Research on nonfinancial companies finds that larger companies typically grow more slowly and earn lower returns on capital.
Gregory V. Milano, CFO.com | US
April 29, 2011
Gregory, please allow me to compliment you on an informative and insightful article. ı...the best path forward for large companies is to act more like a group of small companies than as a bureaucratic conglomerate.ı The Risks Johnson & Johnson recently announced the acquisition of Swiss medical device maker Synthes for about $21.6 billion. In 2010, Johnson & Johnson was involved in at least 11 major recalls. Chief Executive Officer William Weldon maintains the companyıs quality control issues have been ıovershadowed by one companyı (McNeil), and maintains ıthis is not a systemic problem.ı At Johnson & Johnson, each division has its own culture and operates as a group of small companies. According to Tom Krause and John Balkcom, (BST Consulting), in a recent discussion of the oversight of safety of the BP board, ıour experience suggests that the boards of directors in high hazard industries rarely if ever see the information and data they need to assure themselves that exposures to catastrophe are being continually identified and effectively managed.ı With each acquisition, does the C-Suite and Board have actionable intelligence at their fingertips to oversee J&Jıs more than 250 companies operating in 60 countries? Risk to Reward In a previous article, Integration Acceleration, (CFO 01 Feb. 2011), Susan McDonough, senior director of acquisition integration for Cisco, discusses "postmerger integration" well before the deal actually takes place. ıCisco works backward, figuring out where it wants to go and then developing what it calls a ıplan of recordı for capturing the deal's promised value.ı Does the C-Suite and Board consider the change in corporate culture prior to each acquisition? In the prior comment posted by John Davis, ı...senior management needs to build a culture in which new ideas are fostered and allowed to develop. We see this risk tolerance in the smaller company's as they look to grow and capture greater market share.ı In Weldonıs case, if senior leadership isnıt willing to accept bad news, problems (risks) go unmanaged and opportunities are ignored, and J&J fails to capture the ıdeals promised value.ı
Posted by Mark Rome | May 04, 2011 03:32 pm
Studies of small cap stocks also show better returns, but the typical argument is that they are riskier. Higher volatility of earnings and higher bankruptcy risk.
Posted by Robert Ewalt | May 04, 2011 03:20 pm
Thank you for sharing your insights as your premise is very real. While large corporations have incredible resources at their disposal many of these organizations suffer from FUD about their actions. No one wants to risk losing their job for an uncertain outcome from a decision they are responsible for. As Seth Godin points out in his books and blogs being a Linchpin carries risks in any organization. The culture to move an organization forward comes from examples throughout an organization; the employees are always watching to see how appropriate risk taking is rewarded or punished. Does your organization suffer from FUD?
Posted by Eric Mitchellette | May 02, 2011 07:31 pm
Interesting article - this confirms what we have seen in the market with companies that we work with. The large companies where their business units operate independently do have more of an entrepreneurial culture. As a result, generally they have grown more quickly ( and profitably) than peers that are centralized ( command and control). However, the decentralized companies have their own share of challenges. If their growth does not exceed the costs of a centralized model ( economies of scale - spreading fixed costs), the strategy fails. Therefore, we have seen companies run a hybrid model - centralize costs ( for example shared services) but leave decision making/strategy etc... at the business unit level.
Posted by Jim Wong | May 02, 2011 11:52 am
The reason that we see this trend in most large companies is that they have become too conservative and do not have the proper tolerance for failure. To often, new products and ideas are over analyzed so that the company will not have any failure. When this happens, a company's creativity is reduced and only a select few products or ideas are invested in by the company. In order to combat this, senior management needs to build a culture in which new ideas are fostered and allowed to develop. We see this risk tolerance in the smaller company's as they look to grow and capture greater market share.
Posted by John Davis | May 02, 2011 11:48 am© CFO Publishing Corporation 2009. All rights reserved.