To want to grow and become a bigger company is a normal objective for most businesses, but in some companies it becomes the main purpose – above and beyond becoming a better company and creating value for the company’s stakeholders.
Like revenue and profit, size is really an outcome – it is a measure of how much your customers are willing to pay for your services and how inspired your employees are. Both are shaped significantly by the way the company treats its other and often weaker stakeholders.
If customers and employees are just plankton feeding your corporate whale you can use the shortcut of an acquisition strategy.
Unfortunately the BIG is Beautiful thinking has been accepted as a commandment in the corporate religion not to be challenged – only good things comes out pursuing BIG. It is well documented that large companies have scale of economies and can do a lot of things cheaper than smaller companies.
BIG companies can compete more effectively in traditional markets and squeeze smaller players out of the distribution channels and outspend them. This has worked in the industrial age and to a degree in the knowledge age – but the global business environment is changing:
• The average lifespan of an S&P 500 company has declined from 70 years in the 1920s to 15 years today.
• More than half the S&P500 companies from year 2000 have disappeared.
• There are 40% less public companies in the US than in 2000. In UK it is 50% less
If large corporations were a species – we would call it endangered - Lynn Stout, UCLA
If companies manage to get into fortune 50 they are almost guaranteed not to grow. So treating growth and size as a married couple is wrong – they are not even dating!
Contrary to the BIG is Beautiful thinking it is not the asset builders that have dominated the most recent future – it is time to look at the dangers of being big.
Top 10 dangers in your BIG is BEAUTIFUL Strategy
1. Takeover targets are not just about tangible assets anymore.
To buy acquire a company you have to pay more than it is worth and find synergies (short for axing management and all staff functions, marketing and sales). This worked well when assets mainly where brick, machines, products and other tangibles but this has been overtaken by intangible values like knowledge, brand, engagement and networking capabilities.
2. Asset hoarding is not the most effective business model anymore
The companies with the most effective business models seen from a revenue and profit perspective is not relying on the traditional logic of buying competitors or squeezing them out of markets. The new network companies like Google, Apple (in its app store driven version), Amazon and their likes are connecting manufacturers and suppliers with consumers and buyers in a massive scale.
The central goal was not to buy their way to big but to create massive value for users with radically useful products. Big was certainly an outcome.
3. Acquisitions are not as profitable as they used to be
Few in numbers the network companies normally create markets rather than fight the incumbents in their well-defined little market sandboxes with set rules about who own the toys. In the process of creating new markets they destroy old markets. The incumbents in the mobile phone market fell as a result of the appstores – not the smart phones. The newspaper industry lost half its advertising revenue to Google in a few years and Amazon is closing brick and mortar stores.
Being big in a market that is being disrupted does not protect a company; it just means a larger and more smelly carcass.
It is also well known that acquisitions are a reset button that can mask a company’s true performance. When the balance sheets merge the CEO gets a new lease of his corner office making it impossible to really measure the value of an acquisition.
Asset builders are not the largest animals in the jungle anymore and the networking companies don’t want to buy them or even compete with them. They will be outmaneuvered.
4. When you buy intangibles they might not work in your company.
This became obvious when McDonalds bought Chipotle and although they expanded the chain dramatically the Chipotle sustainability brand grew faster outside McDonalds. From a valuation of 1.5B$ in 2006 when it was sold to 23B$ today – this McDonald could not unlock. As knowledge become more generally available more value is locked in the engagement created with employees and customers. Both can walk out the door at any time.
5. A takeover destroys massive amounts of value
If an acquisition is driven by being “BIG” rather than synergies with the existing organisations the value extraction process becomes painful as cannot buy a company for what it is worth – you have to pay more. The headcount stripping exercise is only seen as impacting cost when in reality it affects all areas of the business – people have a lot of knowledge that is not captured in systems. A long time after the CEO declares the acquisition a success and completed customers and employees are still suffering from lack of knowledgeable people that could have intervened when the poorly integrated systems fail. Before the systems are up running the next acquisition will be lined up.
Synergies are often internally driven not market driven
If an acquisition was treated like a product
6. Measurement often destroys more value than it creates
The growth imperative often forces organisations to take a very short sighted approach. Acquisitions and other “getting big” initiatives have to be successful and results demonstrated immediately. Anybody that has been through a merger knows that it often take many years before the merger is settled – not quarters.
Large organisations also tend to measure the wrong things. Typically the focus is on the easy rather than the important measures which lead to a cost centric culture. Creating value and innovation is a long term process that cannot effectively be managed through cost control. Finally large companies tend to use the measurements for the wrong purpose. Measurements are typically used to control people and not to develop and motivate them.
“No measure does less damage than wrong measures or measures used for the wrong purpose” Jeffrey Pfeffer
7. Innovation and creativity declines as corporation grows
Most of the truly innovative companies of our time did not exist a few years ago and they claim to fame is not innovative products it is innovative business models and thinking. This kind of innovation rarely happens in large corporations.
Larger corporations also have difficulty tapping into their people creativity as the executive suite gets isolated from their people, from customers and society at large and frankly they often don’t believe in the organisations value capabilities
In a survey of 400 CFOs 80% stated “they would reduce discretionary spending on potentially value creating activities in order to meet short term earnings targets” The Boston Consulting Group
8. The illusion of bigger means more diversified and lower risk
The prevailing wisdom is that when companies diversify they also lower risk although the financial crisis should have eradicated that assumption it still lives on. Markets are not safe isolated lakes where the larges fish rule – disruptors empty these lakes fast.
Many companies rely on some commodities that seriously impact their business either as raw goods or as finished products. These markets used to follow demand and supply models before the derivatives markets started to dominate. Today every $ of commodity traded Is multiplied by hundreds of dollars of derivative contracts that are controlled by algorithms rather than people – perfect bubble economy conditions.
9. Corporate Silence, Effectiveness & Psychological distance
The larger a corporation becomes the more it follows the conventional wisdom it has created. There is no consent and all views are convergent with the logic of the corporation and its industry. This is coined corporate silence.
In large scale organisations efficiency becomes the focus rather than actually investigating if processes create the desired output. Effective is forgotten and finally the psychological distance between large corporation managers and ordinary customers and customers becomes so large that they really fail to understand each other.
10. Large organisations have lower engagement
As Gallup has demonstrated, companies with a high level of engagement outperform their low engagement peers on all revenue, profit and quality parameters.
At the same time they can demonstrate that there is a significant correlation between size and engagement levels.
Is it time to rethink your BIG IS BEAUTIFUL strategy?
