Wednesday, April 13, 2011

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.

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 convention 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.


  1. If you have not already, you might be interested in reading "The Inventor's Dilemma," by Clayton Christensen. The book explores by case study why certain entrenched and historically well managed companies with highly motivated employees still failed to anticipate and adequately plan for disruptive technology. For the most part, the author concludes that the values that make a company the leader in a segment can also work against them to innovate in that area.

  2. I read that book a few years ago, and I generally agree with the premise, although I'd argue it's more than just disruptive technologies companies have to watch out for -- almost any entrenched practice, even ones that were once a strength, can become a millstone around their necks. Another book that examines the problem from a different perspective is "Judo Strategy", by David Yoffie. That book is an instruction manual for how a smaller, more nimble organization can take advantage of the competitor's existing assets.