Wednesday, 9 May 2012

How a big business can act like a small business

A common concern my clients express is how a large business with its engrained culture and rigorous risk processes can compete with fast-moving start ups. The latter are unimpeded by the organisational strata that come with scale and therefore can act fast to access market opportunities. They are also unimpeded by incumbency and therefore are free to disrupt your business with impunity.

In my experience, the reason behind the lack of organisational agility that is at the root of the problem is based on how personal risk and reward is calculated in a business. It is also rather soluble, provided that underlying psychology is understood.

Managers in a start-up actually have it rather hard. If they don’t hit their targets then after a very short time they won’t be able to pay the wages. Cash flow is a key challenge for most start-ups, even those that are comparatively well funded. What this challenge breeds is an institutional attitude that they must rapidly seek out the “low hanging fruit” commercially and an acute sense for when they’ve found them.

Most Managers in more established businesses are also incentivised to generate short term profits, but for different reasons. Their bonus, compensation and progression depends on it.

This is a good thing as an operational focus too far in the future leads to a lack of pressure to create value tactically in the market and hence to generate cash. But for the whole business it can lead to a lack of growth because investment in new product development, advertising or process improvement hit the bottom line before they create improvements in the top line.

This incentive model means that taking risks with new products or business models to achieve organic growth means taking personal risk. So a good idea is often dismissed early on because it’s too risky to expend resources that could be used for short term gain for strategic advantage.

That’s not to say that Managers don’t have ideas. They probably have lots. But they never make it past the personal risk/ reward test.

One way to get around this is to have a growth fund at CEO level that can be used to fund or part-fund an operating unit’s growth initiatives. Managers pitch ideas for this growth investment and the CEO chooses which to fund. Many inorganic growth initiatives start in this way, so why shouldn’t organic growth?

And this method should lead to more growth ideas of better quality. Since the CEO is investing personally in this exercise, Managers have large incentives to submit ideas as it brings exposure and the opportunity to progress, as well as the simpler incentive of growing the P&L.

For the record, a similar arrangement was used by at Gillette by Jim Kilts during his tenure as CEO. The company’s revenues grew from $8.3Bn to nearly $10Bn during this period and became the dominant force in several categories before it was acquired by Procter and Gamble in 2005.

Any other similar examples, let me know! I quite like the idea and would be interested to see if anyone else has tried it.

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