This post is still very much a work in progress.
Since the industrial revolution, if you were interested in a career in technology, large companies were really the place to be. Apart from the perks that come with working for a blue-chip company, the scale, breadth and depth of resources available to you meant that they had a virtual monopoly on innovation. However, over the past ten years, this changed. In many industries, scale stopped being an advantage. It slowly, imperceptibly at first, but then quickly became a disadvantage. Size began to mean inertia, an inability to cope with a fast-moving environment. Dinosaurs, doomed on the route to extinction, a fate as immovable and unavoidable as it was 65m years ago when Earth and an unnamed comet set on their collision course.
Across many industries, the advent of the iPhone, Android, and cloud computing radically lowered the barrier to innovation. Scale was no longer required. A few app developers created world-changing companies such as Uber, Whatsapp, AirBnB, and disruption became the key challenge faced by large corporations world-wide.
The key question amongst large businesses was now, “How can we be more like start-ups?”
The template for the start-up management model was set out by Eric Ries in “The Lean Startup”. This showed how agile development principles and lean management could be used by small companies to experiment and “pivot” towards successful business models, outflanking larger, less nimble companies. Mr Ries is now following up on his rich seam of fortune with his follow-up “The Startup Way”, in which he will show how these principles can be adopted by companies large and small.
However, this begs a question. Should large companies even try to emulate their smaller siblings?
The legal problem
This is a question that a recent Harvard Business Review blog post addressed head-on. The key problem, the author argued, is that large companies have corporate reputations to uphold and stakeholders to report to, and so are constrained by what they can do. Small companies are beholden just to their owners. They can therefore operate to, and often, beyond, what is legally permissible. The stand-out example here is Uber, whose ride-sharing platform violated the local transportation regulations of many cities it set up shop in. The same is true of many other disruptors – PayPal, AirBnB, Whatsapp to name just a few. Large companies often attract the attention of regulators, anti-trust authorities, consumer groups and do not have the privilege of being able to operate undetected. Crucially, there are no other existing revenue streams that can be put at risk by flying close to what is legally permissible.
Executive Summary As more and more companies face disruption, the continuing cry from Wall Street investors is, “Why can’t companies be as innovative as startups?” Here’s one reason why: Startups can do anything. Companies can only do what’s legal.
Comparing Pensioners with Toddlers – Economic Theory
The blindingly obvious problem that is often ignored when corporate managers ask, “why can’t we be more like a startup?” is that startups and large companies are in completely different stages of their development. A startup is a company looking for a business model. A large company, is one that by definition has had tremendous success in exploiting one or many business models. They are intrinsically different. It is like asking why can’t a pensioner be more like a toddler. The answer is simple – he is not a toddler!
In economic terms, a company, or a firm exists to coordinate the means of production. Firms arise wherever it is cheaper and easier to coordinate transactions between individuals through employment contracts within a company than through contracts on the open market. The size of companies is then determined by economies of scale and the relative cost of coordinating internally as compared to transacting with external partners. In the twentieth century, economies of scale created titans in all industries as varied as chemicals, mining, automobile manufacturing, while more recently, the importance of network effects has created giants such as Facebook, Amazon and Google.
A large company is therefore a startup that has achieved success. Much like a person growing up discarding the excesses and embarrassments of youth, as a company grows, it instills management structures and processes to help coordinate its activities. In come KPIs, decision gate review meetings, supervisory boards, programme governance, investment committees. These organisational structures, processes and mechanisms are there to coordinate resources (primarily people and capital) to execute the existing business model as efficiently and effectively as possible.
Efficiency vs Innovation
However, efficiency comes at a cost – innovation. Efficiency is often achieved through rigorous application of predictable standards, through initiatives such as continuous improvement, the continuous drive for lower costs. These activities, while driving shareholder value, at least in the short term, severely constrain the ability to try something new. Innovation, by definition is the process of driving change, which runs against the grain of repeatibility and predictability.
The Corporate Identity – An aversion to risk
For many of us, our youth was a time of exploration, experimentation and self-discovery, forging a path into adulthood. This process is subject to external influences such as our parents’ expectations, includes a measure of active decision-making, and considerably more circumstance and serendipity. Most startups go through a very similar journey as they grow. Very few successful startups emerge in much the same way their founders expected them too.
However, as companies grow, much in the same way as adults forgo the indiscretions of youth, companies also mature. They forge an identity, codified in mission statements and brand values to which they are expected to conform. This limits their ability to experiment. Customers know what they are buying when they purchase a service or product from the company. Similarly, investors have clear expectations. Shift too much away from the company identity, and both investors and customers become nervous. Additionally, if a company tries a risky venture that fails, then the impact on its corporate reputation and brand image may be significant. As a result, most senior executives are cautious by nature. Custodians of multi-million brands often think twice before embarking on a venture that will not resonate with its customers. Startups, who have yet to develop a brand identity are under no such constraints.
And most importantly, people
Large companies can declare to their hearts’ content that they are innovative, that they encourage risk-taking, and are fostering a startup-like culture, but the reality is often different. Their employees work for large companies for a reason. Often, the job security, perks and general corporate comfort blanket are what makes the large company attractive. On the other hand, risk-takers prefer the high risk-reward ratio of working for a company that may make you a millionaire in the future. Not for them the carefully curated career progression through the corporate hierarchy. Of course, I exaggerate in order to make a point. Nevertheless the underlying truth remains. Risky environments attract risk-takers. Safe environments tend not to.
Leadership – the one way large companies should be like startups
Now of course none of this means that large companies cannot innovate. Microsoft, Apple, Amazon have all been masters of reinvention. GE has not survived for more than one hundred years without reinventing itself many times over. Crucially, however, all such changes have come from acting big, not small, exploiting the advantages that scale provides. Always through the vision of the leader or CEO at the helm. This is the one key way in which a large company must act like a startup.
Startups have the distinct advantage of being guided by their founder, not being muddied or bogged down in corporate politics . This is the one area that large companies must emulate. New business models, new markets, new product categories can only be achieved through top-down leadership. The examples are too numerous to mention, and the tomes on leadership weigh down many a bookshelf. But the conclusion is simple. Both startups and large companies require clear leadership. As for the rest, it is simply down to the art and practice of management.
Postscript: For a discussion of management practices to foster agility in large companies see a previous post here.