In 2007 I wrote:
Between the years 2001 and 2006, if you bought 100 shares each of the following large prestige leading companies : Coca-Cola, Citigroup, Dell, Exxon-Mobil, GM, GE, IBM, Disney, 3M, Johnson & Johnson, Microsoft, Wal-Mart, Pfizer and Proctor & Gamble, you would have invested about $50,000 and gained about $500.”
In contrast, if you invested equally a total of $50,000 in Cognizant, Ralph Lauren, Cheesecake Factory, Google, Hanes, Coach, VMware, Costco, Apple, and Amazon in 2002 or whenever they went public it would be worth about $ 200,000 or about a 30% annual return. The numbers today say you would have lost $12,000 in the large stocks and even in the market decline made $41,000 in the growth stocks.
Our financial experts, corporate leaders and government experts discuss the financial aspects of these results every day, but vastly underestimate other key impacts. In particular, they are ignoring the structural and competitive assumptions that are dooming these large companies. The reality is the president of General Motors and a bunch of others deserve to get fired. As we are learning with the auto companies, forget the bailout money, bonus controversies, and regulation debates, etc. These companies need completely new structures and managements.
Why is this phenomenon so apparent when these large companies have so many resources to effectively compete? The obvious answer is that the economy and society are changing so quickly those major corporations lack the flexibility to respond and that:
Bigger is not Better.
These companies operate in the same environment and face the same uncertainties as the innovative, more productive companies in the second group. However, the changes taking place in the world economy make the competitive advantages of size obsolete. Unfortunately we need to consider the opposite of everyone’s theory that companies like GM and Citi are too big to fail. Rather, they may be to big to succeed.
Nowhere is this issue more prevalent than in the banking business. They have spent years making acquisitions and investments to provide more synergy, economies of scale and presumably profits. The net disgrace is that in 2008 they wrote off billions of dollars in bad loans and needed the government to rescue them. What is of greater concern is that their solution is to spend money on redecorating, planes, having lavish meetings and naming ballparks rather than challenge the entire strategy and structure of their organizations?
One of the major problems is that minor but critical long term changes are frequently dismissed because they cannot produce significant results for these large companies. For example, much of the grocery business has been paralyzed by focusing on the impact of Wal-Mart on the big chains. But startups like Wegmans, Whole Foods, and Trader Joes have thrived by differentiating themselves from the pack. The favorite phrases of investment bankers to encourage acquisitions, synergy and economies of scale are proven false in many cases.
Chrysler and Mercedes and Time Warner and AOL are probably the best example of causing deterioration in a number of companies under the promise of synergy. Similarly merging companies to combine obsolete plants in America has been a folly while new low cost competitors from China have just begun to dominate the market place. Why are we even debating the problems of unions, dealers etc. within the auto companies when the reality is the Japanese build better cars even in America.
Several aspects of bigness inhibit dealing with the changes in our society.
- The most limiting factor of bigness is its devastating impact on culture, structure, passion and creativity. Research shows that people want to do a great job and take pride in their work.
- Large organizations do not understand how their structure and operations inhibit the energy and success they are trying to establish. For example, handling diversity in the workplace has become increasingly difficult with size. Work hours, skill differences, training, maternity leave, international differences, sexual harassment, creativity needs, etc. are all examples of issues where large organizations have inadequate responses to varying needs. The failure of polices in these areas is evidenced by a Monster.com survey “where73% of respondents felt companies did not do a good job getting entry-level employees excited about their work.”
- Corporations also refuse to face new structural realities. While much production has moved overseas, old quality and manufacturing systems dominate in many cases. As a result companies are startled by computer or lead paint recalls because they never considered how these new processes work. Similarly, distribution processes with reps, retail dealers, distributors are not challenged enough.
- Companies also ignore the impact of their policies, structures, and reward systems. The growth of women, international companies, minorities, outsourcing, and the internet all have profound impacts that are managed effectively because of outdated strategies and policies. For example, most company’s policies on company dating, office hours, etc. are simply unrealistic.
Nowhere is this more evident than in corporate outsourcing. Nearly 25% of the U.S. labor force is independent agents such as independent contractors, free agents, consultants, etc. We are rapidly evolving towards a knowledge and service economy where all the economies of scale of large factories become more general than specific. Places like China are developing massive manufacturing areas where competitor’s products of even different quality levels are made side by side in the same factory. Recently, Dell computer had a major battery recall and the batteries were made by its competitor Sony. Similarly toy recalls ignored normal quality control practices.
The net result of these issues is that many organizations are incapable of creating environments that support the qualities necessary to succeed in today’s changing and complex market place. In particular, professional cultures and decision making need to replace hierarchies, which are the cornerstone of bigness. Organizations are frequently focused on control, minimizing risk and treating everyone equally. Edward Demming is quoted in a great line about leadership: “It is the ability to drive fear out of the organization so that employees will feel comfortable to make decisions on their own.“ Large organizations cannot focus on maximizing the energy, skills and motivation of its employees.
What are the individual and organizational options to deal with these dilemmas?
- Large organizations are in a catch 22. The dynamics of the marketplace and the environment require more innovation, risk taking, passion and energy. But the bigness of organizations causes defensiveness, uncertainty and structures that inhibit those very behaviors. Individuals and organizations need to recognize and focus on these contradictions. They then need to create environments that are dramatically different than what we see.
- The success of smaller, more innovative companies leads me to conclude that many organizations should get smaller in order to really deal with today’s environment. Reducing layers and creating professional cultures are a start. Splitting up organizations, spinning off or creating more independence among groups may be what’s really necessary to maximize the potential of both individuals and the organizations they work for.
- In general, we also need flexibility to realize there are no simple answers… While many private equity firms are highly diversified, other firms have succeeded by focusing on their area of expertise. Indian programming firms, Google, Ralph Lauren, Coach, have all succeeded by following clear models and staying focused . For example, Coach and Ralph Lauren have stayed focused and succeeded while companies like Macys, Liz Claiborne and Jones New York have diversified and floundered.
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In summary, “BIGGER IS NOT BETTER.” The entire country is suffering the consequences of GM, Citibank, and Time Warner learning that. The performance of small cap stocks in the last 10 years is further evidence. In order to be flexible in our changing environment, companies simply need to have more focus at the operating level than the corporate level. This includes all aspects of performance such as human resources, investment criteria, research and development, and performance criteria. For example, pay structures have become inverted paying top management excessive salaries and bonuses while making the potential innovators in organizations both threatened and underpaid.
