LESSON
Number 43
 

Big Company Disease (BCD)

Manfred Hoefle

 

International problem – Complex diagnosis – Chronic phenomenon – Radical remedy needed

  

After the biggest loss in the 100-year history of Sharp Corp. the President, Kozo Takahashi, announced that the electronics group had fallen victim to Big Company Disease. He admitted, “We forgot ourselves and the founding principles of this company as our operations expanded.” He then announced reforms to “change everything.”(1) The benefits of these reforms have yet to be seen.
Although hardly remarked upon overseas the Big Company Disease (BCD) has been recognized and criticized in Japan for a long time. In the early 1980s, Kazuma Tateisi, the founder and chair of Omron Tateisi Electronics Co. (now Omron) noticed its impact on his fast-growing enterprise. The successful entrepreneur described in The Eternal Venture Spirit – An Executive's Practical Philosophy(2) how the disease spread. Tateisi coined the term Big Business Syndrome for the symptoms.

An international problem

BCD is not a transient phenomenon and Sharp and Omron are not special cases; over the past 20 years all three CEOs of Toyota have repeatedly warned of BCD. At first glance that may appear surprising given Toyota’s reputation as a dynamic global corporation. In particular the US auto industry sees Toyota as the industry benchmark and the Toyota management system with numerous best practices as the one to copy.(4)

This strange combination, both positives and negatives, is a sign that BCD has become a systematic problem in Japan. But is this only true for Japan? No of course not. The BCD pathology exists elsewhere, but under different names. It may be called a general decline or mismanagement.

The USA has a long history of big companies of this type: examples are US Steel and Bethlehem Steel, which were the biggest steel corporations in the world, Singer, the venerable sewing machine manufacturer, Kodak, placed in administration in 2012, RCA (Radio Corporation of America), a former powerhouse of technology, and Westinghouse, the pioneer of electrification in the United States.

A prominent victim was General Motors (GM). GM has been associated with BCD ever since the 1970s.(5) The long-time world’s largest corporation was rescued by the US government in 2009. GM was then reorganized as a new corporation and its operating divisions were sold or closed. The traditional business still operates, but will take time to recover.

Another case study is IBM. This company has a mixed history: founded by Thomas J. Watson in 1911, it first made punched card machines, clocks and weighing scales. In the 1960s, IBM became an icon of the computer age, later it gradually stagnated, and eventually posted a world-record $8 billion loss in 1993. The preceding ten years could well be described as the BCD phase. Louis V. Gerstner was hired by IBM as CEO and initiated massive cuts to achieve a business turnaround.(6) He also initiated the transformation of IBM into the world’s largest computer service firm with around 430,000 employees. More recently a series of hardware business units were sold (including the pioneering PC business), and some software and service firms purchased. The traditional strong emphasis on R&D was continued and has contributed to a strong patent portfolio. This innovative strength also appears to be commercially successful, thanks to a new cognitive computer system named after the firm’s founder Watson.

The conglomerate, an organizational form that emerged in the 1960s, due to low interest rates and heavy capital market fluctuations, was soon affected by BCD. The high growth rates of conglomerates were initially due to sequential acquisitions but soon led to large business structures, which became unmanageable. Within the next ten years most conglomerates had disappeared or rapidly downsized.(8)

The difference between Japan and the USA is roughly as follows: in Japan employee loyalty and identification with the firm is very strong; a culture of consent predominates and diversity is low. However, after the gradual decline of classic mass production the preference for size led Japanese managers to overestimate the benefits of scale and synergies. Very few startups firms emerged to replace or join the early champions; the Japanese start-up scene is small. BCD has become chronic and widespread. Just consider the situation of former global champions such as Panasonic (formerly Matsushita) and Sony or conglomerates like (Keiretsu) Hitachi, Mitsubishi and Sumitomo/NEC.

In contrast, in the USA businesses are dominated by capital markets and employee and management loyalty is weak. This strengthens the tendency to rapidly restructure underperforming companies or push them into insolvency. Attempts are seldom made to cure BCD, due to the short-term attitude of investors and managers; instead, companies tend to downsize by selling off business units.

Germany (and most of Europe) presents a different picture. When considering the past of big companies in Germany some common characteristics stand out: their longevity, the small share of conglomerates,(9) and the relatively high proportion of family and trust enterprises, with core long-term shareholders. There is another unique feature, which favors big firms: DAX companies are subject to German co-determination law (elected works councils); German trade unions focus primarily on a high level of unionization; their cooperative behavior on governance and management has a positive impact, which even extends to quasi co-management. Put simply, management and government in Germany is midway between the extremes of Japan and the USA. Consequently, the malaise associated with big companies is less.

A complex diagnosis

Just as cultures and styles of management differ, so do the symptoms of BCD. In the case of Sharp, the new CEO identified the key symptoms as: too many promises made, time-consuming coordination processes, and numerous formal reorganizations "managing the organizational chart." As a rule, BCD exhibits a combination of symptoms,(10) whose emergence and impact is gradual and at first unnoticed. It is an institutional disease that usually starts at the corporate headquarters or summit of the company. It causes: a progressive paralysis of the organization’s ability to innovate, indifference to customer service, and exploitative and manipulative attitudes toward employees (human resources).

In formalized structures management conduct is focused on past success. A business executive is often promoted for being a faithful servant. Peer groupings encourage consensus at the lowest common denominator. Also, those who know it all often react to innovative suggestions by saying “It will never work” or “We have always done things this way.” Because decisions on products and markets can bring significant risks, marketing departments are often required to justify such decisions; however, this strategy overlooks the fact that marketing does not discover markets, it follows them. Also marketing departments specialize in competitor analysis; they are not a reliable source of entrepreneurial impulses. As a result, innovation may gradually decline into a series of public relations (propaganda) stunts.

BCD is a syndrome with complex symptoms.(11) Here is a list of typical symptoms:

Attitudinal and behavioral symptoms:

  1. Big-is-best attitude, addiction to growth
  2. Conceit, megalomania
  3. Focus on internal matters, continual reorganizations
  4. Neglect of core business and regular customers
  5. Complex decision-making, avoiding accountability & liability
  6. Peer groupings (executive inner circles, decision-making committees)
  7. Loss of desire to innovate, lack of curiosity
  8. Complicated in-house contractual relations
  9. Focus on capital markets (equity fund managers)
  10. Weak group identity or loyalty

Structural and operational symptoms:

  1. Matrix organization, multi-level hierarchy, obsessed with functions
  2. Centralized and fragmented corporate service functions
  3. Too many meetings, too many participants, too lengthy
  4. Multiple manuals, guidelines, rules and process descriptions
  5. Comprehensive and elaborate compliance systems (for ethical behavior)
  6. Countless circulars and flood of e-mails
  7. Huge headquarters
  8. Duplicated functions and positions (multiple divisions and units)
  9. Multiple management concepts
  10. Ritualized budgeting, hockey-stick planning
  11. Hiring external consultants to work on core management tasks
  12. Executive posts filled mostly by external hires

These syndromes can affect any large company. However, BCD is an institutional phenomenon which is closely associated with managerism.(12)

A chronic phenomenon

Major organizations breed group dynamics, which lead to complexity and restrict transparency unless counteracting forces emerge. A significant share of the workforce, the average employee, is not opposed to circumstances created by BCD; in fact, employees can easily come to terms with BCD; often subcultures emerge which actually make working life easier for employees.

What is a big company?
It is often claimed there are many big and successful companies and so there is no natural limit to company size. It is certainly not easy to define a limit for company size, because that depends on the circumstances of each individual business. Perhaps very big or too big would be above $100 billion revenue (that covers 25 companies worldwide, apart from oil and gas industries and commodity traders). Many big companies are fairly homogenous (oil, raw materials, commodity traders, automotives) or government-owned (above all in China). The few remaining conglomerates (GE,(13) Siemens, Samsung,(14) Nestlé, P&G and others) have effective management and specific national circumstances.

Many management teachers and consultants argue that bigness and complexity are easily manageable as long as the correct concepts and tools (theirs) are applied.(15) There has been a rapid increase in corporate breakups and spinoffs recently. The reason managers give is to reduce diversity and complexity and be more sharply focused. The real purpose, to simplify management, is never mentioned, because it could attract accusations that conglomerate companies of such size and diversity are just too big to manage.(16) Notable current examples are Bayer, H&P, Philips and Siemens.

A radical remedy is needed

BCD is primarily an institutional syndrome, a problem of magnitude, so that structural measures should be used to solve it. That means first:

1. Downsizing with demerging and spinoffs
2. Decentralizing, setting up profit centers, segmenting
3. Reducing hierarchy levels (maximum of six)

Second, measures relating to control and incentives:

  1. Detailed internal contracts
  2. Clear responsibilities with personal accountability & liability
  3. Regular and transparent assessment of performance
  4. Pay raises and bonuses for exceptional performance only
  5. Promotion of in-house staff
  6. No planned economies within companies (complex plans/budgets)

Finally, there must be changes to thinking and attitudes:

  1. Think from a customer and market perspective
  2. Think: This is my company.
  3. Leaders must understand the business; use the experience/expertise of employees; maintain close contact with innovative communities (above all universities and startups)
  4. Company philosophy goes beyond commercial objectives
  5. Demanding but reachable targets
  6. Prioritizing innovative solutions

If a company suffers from BCD, it must be downsized and inevitably workplaces will be significantly reduced. The above measures should be supplemented by methods and instruments for reforming and revitalizing the company.

Big Company Disease (BCD) is primarily a problem of size and dimension.
It is due to management failing to limit and control growth at an early stage.
A proper strategic cure requires radical structural and personnel measures.

 

Literature

  • Collins, James, C.: How the mighty fall. And why some companies never give in; Random House Business Books, London, 2009.
  • Geuss, Arie de: Jenseits der Ökonomie, Klett-Cotta, Stuttgart, 1999.
  • Kohr, Leopold: Die Lehre vom rechten Maß, Otto Müller Verlag, Salzburg/Vienna, 2006.
  • Drucker, Peter, F.: Management, Tasks, Responsibilities, Practices, Harper & Row, New York, 1973.
  • Hoefle, Manfred, J.: Too Big To Fail versus Rechtes Maß - Zum Dilemma übergroßer Unternehmen; http://www.managerismus.com/; Denkschrift Nr. 5, 2011.

 

Anmerkungen

(1) Wall Street Journal, 25 June 2013, by Noriko Nakamura and Mayumi Negishi.

(2) Productivity Press, Cambridge, Massachusetts, 1989 (Japanese original 1985). The foreword was written by the great management thinker Peter F. Drucker, who Kazuma Tateisi consulted during Drucker’s first lecture tour of Japan in 1959.

(3) They are Hiroshi Okuda, President and CEO (1999-2006); Karsuaki Watanabe, President and CEO (2005-2009) and currently Senior Advisor; and Akio Toyoda, President and CEO (2000 -).

(4) See also The Toyota Way by Jeffrey K. Liker, Mc Graw-Hill, 2004.

(5) Diagnosis by Peter F. Drucker, probably the GM expert. In the first classic work of management literature Concept of the Corporation he describes GM as, "the prototype, as an organization and its problems therefore as problems of structure”. A telling and often quoted anecdote of Ross Perot, who sold his enterprise to GM, is "I come from an environment where, if you see a snake, you kill it. At GM, if you see a snake, the first thing to do is to organize a committee on snakes. Then you go hire a consultant who knows a lot about snakes."

(6) Around 100,000 employees were laid off.

(7) The business has been granted more patents than any other US company over the past 20 years.
(8) The best-known firms are Ling-Temco-Vought, ITT Corporation, Litton Industries, Textron, Teledyne, Gulf+Western and Transamerica.

(9) This includes the industrial empires of Hugo Stinnes, Flick and industrial groups AEG and Mannesmann.

(10) Analogous to human medical diagnoses: sclerosis (hardening of organs and tissue), rheumatism (painful illnesses), impaired mobility (limbs, spinal column, bones, muscles and tendons) and burn-out (exhaustion syndrome).

(11) BCD also affects the non-commercial sector: universities (dysfunctional relations of professors, teaching staff and administration) and hospitals (dysfunctional relations of physicians, nurses and administration) as well as associations and NGOs.

(12) Managerism is an inappropriate form of company leadership and management culture, which is characterized by a self-serving management that focuses on capital markets and is indifferent toward employees; managerism is mostly found in public corporations. Typical features are short-termism, profit maximization, over-expansion, growth orientation, avoidance of accountability/liability, excessive executive pay, careerism, conceit, self-promotion, socialization of risk, weak corporate governance, and poor corporate citizenship.

(13) While Jack Welch was CEO, General Electric became a high-earning conglomerate with a strong finance division (sixth largest US bank), which was endangered by the 2007 finance crisis. Welch’s successor, Jeffrey Immelt, reemphasized manufacturing.

(14) In 2012, former CEO Choi Gee-sung changed role to become Chief Strategist. He believes innovation is the vital nerve of the business. Samsung’s R&D spend is three times higher than Apple, which prefers to buy innovations.

(15) The management teacher and consultant Fredmund Malik predicted companies, "could become many times bigger than before, because the new management systems give them the necessary tools." And moreover, "I can imagine corporate groups with a million employees or more and without beauracracy and with high productivity." (Strategie, Campus Verlag, Frankfurt and New York, 2011, p. 55).

(16) The negative reaction to Denkzettel Nr. 28 (www.managerismus.com) proposing the Medical Systems division of Siemens be demerged is revealing. Criticisms by employee representatives focus on loss of workplaces and identity; managers focus on loss of scale benefits and synergies. The logic that a separate business with specialist customers does not benefit from a conglomerate structure and should be given entrepreneurial freedom was rejected.