Is Your Company Too Big?

Companies have been feverishly pursuing growth and global expansion—and in the process setting themselves up for failure.

January 24 2011 by William E. Rothschild


Many business leaders today seem obsessed with global growth. That obsession is based on an assumption that big and global companies are less vulnerable to unpredictable events and trends that can rock economies—which, in turn—has given rise to the concept of being too big to fail.

Over the past decade, we have witnessed the aggressive growth of giant American companies, as well as universities, seeking to gain a strong beachhead in developing nations and regions like China, India, the Middle East and, most recently, Brazil. There are plenty of examples in all industries and markets of leaders who believed in the go-big/go-global growth imperative and who were willing to take on profitless growth just to be big. (See “Too-Big-to-Fail Failures,” p. 64.) These companies did grow for a time, and many were even lauded as invincible. But they all failed in the long term because they lacked five critical factors required to succeed: Leadership, Adaptability, Talent, Influence and Systems.

Leadership:

Having the right type, depth and mix of leaders is essential. There is no one type of leader for all organizations and situations. Leaders must fit the life cycle and strategies of the organization. Since a large company has a portfolio of businesses in different stages of life, it requires a mix of leadership types and styles.

For example, new ventures grow rapidly and require leaders who are willing to assume risk and aggressively gain share. These leaders must be self-assured, risk-taking, missionary, entrepreneurial, even autocratic, to able to take advantage of changing markets and competitive moves.

On the other hand, core businesses are likely to be more mature and growing slowly, which requires the talents of experienced professional managers, or caretaker leaders. They must be more cautious and able to grow systematically.

Declining businesses require the talents of leaders more like surgeons, or even undertakers, who have no allegiances to vested interests and call the shots as they see them. They might even be willing to eliminate the businesses entirely.

Managing this variety and diversity of leadership is tough for any organization, large or small, domestic or global, but it is a major problem for too-big-to-fail organizations, since they need a stable of different types of leaders and can’t rely on the cookie-cutter selection and development process.

Unfortunately, most giant organizations are led by caretakers, who often select and promote other caretakers to lead divisions and subsidiaries, rather than the right type of leader for the organization’s maturity and growth. There are also likely to be internal conflicts and disagreements on the right course of action. Caretaking leaders have problems with both risk-takers and surgeons. Risk-takers don’t want to be constrained by company bureaucrats, and surgeons challenge the folklore that keeps them from pruning outgrown core businesses.

GM and AT&T are classic examples of giant companies with inbred cookie-cutter leaders. Both had a dominant market share and competed against companies like themselves. These companies focused on the core business, where they had dominant technological and market positions, and ignored the changes in their market, customers and technology.

GE is probably the most successful of the go-big, diversified conglomerates that had problems developing the right mix and variety of leaders. In fact, GE believed that you could train professional managers able to lead any business, regardless of market and competitive conditions. But when they embarked on nine major new ventures in the 1960s, they discovered this was not true. Five failed and the rest took more time than anticipated to succeed.

Other companies believe they can acquire or pirate the right type of leaders, by either buying entire companies or stealing their leaders. This rarely works because new leaders struggle to adapt to new cultures and often fail or stay only a short while. Adding global businesses in developing nations heightens that struggle by adding different cultures, educational levels, language and values to the complexity.

Adaptability:

A second requirement for success is the ability to adapt to market, technological, competitive and sociopolitical changes. Giant companies often struggle to adapt. As market or technological leaders they are reluctant to accept a new reality and risk cannibalizing their current positions. For example, Kodak led the low-priced photography market. It had a winning strategy of selling low-cost cameras and making money on film and processing—the classic razor blade strategy. As a result, Kodak was reluctant to accept the reality of digital photography, which threatened its film and processing businesses.

Similarly, Xerox was once the innovative leader in the copier market, where it made its money selling supplies and service. It ignored the emerging small copier segment. Both Kodak and Xerox lost market position and became much smaller players. Both have since decided to venture out of their core businesses to grow.

The message? Giants unwilling to accept change ultimately suffer.

Talent:

A third success factor is having the right type and depth of functional and professional skills to carry out the strategies. The number and type of critical functional skills depends on the size of the opportunity and the timing. If the market is huge, obviously the depth of talent is large, but in a niche market with a small talent pool, quality counts. Furthermore, the talents required depend on the type of technologies and how advanced they are. Obviously, putting a man on the moon is very different than designing and developing mass-market products.

Marketing and sales skills will also vary. In some markets, long-term relationships really matter; mass markets require a huge number of order-takers. The type of production, logistics, outsourcing, financing and human resources will also be different and require a different mix of skills.

Small organizations that are more specialized often find it easier to hire, train and retain people with the skills required, while big companies need broad portfolios of talent and must hire and train talented people in large quantities. Some rely on hiring experienced managers as needed, while others train them themselves.

The complexity is compounded when the go-big giant is also go-global. Many companies that have moved into China and India now face shortages of skilled labor, the need to pay higher wages and even strikes. Influence: All organizations must be able to sway external and internal stakeholders, particularly investors and governments. Too-big-to-fail companies believe that governments and investors have too much to lose if giants were to fail, so size appears an advantage. They invest heavily in lobbying at all levels of government, employ large investor-relations staffs and invest heavily in advertising and networks in an effort to keep investors happy. In China and India, for example, giants like GE, GM, Boeing, and financial services firms created strong ties to governments and gained permission to partner with homegrown companies. GE, for example, invested heavily in manufacturing and sales over the past decade, even opening R&D centers in both China and India.

All the giant multinationals believed that they could gain a strong position in these countries. But in July 2010, GE expressed concern about what the Chinese government’s backing of its domestic companies meant about its willingness to allow GE to succeed. Among other things, China has not stopped the pirating of copyrights and patents, as it promised. The Chinese require foreign companies to work with domestic companies, which affords access to proprietary technology, which is often subsequently pirated. Even in developed nations, governments have not been allies of big companies—and increasingly are adversaries. The Obama Administration is enacting higher taxes and more regulations and blaming go-big/go-global companies for the U.S. economic crisis. Big business has become a target and big labor is now the partner. This also happened during the Great Depression when Franklin Roosevelt used big business as a scapegoat and again after World War II, with legislation and regulations supporting giant labor unions. It took more than two decades to change this balance of power—and now it is now happening again.

Another stakeholder group, investors, has changed its investment priorities. As a result, go-big/go-global companies find both their stock value and their ability to raise capital declining, while those of smaller more innovative specialists, like Apple and Google, have grown.

Systems:

Finally, successful companies must have the right systems and networks to control their own destinies. This was once an advantage of the giants. In the 1980s and 1990s, big companies owned the most expensive, comprehensive and sophisticated information and forecasting systems. They enjoyed access to market and competitive information that was not available to the small players.

Today, this has changed. The Internet makes information available to everyone for free. Security is a major issue, but even there small players enjoy an advantage. Giant companies are forced to spend hundreds of millions, if not billions, to secure their systems—particularly as they move into developing nations.

Overall, go-big/go-global sounds great in theory. But these companies have an increasing competitive disadvantage, which suggests the strategy will fail, just as it has in the past.

A Better Path

Companies need to become more selective, to be internationally opportunistic and more focused on their home-court advantage and, most important, to remember that cash is king. Successful strategies require a comprehensive evaluation and anticipation of all the key elements of success, not just a simplistic focus on growth. Winners determine the relative attractiveness of their markets by clearly understanding their customers, the competition, changing technologies, changes in distribution and sales and, most important, changes in stakeholders. Smaller markets often prove more profitable than large, rapidly growing opportunities.

It is important to have a presence in some emerging markets, but only where there is a clear competitive advantage needed by the host country. It also means recognizing that there is only a limited window of opportunity and investing no more than what is absolutely necessary. Technology can be developed overseas, but not the entire technology or product. Executives must make sure that the complete product or technology is managed and compiled in their home country, where it can be protected legally and technically. A company also typically has a better understanding of its domestic stakeholders. If a company is willing to invest to grow and defend those markets, it will have a much better, long term advantage, than if it reallocates resources to foreign nations.

Successful long-term American companies will be those that invest in the U.S., manage and control their R&D in the U.S. and focus on solving the major problems facing the U.S.—especially since there is a need for jobs in the U.S. The U.S. still is one of the best places to find leadership and professional and technical talent, as well as having governments at all levels that can be persuaded to help.

Lastly, companies of all sizes need to manage their business around the concept that cash is king. Cash flow is extremely important in companies of all sizes. It becomes even more important in foreign markets and turbulent times. Too-big-to-fail giants forgot this fundamental truth and demonstrated that size is not key to survival and success and that big companies can not only fail, but fall harder than those that are more focused and selective.

Too-Big-to-Fail Failures

Proof that size does matter—although not always the way one thinks.

SEARS was the Wal-Mart and Amazon of its time; it dominated theretail business and had a strong catalog business and brand, but decidedto diversify to become a big integrated financial services leader. Itsought to expand its Allstate insurance business into a one-stop financialservices company and failed. If Sears had continued to focus onits core retail operation and responded to changes in how its customersshopped, it could have brought its catalog business online and wouldlikely rank alongside Amazon today.

GENERAL MOTORS once dominated the U.S. auto market. It took itseye off the domestic market and its major brands to add foreign brandsand moved into all major developed nations. It gave up the small-carmarket to the Japanese and Koreans and focused on the big-car, truckand SUV markets because they generated large margins. In 2009, GMdid the unthinkable: It declared bankruptcy and became a ward of theU.S. government.

CITICORP did the same. It grew from a well-managed domestic bankinto a major global conglomerate. It, too, has since been reduced insize and power and become a ward of the U.S. government.

William J. Holstein is CEO of Rothschild Strategies Unlimited LLC, author of The Secret to GE’s Success and an adjunct professor at University of Bridgeport.