Commodity Products

I can't count the number of times during my years working in large corporations that I heard a CEO, or some other senior executive, proclaim a market segment or niche to be "too small to be interesting".  Hell, I'm sure I said it plenty of times myself.

Corporate management is obsessed with growth.  As one of my mentors once quipped "Growth covers a multitude of sins".  And he was right, it does.  Sloppy practices, inefficiencies, bad decisions -- they all can be made to look small by rapid growth rates.

And shareholders love growth, too.  It is the most important factor in determining the value of a business after it's current earnings.  "How fast is it growing?" I often heard.  Faster growth begets higher multiples, which begets improved stock price, which begets executive rewards.

But when you're already really big, it takes BIG growth to move the needle.  And because of that, executives are usually focused on doing BIG deals in BIG markets, with the intentions of capturing BIG share.  And big markets tend to share a common characteristic -- there are lots of competitors in them, and those competitors inevitably pull prices down to the lowest common denominator.

Now this sin is by no means universal in big companies.  A few larger corporations seem to realize that the more attractive markets tend to be those where there are limited competitors and fewer price pressures.  They would rather do multiple small deals, placing many smaller bets, and hope to capitalize on these juicier opportunities.  But getting growth this way isn't easy.

Most large corporations believe they need to leverage their administrative costs .  And so it is a rare to find a large corporation properly staffed to pursue many smaller niche markets.  And ever rarer to find one that can consistently integrate those opportunities into their existing management framework.

Small companies, however, tend to live in such small spaces.  They develop unique skills and capabilities specifically to exploit niche markets.  They aren't as obsessed with growth, and are willing to be more patient, knowing their future is much more secure in a small corner of the market than buffeted about in the midst of commodity product price wars.

Once a large corporation has a commodity product mentality, they inevitably think of all their products in terms of ever lower production costs through scale, driven by customer demands for ever lower prices.  Should, by some stroke of luck, such a company end up with a niche business filled with opportunity for high profits and limited competition, they typically blunder about like a bull in a china shop, upsetting the delicate balance that allowed the niche to exist in the first place, and invariably causing pricing to collapse.  They feel they are winning a war, but are, in fact, destroying value by their commoditization of the market.

Corporate Anonymity

There is definitely an attitude seen in corporations of meeting the minimums and serving your sentence.  And if you do so, you are entitled to praise, financial reward, and satisfaction.

This attitude is present in many individual contributors, and in larger corporations it invades the management ranks as well.  Another way to label these employees would be disengaged.  They are the ones most likely to say "that's not my job", when asked to do something.

The disengaged are characterized by clock-watching, lack of sharing of ideas, no volunteering to help solve anything, and a laser focus on things like the details of what their job descriptions say they must do.  In my own experience, these employees don't seem to "get it" that they aren't making a significant contribution to moving the company forward.

My guess is this attitude has its roots in childhood, and it seems to be a combination of several things:  a focus on getting boxes checked in order to meet minimum requirements, a mental laziness which concedes "somebody" knows how all this "stuff" is supposed to work and its "not my job" to have to understand it, and a sense of entitlement which seems to infect a broad swath of our society.

Does this attitude impact large corporations more than small?  Probably.  Large organizations provide more cover for these disengaged people than small ones do -- but they are certainly present in both places. 

The impact to the company is pretty obvious.  Disengaged employees contribute less, are often out of alignment with the company's objectives, and take up a lot of management time.  They significantly contribute to corporate inefficiency.

Companies generally battle the disengaged with speeches and educational programs.  But there is definitely a hard-core disengaged group that can only be "fixed" by trading them for future draft choices.

See how some of my thoughts on Corporate Management play out in LEVERAGE, a corporate thriller.  It is available in paperback at Createspace, and formatted for eReaders from Smashwords.

History

A few years ago, I read a 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-weaknesses described below.

People tend to become slaves to past decisions.  When I was young, my father detested vans.  He saw them as hippie-mobiles (yes, I grew up in the 60's & 70's), and so, when the minivan came on the scenes, he didn't want to have anything to do with one.  It took a long time, and a complete makeover of the "van" image in his mind, before he would purchase one.

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

Corporations are hindered in the same way as individuals.  Their collective experiences, especially those learned painfully through major errors, become ingrained rules the organizations live by.  And large organizations, because of their size, accumulate these faster than small ones.  Eventually, they can become "rule-bound", unable to embrace new directions or ideas because of the way those things resemble the past.  When the world begins to change, these rules become chains, preventing large organizations from responding to new trends.

But rules are just one aspect of how history impacts the ability of the large corporation to respond.  There are also physical assets that have a huge impact on a firm.  What was once a prized asset that allowed the company to earn great returns and fend off competition (a unique IT capability, a distribution network, critical patents), ultimately can represent the seeds of destruction.

For example, imagine your company manufactures widgets.  These are not ordinary widgets, but are quite complex, and require a trained network of dealers to sell them to customers.  Your company is the number one widget company because they've wrapped up the best dang widget dealers in the world!

But then something happens.  Maybe widgets get simpler.  Or perhaps a killer site on the web is just as effective at convincing people buy as your dealers.  For whatever reason, now your network of dealers looks like an expensive way to bring the product to customers.  Your widget market share is falling with younger buyers.  But you can't enter the internet space yourself -- your dealers would have a fit.  And you can't completely switch over -- your current sales are coming precisely from those customers who haven't found the net.  You would be throwing out the baby with the bathwater!  So you sit.  Maybe conduct some experiments on the side.  Perhaps you try some things at small scale.  When you're finally ready to commit to a new direction, it's too late -- you've already lost the number one market position to a smaller competitor who could move more quickly.

It was your history that put you in the position -- your huge investment in the widget dealer network.  That and a series of short term decisions that were, in fact, best in the short term, but in the long term led to failure.

Small companies also have history tugging at them, but their history is usually shorter, less full of "rules" to follow, and include fewer mega-investments.  In this way, history, like the other factors I've mentioned in previous columns, tilt the business playing field in favor of the small and nimble companies.

Tom

Visit my blog at: http://outofcorporatelife.blogspot.com/

Check out my new novel LEVERAGE at:  http://www.tomspears.com/leverage/

Groupthink

Probably the most common way I've seen groupthink manifest itself in organizations is in a series of rules of thumb organizations live by.  They can often be detected by listening for statements which start with the phrase"

"...we tried that once..."

The phrase is, by itself, an admission of corporate thinking that establishes conventions which are hard to overcome.

The weird thing about groupthink is -- sometimes it's right, and makes sense.  Other times, it can be deadly.

A case in point:  during my career I continually looked for opportunities to add products to my existing distribution channels as a way of growing sales.  This worked pretty well until I hit a business which had a very narrowly focused channel.

"We've tried introducing complimentary products to the these guys before, but it didn't work."  It was a sure sign of groupthink, I decided.  It wasn't until I'd tried half a dozen products myself, that I realized the naysayers were absolutely right -- the channel was not serious about complimentary products or new sales.  They saw new opportunities as risky.  Those new products could put their relationships with their customers at risk on their core products, and they were only interested in sure things.  And how many of those are there in business?

So, is groupthink a disease, or rational rule-making?

In my book, it is still a disease -- the reason being that causality becomes separated from the rule itself.

Why do we invoice at the end of the week rather than every day?  Because that's the way we do it!  There might be good reasons for the decision to behave in this fashion, but unless the employees in the trenches can explain why, it's an example of groupthink.

The disease is probably at it's worst when used as a shortcut for strategic decision-making.  For example:  "We always overestimate inour strategic plan." or "We shouldn't make acquisitions outside of our industry, because we can't make them work."  Those are the groupthink notions that get companies in trouble.

Is groupthink more prevalent in large corporations?  You bet!  It is in larger and more complex organizations that people are looking for those simple and pat rules to help them make easier and safer decisions.  It is also in large organizations where political pressure keeps dissent to a minimum.

Yes, groupthink is one of the big organizational anergies that level the playing field between large and smaller companies.  But there are others even more damaging, as I will explore in future posts.

The Sunk Cost Fallacy

Many of us learned about sunk costs in a basic business or economics course -- sunk costs are the ones already in the past.  They are those expenditures which, when the results of a particular choice are tallied up, will weigh in on the negative side, but don't have anything thing to do with continuing on with a particular investment.

For example, imagine you approve a thirty million dollar expenditure in a new production process, one which shows a nice return based on some huge productivity improvements.  After spending the first five million, however, it becomes clear the original productivity rates will never be achieved.  In fact, when you "run the numbers" on the remaining twenty-five million yet to be spent, the return is virtually zero.  What do you do?

On a strictly economic basis, you punt.  The original five million is a total loss, but you should stop the project because the twenty-five million yet to be spent is just good money being thrown after bad.

In reality, I've almost never seen this behavior.

Most people can't get the five million dollars already spent out of their mind.  The want that investment to be productive, and so against all logic, continue to spend in the vain hope somehow the project will make its original projections.  By that stage the five million is a sunk cost, and doesn't have any relevance to the decision to press on.  Or does it?

In large corporations, the problem is larger than just "forgetting about" the initial five million outlay.  It's all about admitting to mistakes or errors.

Stopping the project is tantamount to confessing to imperfect management ability.  In most large corporations that comes with a political pricetag -- at the least a loss in confidence, at the worst a loss of job.  If the decision maker admits to the error, they are likely to be punished, and the more the organization focuses on finding the guilty, the bigger those stakes become.

On the other hand, if the decision maker allows the project to continue, they will likely have time to devise a plan to lay-off blame elsewhere.  Bad execution, deceptive suppliers, poor analysis -- the list goes on and on.  I've even observed managers repositioning others to be the scapegoats for impending disasters, when what they should have done is called time out and stopped the spending.

The larger, more political, more punative and more complex the organization, the more likely they are to suffer the inefficiencies of the sunk cost fallacy.

Corporate Inefficiency

I read an interesting article passed along by a friend on 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 entrepeneur, makes a number of excellent observations. The article, which was in the Financial Times and can be reached by clicking the link, is summarized below. I think some of these observations need to be expanded upon in my blog on Corporate Politics and I will do so in subsequent posts.

Corporate diseases make large organizations less effective -- their types and varieties are listed below:

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

How does Company History Impact Politics?

Originally published 9/8/10

Old habits die hard. At least in corporations they do.

If you've ever worked in a large corporation, you've probably experienced the inertia that exists there. Yes, the chief executive (and to a lesser degree, other high level executives) does influence the company -- he/she sets strategy, maybe refines the mission and values, and over enough time, may even change the direction of that inertia.

Sometimes that inertia is called Culture. I personally hate the Culture name, because it is overused and fuzzy in meaning.

Suppose the last Chief Executive (who was in place for 25 years, for argument sake), was a detached high flying strategist who allowed freewheeling politics to rule the organization. Now suppose the Chief Executive retires and is replaced by a hands-on CEO who hates politics. How long does it take to change the underlying environment?

The answer is -- a long time. And it will be a very painful period. Why? Because old habits die hard! The existing organization is filled with people who grew up in and flourished in a highly politicized environment. In their world, certain tactics and political maneuvering became a part of their management style and part of their survival tools. That is hard for people to let go of, particularly since it continues to work, despite what the new CEO is demanding.

Unfortunately, for the current team, the quickest way to change the highly politicized environment would be to change out the people. Since it isn't practical to fire everybody, what actually happens is a few people are sacrificed in the transition, and change plods along very slowly.

So is company history important to understanding the politics of the organization? Absolutely!

Is There Anything Good About 'em?

Originally published 8/28/10

I've spent lots of space detailing the frustrations I've had with upper levels of management in the large corporations where I've worked. One might be tempted to think I don't find any value in them at all -- but that would be wrong. Let me list a few of the pluses of the large corporation.

They provide more career progression opportunities than smaller companies.

They are under more scrutiny, and hence, generally have to be more fair than most other entities (not counting government). Their actions will always be potentially subject to the public eye.

They tend to attract talented people. In many smaller companies I've observed, there are only a trusted few who are really the thinkers and leaders. Larger companies have more smart people sprinkled through the ranks.

Let's face it, they're more efficient. At least up to the point where the synergies of combining operations outweigh the anergies (a term one of my former bosses used to use). Anergies could include -- unnecessary corporate overhead, inefficient communication, being the target of lawsuits simply because of size, etc.

They probably have more staying power, on average, than smaller private firms, although that point might be debatable.

In general, I'm not so much down on the concept of the large public corporation, just the odd way the interaction between shareholders, board, CEO and senior team has evolved. The lack of trust, respect and loyalty. The rampant scapegoating. The quickness with which we fire, rather than work with people. The measurement of expended hours and personal sacrifice, instead of commitment and contribution. The intolerance toward making errors, confessing errors or learning from errors.

Of course, examining the negatives tends to be more entertaining and more controversial, so I probably won't stop doing it, but just this once I felt the tug of my conscience telling me I needed to be more evenhanded.