Friday, January 15, 2010

TBTI (Too Big To Innovate)

TBTF  The acronym, TBTF (Too Big To Fail), is everywhere these days.  It describes in a nutshell the problem with companies, especially banks, that are so large that their failure would wreck the economy.  Fearing that a number of banks fit this category, the Fed and the Treasury bailed them out last fall.  It is puzzling to me how banks that were considered TBTF then could be allowed to continue without restructuring now.  Why would we do nothing to restructure these institutions to bring them down to a scale where they are not TBTF?  No business should be allowed to grow so large that its very size should make it a candidate for a Federal bailout - or threaten the economy as a whole.

TBTI These mega-banks make me wonder about many other U.S. companies that may not be TBTF but are TBTI (Too Big To Inovate).  What do I mean by TBTI?  General Motors is a great example.  GM grew to such a massive size that it was no longer in touch with the market.  The senior executives of GM felt that they set the market.  What was good for GM was good for the country.  The arrogance that comes with size is a classic symptom of companies that have become TBTI.  Innovation died at the hands of finance MBAs who drove the company to make bigger and fancier SUVs, who decried any new approach such as the EV-1 (electric car) in favor of the Hummer.  Who tried to fend off the Japanese automakers with tariffs rather than increase their own quality. Who spouted the corporate line about "increasing shareholder value."  In a nutshell, GM quit listening.  The executives were into complete entitlement - corporate jets, country club memberships, and golden parachutes.  But who would want to bail out?  It was so much cozier inside the corporate tower where reality could be blithely ignored.

But my comments are not limited to General Motors.  Many highly-respected Fortune 500 companies have moved beyond the glory of their growth years and into TBTI.  To be fair, there is a lot of lip service provided on the topic of innovation but most of it is just that.  Whether you think of GM or a host of other American icons, the sad fact is that most of them have become far more interested in "protecting the corporation" than in innovating.  Scale does that to you.  When you are big enough to become a target for significant lawsuit awards, you can't help but develop a hunker-down mentality that keeps you away from anything that might be construed as risky (aka, innovative).  When you become that large, you can't help but develop a bureaucracy and middle management that is more interested in the competition for self-advancement within the company than in serving the customer.  You can't help but develop an organizational structure that walls off departments and makes customer responsiveness way too limited.  You can't help but develop a senior management that wants to hold onto the reins of control in an ever tighter manner lest someone lower in the organization take an unwarranted risk.

TBTI comes most easily when you forget what made you large in the first place.  Growth came from customers who found the company's product or service to be worth the money and better than the competitions'.  Dollars to doughnuts, innovation played a part in that early growth phase.  After the struggle to survive subsided and the first long march to profitability had been completed, management turned its attention to a different task: making more of the stuff that sold so well and making it more efficiently in order to make more profit.  After a long struggle, it is natural to want to take the easy road for awhile.  The trouble comes when you think that the easy road is the only road, when the hard work of innovation becomes too risky, when today's profit is better than next year's growth.  At this point, companies become TBTI.

What to do about companies that are TBTI?  I would suggest a similar therapy to those who are TBTF:  get smaller.   But the kind of getting smaller is quite different between these two corporate pathologies.  For companies that are TBTF, the goal is breaking the corporation up into autonomous pieces that are able to survive independently - and below the TBTF threshold.  The goal for companies that have become TBTI is slightly different.  The corporation as a whole doesn't need to be broken up but the business units within the company need to be segmented down to a size and given enough autonomy that decisions once again happen more at the business unit level than the corporate level.  Innovation is unleashed by giving it oxygen in the case of business units, resources and autonomy.  Businesses that are close to the street will know what is needed to please their customers.  Corporate headquarters will remain largely clueless.  This will, of course, take guts on the part of the senior management team.  It will mean trusting their business unit management teams once again.  It will mean being willing to not have a knee-jerk reaction to protect the corporation first.  It will mean keeping the business units small enough (usually less than 300 people) that the players know each other by first name and know what each is capable of without doing an HR Performance Appraisal.

The irony of radical surgery on the TBTF banks and automakers is that they are likely to become more innovative.  Not in the smoke-and-mirrors innovation of derivatives and CDOs but true innovation that adds value to their customers and not just the management team's bonuses.  I think E.F. Schumaker was right, small is beautiful (not to mention functional, innovative, exciting to work for, and growing).  I don't know about you but I have had enough of Big for awhile. Let's hear it for Small.

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