now, what is changing?
The basic answer is that new technologies are creating better ways to deploy the support functions: They can be outsourced, require minimal capital expenses, and are more flexible than they used to be. Some scenarios: You need an assistant but don't have enough work even for a part-timer? No problem, hire a "Virtual assistant". Pay per hour, no fixed costs, 100% scalable. Neat!
All right... what about IT? We talked about all this IT waste earlier, is something changing? Yes, you don't need IT anymore! Leave IT to the pros, live in the cloud: Your CRM? Use salesforce.com; ERP? That's sexy, use an open-source solution in Amazon's cloud: Compiere in EC2. Call-center? Easy, rent some cheap call-center space and resources in India. Also, don't forget to hire your customers: have a website where your users can efficiently help each-other. R&D? Use open innovation, post your R&D challenges here! Marketing? Use super-targeted ads through Google or Viral marketing with Facebook!
By now I hope you see what I see... technology is changing the big vs. small company balance, and it should favour small companies.
A few tips?
Tip #1 - I would advice everyone that shapes organizations to be mindful in balancing control with independent decision making and size with organizational hidden costs.
Tip #2 - Avoid creating organization structures assuming that they'll take good care of the problems you see. Problems are solved by people, organizations are suppose to help. Actively gage how people are acting. Are they creating value or just being the caricature of their role?
Readings: The World Is Flat by Thomas L. Friedman. Yet another good book left unfinished, chapter 2 was good enough to inspire this blog.
What have I done myself? Not much yet, for now I have a large share of Small Cap in my 401k!
Disclaimer: Everything I write in this blog expresses my opinion and not my employer's. Examples used are only intended to illustrate my opinion and are not intended to be judgemental of good or bad management practices. Use my tips at your own risk! Comments are uncensored and represent the view of who posts, not mine. To the best of my knowledge, the images used are copyright free. The Mammoth image in this post is licensed under the Creative Commons Attribution ShareAlike 2.0.)
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