25 Nov 2021 18:42 IST

Why big is not always beautiful

Leaders chasing exit values and valuations end up making daft decisions driven by their quest for size

On November 9, Lawrence Culp, GE’s Chief Executive, announced that GE would split its operations into three public companies. As The Economist put it: “The ambition to be everything was enabled by the perception that it could manage anything. The 21st century punctured that perception.”Mr Culp it continued, called out “the illusory benefits of synergy” which could be traded for the certain benefits of focus. As if to reinforce the logic, two other large global giants followed suit. Johnson & Johnson spun off its consumer-health division into a separate business and said it would focus on its pharma and medical device businesses. Across the world, the Japanese conglomerate Toshiba laid out a formal proposal to split into three publicly listed companies.

Larry Culp, CEO, General Electric Co., speaks during a Bloomberg Television interview in New York, US. General Electric will split into three separate companies in a stunning breakup of the iconic manufacturer founded by Thomas Edison whose sprawling businesses once made it the world’s most valuable company.   -  Christopher Goodney | Bloomberg

 

Sometimes there’s a fascination to have the power of one. Leaders issue a clarion call to highlight that we are one team, one organisation, we have one process, one way of doing things. The size of one large behemoth is alluring. Team members take pride in belonging to the largest, and revel in the one way. But this is not always the best way. Size sometimes takes a toll. Uniformity sometimes extracts a heavy price. What are some of the benefits leaders risk losing, when they pursue the bigness and oneness path?

Autonomy

One conglomerate that has successfully not just survived but thrived is the Berkshire Hathaway group that Warren Buffet and his friend and partner Charlie Munger run. A big reason for their success is to find great businesses, leave it in the hands of excellent managers, and then get out of their way. Big organisations find it difficult to do this. With size comes the urge for more control, more innovation-crimping processes, and soon you are big but no longer beautiful.

Warren Buffett, CEO of Berkshire Hathaway.

 

There is an elegance to one. CEOs, dictators, politicians — all love the idea of “one ring to rule them all.” There is a grandeur to the one organisation statement, a satisfying uniformity in the one way or one process or one policy. But this obsession for one does not consider every single human being’s desire to be different and unique.

I recall the endless debate as clients outsourced their processes, around whether it was possible to have one single global system. While a HRIS system could be possible within a single system, I always pushed back against the myth of a single global payroll system. Like ‘recession proof’, ‘off-the-record’ and ‘overnight success’ — it doesn’t exist. No system, I believed, could embrace the diversity of different countries, compliances, employee needs, and business needs across over a hundred countries around the world.

There was no massive benefit that could emerge from that one system that would in any way outweigh the cost, time, change management challenges and effort of attempting to create one. Leaders need to pose this question of themselves — will the big and the one really spark innovation, creativity, energy and growth, or will it end up suppressing them?

Agility

There’s a story told (most likely apocryphal) that the Israeli Air Force wanted to take out the threat posed by an Iraqi nuclear plant located deep inside Iraq. While there was no problem with a bomber reaching the Iraqi border undetected, there was a high chance it would be spotted during the long journey overland across Iraqi territory and be shot down. The Israelis (so the story goes) put together a squadron of fighter jets that flew in close formation in the shape of a jumbo passenger airliner.

The jets stayed in this formation all the way till they reached the nuclear plant. On radar they showed up as a harmless passenger flight. They reached the plant, bombed it out of existence and scrambled back at jet speed over the border. A huge passenger airliner but made up of individual, agile, Mach 2 speed fighter jets.

Even though I was never sure of the authenticity of the story, I always used it as a powerful example for each team I headed, when we spoke about growth. I urged us to retain the speed,agility and manoeuvrability of fighter jets even while we stayed within the confines of a large organization.

We had to stay responsive to changing customer needs, we had to stay synchronised with each other, we had to fly our individual journey or as product or geographic divisions but at the same time retain the vision, the mission, the processes of the big organisation wherever it added value to serving our customers. This is a different way of flying the big journey, but still staying small and nimble while doing it.

In fact, if you look at the Forbes Top 50 companies ranking list from 1917 when the list first started to 2017 — over those 100 years only two companies survived under their own names — AT & T and General Electric. AT & T was broken up by government mandate in 1984 and in 2021, we see GE also making the trip to ‘splitsville.’

Buffet and Munger would agree. They have always been, as they put in Buffet’s 2006 letter to shareholders “skeptical about the ability of big entities of any type to function well. Size seems to make many organisations slow-thinking, resistant to change and smug. In Churchill’s words: “We shape our buildings, and afterwards our buildings shape us.”

Here’s a telling fact: Of the ten non-oil companies having the greatest market capitalisation in 1965 — titans such as General Motors, Sears, DuPont and Eastman Kodak — only one made the 2006 list. Every business leader and aspiring business leader should read those words of wisdom again and again — before they embark on an Alexandrian conquest to rule the world, or before thy make one more ego-driven acquisition.

Lack of focus

This week’s business news was dominated by the dramatic fall in value of India’s most hyped IPO. Ironically in our last reflection, we had written of Icarus leaders who flew too close to the sun until the wax that held their wings together melted and they plummeted to earth. What started as a payment app morphed into a super app that tried to do many things for many markets all the while being, as Aswath Damodaran put it ‘India’s premier cash guzzling machine.’ The ambition of the founder was that it would be the largest-ever IPO with an issue size of ₹18,300 crores. Instead, it closed the opening day grasping the record of the steepest fall.

As the adage goes — if you stand for everything, you stand for nothing. Part of the reason that some of today’s start-ups and even older businesses pursue acquisitions with a ravenous appetite is that their strategy is a chase for valuation instead of value. The fintech founder with the disastrous IPO, in a Hail-Mary townhall urged his employees to keep their attention on serving investors. That is part of the problem.

I’ve always believed that as a business, if we focus on serving customers first and best, then the investors interests will eventually be taken care of. When a leader chooses to focus on exit values and valuations then we often end up making daft decisions driven by our quest for size.

In his 1983 letter, Buffet gave us a clue to why this happens “managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch.” As is Buffet’s habit so often, he followed this with a punchy quote. “Pascal’s observation seems apt: 'It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room'.”

This is a skill leaders must learn — to eschew big when it means a loss of autonomy, agility and focus. As Denis Thatcher expressed so wonderfully — shouldn’t end up as useful as ‘the one-legged man at an arse kicking contest’. Today’s VUCA world often makes business an ‘arse kicking contest’ and its best we walk in with two legs or three or more. One, would leave us feeling quite sore.

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