Classic: Corporate Inefficiency

Originally published 6/18/2011

Four years ago I read an interesting article passed along by a friend, one which discussed why large corporations – despite their advantages – often fall victim to smaller upstarts with limited resources.  The author, Luke Johnson, a UK private equity firm president and entrepreneur, makes a number of excellent observations with which I personally agree, having seen all of them in action in big corporations in one form or another.  In fact, one of my old bosses used to describe these things as “Aenergies,” at least when he was referring to the merging of a large acquisition into the “mother ship.”  I think the term applies to “bigness” in general quite nicely.  The bottom line is that “bigger isn’t always better,” something that I’ve become well acquainted with since co-owning my own small business.

The original article, titled “The Biggest Groups are Ill with Inefficiency” was published in the Financial Times in April of 2011, and can be reached by clicking this link.

Johnson’s conclusions about the inefficiency of being large are summarized in this post.  I will be writing separate posts to expand on each of these ideas over the next several weeks as a part of my “Classic post” series.

Ultra-large-corporation diseases make organizations less effective, countering some of the inherent advantages of size and scale.  The types and varieties of these diseases include:

  1. Sunk Costs Fallacy -- being unable to abandon a project because it can't be admitted it was a bad idea.
  2. Groupthink -- The inability to question thinking conventions that have evolved at the company.
  3. Compliance over management -- too much focus on checking compliance boxes rather than actually governing and managing the enterprise.
  4. Institutional Capture -- people acting in their own interests (and often expecting outlandish compensation for doing so), rather than in the owner's interests.
  5. Office Politics -- Subversion of good ideas and projects to serve the needs of internal constituencies.
  6. Failure to act as Owners -- wasteful spending because it isn't the employee's money being spent.
  7. Risk Aversion -- punishment for errors taking on greater importance than the possible rewards for success.
  8. History -- being hindered by existing assets, relationships, technologies, and mindsets.
  9. Anonymity -- surviving by keeping one's head down and being satisfied with mediocrity.
  10. Commodity Products -- big companies need large markets, which typically have more competition and are lower margin.

While size has its advantages, the above ten vulnerabilities provide a partial list of targets that smaller, more nimble competitors can use to use to “win the war.”  Having worked in both environments, I can readily say that smaller organizations are more dynamic, provide greater spans of control (which is more interesting, in my opinion), and are generally much more fun.

That being said, they are also riskier ventures that can easily end up out of business if the right combination of product/service, strategy, and people isn’t relatively quickly distilled.  Remember, history is written by the victors.  There are many bankrupt small businesses out there that can attest to the high risks involved in starting a new enterprise.

But even with the risks, being able to explore such opportunities can be a reward in itself.

Posts in the “Behaviors Managers Hate” Series (Chronological Order)

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