Classic: Corporate Inefficiency, History

Originally published September 11, 2011

A few years ago, I read an interesting book on something called Judo Strategy by author David Yoffie.  Yoffie did a great job describing how smaller companies can identify and exploit large-corporation strengths and weaknesses.  One of those areas was the inability of large organizations to divorce themselves from their successful histories – both because of assets they’ve accumulated in support of those successes, as well as the thinking and decision making patterns that develop as a result.

The old saw which states:  “If you do what you’ve always done, you’ll get what you’ve always gotten,” or more recently, “the definition of insanity is repeating the same behavior and expecting a different outcome,” both communicate this point – conventional wisdom says when something works you don’t monkey with it.

Except when things change in the external environment.  When that happens the cause of past glories can become an albatross around the neck (that reference courtesy of Samuel T. Coleridge’s Rhyme of the Ancient Mariner, arguably the best epic poem ever written) rather than an asset.

When your greatest asset becomes your biggest liability

In this post, I’ll focus on the way a successful history hampers us mentally, but the physical asset side of this equation is just as dangerous.  For example, many successful companies have been injured or outright destroyed by the emergence of web commerce.  And it wasn’t because they were surprised by the change.  Instead they were hampered by existing “go to market” strategies.  While new players rushed in to claim space on the web (such as Amazon and Ebay), existing “bricks and mortar” institutions were stuck in their old paradigms, locked into successful relationships with suppliers and distributors.  Borders bookstores is a prime example, a company that eventually landed in bankruptcy as a result of the Amazon onslaught.

This kind of thing has happened repeatedly throughout modern history – larger, seemingly unassailable giants undercut by smaller, more nimble competitors through a clever innovation in product, production, or distribution.  Clayton Christensen’s The Innovator’s Dilemma does a great job of illustrating this phenomena.

Well-worn neural pathways can be just as problematic

Original NCP Cover

Original NCP Cover

People tend to become slaves to their past decisions, particularly when they have led to success.  In fact, for most managers, the connection between their decisions and their success need not necessarily be causal for the mental link to be established.  As an illustration, take the sports star that performs a ritual (sometimes odd or bizarre ones, in fact) before any important contest.  Are these actions connected to the athlete’s success?  Most thinking people would conclude they probably are not.  Yet their prevalence shows us how easy it is to fall into a pattern of repeating seemingly success-driving actions, our minds making a connection that logic tells us isn’t even there.

And the devotion to past decisions need not even be related to success at all to have stickiness.  When I was young, my father detested vans.  He identified them with hippies, a detested group of people among his peers.  Vans, in my father’s viewpoint, were the vehicles of lazy, dirty, ne’er-do-wells (yes, I grew up in the 60's & 70's).  When the minivan later came on the scene, these old associations were still active.  He didn't want to have anything to do with such vehicles even though they were substantially different from the vans of my youth.  It wasn’t until minivans became associated with “soccer moms” that he would consider owning one, despite the fact that it was a perfect vehicle choice for him at the time.

Fortunately, nothing important to our family's survival depended on that decision.  But that isn't always true in business.

Why bigger isn’t better

Corporations, essentially a collection of human beings filled with human foibles, are hindered in a similar manner.  The collective experiences of a corporation, especially those learned painfully through major errors, become informal but ingrained rules that most large organizations easily adopt.  And large organizations, because of their size have greater breadth of experience and the consequent making of more mistakes, tend to accumulate such rules-of-thumb faster than their smaller cousins.  Eventually, large corporations can become "rule-bound", unable to embrace new ideas because of the way each new innovation resembles some unpleasant experience from their past.  When the world begins to change, these rules can become chains, preventing large organizations from responding to new trends.

One corporation where I worked was the dominant player in their market segment.  This company was completely devoted to their channel, their vertically integrated manufacturing processes, and their way of doing things.  When a new, competing technology appeared on the scene, rather than embracing the alternative, they went into denial.  The new technology was easier to copy that my employer’s, and soon a myriad of competitors entered the market, initially driving prices down and putting some of the competitors in this segment under pressure (the irony of the fact that the same thing happened decades earlier during the developmental years of my company’s core product appeared to be lost on management).

Some early exploration into the new technology during this time of hyper-competition convinced senior management that the new segment would “never be profitable.”  Rather than diving in with both feet to gain experience with the new technology, the company built arguments as to why the new products weren’t suitable for their customers.  By the time I arrived on the scene, I could see this alternate technology represented both a serious threat and opportunity.  I tried, but I simply couldn’t get past my employer’s already well-established misconceptions – that the technology wasn’t suitable to the market and no one made any money.

I tried to arrange deals in this segment on three occasions over a five year period, but in the end, I failed to sell our CEO on any of them.  And while my efforts were going on, as well as afterward, one company rolled up a number of the smaller industry players and has emerged as a powerful competitor and a much greater danger to my former employer than would have existed had they also entered the.  How this will play out over the long term is still anyone’s guess, but even at this point it is clear my former employer’s history played a major role in allowing smaller, more nimble competitors to first gain a foothold in the marketplace, and later to reach the size to become a serious threat.

Small firms aren’t exempt

Full cover of the old version of NCP.

Full cover of the old version of NCP.

Small companies also have history tugging at them, but those histories are often tied to individuals – founders, senior managers, critical contributors.  And even though these histories exist, in my experience there are substantially fewer rubrics to bow to, and even these are often challenged on a regular basis when those in power come from varied backgrounds hold varied viewpoints on how a business should be run.

For example, I recently purchased a small product line from a medium sized (for the industry) player that had been in the industry for many years.  The company had obtained this product line a few years earlier in settlement of a debt, but had failed to capitalize on its potential.  The issue?  The sellers had an established way of running their company, and the acquired product line didn’t “fit the mold.”  As a result, critical activities were not recognized as important and were neglected.  The line’s sales declined to the point that it was a bother rather than an asset.

I purchased the business primarily because I believed it could be returned to its former glory by a more innovative and flexible approach.  And because the line was completely new to us, I felt confident that while we might make mistakes, we would eventually get the formula correct.

The jury is still out on this expansion, but I’m at least encouraged by our demonstrated willingness to try new approaches and test new ideas.


In general, big companies are hindered by their past in several ways, including in both their physical assets and their ways of thinking.  Small companies have shorter histories, and include fewer (if any) mega-investments that can act as barriers to innovation.  When the external environment changes, as it inevitably does in virtually every market, the change usually favors the business ready to embrace the changes – typically the smaller competitor.

In this way, history, like the other factors I've mentioned in previous columns, tilt the business playing field in favor of small and nimble competitors.

Posts in the “Corporate Inefficiency” Series (Chronological Order)

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

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