Too Big To Succeed?

Size matters, big companies can enjoy economies of scale. The logic is simple: the more a company produces, the more fixed costs can be spread across units of production, decreasing costs on a per unit basis. How much does Coca-Cola spend in advertising? Surprisingly not much... a dime a bottle? Size matters, I'm sure you get the point.

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.)

The Coalition Of Enemies

When Boston University organized a leadership session with MBA alumni this year, one of the activities was to play cards. Ok, the cards were from the Center of Creative Leadership. They depicted different themes: a caring gardener, collaborative mountain climbers, creative artists, a happy family, a team of well-organized workers, a group of thieves, connecting rivers, etc. Pick a first card to illustrate your present status and a second one to represent your aspirations. Let me depart from this interesting exercise and focus on the one card that I chose as my first pick: two medieval armies turned their fight towards a third enemy. Big companies are highly politicized and conflict-prone when seen from the inside. Sometimes they appear to be a Coalition of Enemies. In this post I'll try to explain why it is so, and hopefully I'll be able to distill a few good tips on how to navigate successfully through conflict and politics.

Much like cars that have complex designs, corporations have complex organizations. A car has an engine designed to deliver acceleration and speed, at the same time it has well designed brakes and electronic systems to stop quickly. Like cars, corporations have organizations that have built-in conflictive functions, checks and balances if you wish. Some of these company-wide conflicts are well known: regions want to have more autonomy, salesmen seek volume, corporate wants to keep prices high and cut costs, and manufacturing grumbles against engineering who grumbles against quality assurance who in turn... you get the picture. Those broad conflicts trickle within the organization: VPs represent different perspectives, middle-managers take example on their function-head and bring the conflict one level down, and so forth by replication until it reaches every individual in the organization. At the individual level this overlays with a crossroad of conflicts due to overlaps in responsibilities, career aspirations, personal incompatibilities, etc. Then another dynamics takes effect: who can see the conflicts can also exploit the conflicts. If a child can play mom against dad at home, imagine what smart employees or managers can do in complex organizations!

So, how to deal with conflicts in your organization?
1 - First recognize natural conflicts. In doing so, remember that more often than not conflicts are good. In GE our most recent HR initiative is called “Boundaryless Collaboration” and has attributes like “Embraces Constructive Conflict” and at the same time “Leverages Teamwork”. Step-back and try to identify the natural biases of your surroundings. Create the car-like analogy that best matches your organization. Get your company context.
2 - Be skeptical. People will come to you with pre-packaged explanations of what is at play. It can be based on unhealed conflicts, it can be an attempt to play the system and many times it is a defense mechanism (“something is not working and it is not my fault, there is a conflict between…”).
3 - Gather information and perform interviews. People will explain the trade-offs they see, and their behavior and actions will make sense from their perspective. Things will fall into place. I like to write down simple “who thinks what?” two-column tables. It’s simple and powerful
4 - Judge: flag the forces that are good and healthy and segregate them from those that are bad and ill. This will help you drive your actions.
5 - Attack the ill forces. Tackle them; do it on the spot, every time you encounter them. Be courageous; don’t hide behind the “politically correct” and the “benefit of the doubt”. Remember that you always lead by the example first, and people are watching you.
6 - Build coalitions. There is no shame in that, as long as the purpose of the coalition is honorable. Work with your peers, align your teams, and manage up. Build common ground and start from shared values or aspirations.
7 - Communicate, communicate, and communicate. People in your team will understand better the decisions that are not to their liking. They will align and work more effectively. If you are in the engine, you’ll be happier to understand why the driver is braking…communicate!
8 - Close the loop. Continuously check your beliefs, confirm your assumptions, re-interview the stakeholders, re-do the analysis and adjust your actions accordingly. What if you are wrong? Reading this older post on decision and uncertainty can help you managing that.

If you want to dig this deeper, I recommend reading an HBR classic: How Management Teams Can Have a Good Fight.

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