Why Small Companies are Better/Worse than Large Ones
Published by John Seiffer January 22nd, 2007 in Uncategorized, Management, Strategy, CEO SkillsI came across this in a letter by Jim Womack, author of Lean Thinking and, to hear him tell it, one of the developers of the Toyota Way. The graphics are mine - which is why I’m not a graphic designer.
All value created in any organization is the end result of a lengthy sequence of steps - a value stream.
These steps must be conducted properly in the proper sequence at the proper time.
The flow of value toward the customer is horizontal, across the organization.
All organizations … are organized vertically by department … because this is the best way to create and store knowledge and the most practical way to channel careers.
He goes on to say that managers are judged by metrics that apply within their departments. But no one is actually responsible for the horizontal flow of value [toward the customer]. This is the problem big companies face.
So why are small companies better than big ones?
Because you have your hand in everything. YOU (the owner/founder/entrepreneur) are responsible for the horizontal flow of value.
So why are small companies worse than big ones?
Because you have your hand in everything. When the company grows to the point where some organization by department is useful, the owner/founder/entrepreneur is better at building the product than building the company. So emergencies, inefficiencies, and other stuff happens which takes you away from managing the value flow. So you end up with the worst of both worlds. No departmental support and a poorly managed value flow.
Takeaway:
- As your company grows, either learn to become a manager/CEO or hire one.
- Lean Thinking by James P. Womack and Daniel T. Jones is a good read. More of their stuff is here
Technorati Tags: Lean Thinking, Small Business, Entrepreneur, Management, CEO Skills
There are many good points in your article. I would like to supplement them with some information.
For an all-volunteer site, dedicated to small businesses who wish to succeed in federal government contracting, please see the below site:
http://www.smalltofeds.blogspot.com/
The federal government will contract in excess of $80B to small businesses in the next fiscal year.
There are over 50 agencies or “Departments” in the federal government. Each of these agencies has a statutory obligation to contract from small business for over 20% of everything it buys.
Contracting officers must file reports annually demonstrating they have fulfilled this requirement. Not fulfilling the requirement can put agency annual funding in jeopardy. Small business has a motivated customer in federal government contracting officers and buyers.
Large business, under federal procurement law, must prepare and submit annual “Small Business Contracting Plans” for approval by the local Defense Contract Management Area Office (DCMAO) nearest their headquarters. These plans must include auditable statistics regarding the previous 12 month period in terms of contracting to small businesses and the goals forecast for the next year.
The federal government can legally terminate a contract in a large business for not meeting small business contracting goals. Approved small business plans must accompany large business contract proposals submitted to federal government agencies. Small businesses have motivated customers in large business subcontract managers, administrators and buyers.
There are set-aside opportunities available for small entities,veterans, disabled veterans, women and minorities. All it takes is navigating the system, persistance, asking questions, registering, marketing, teaming and working hard.
Small Business America is good at that.
John,
Thanks for your insights! Jim Womack is founder of the Lean Enterprise Institute based in Massachusetts. LEI’s website is www.lean.org. On the website are many articles, success stories, background information, and a Forum for lean thinkers. Disclosure: I am an employee of LEI.
Rachel Regan
Operations Manager
Lean Enterprise Institute
I can see how the whole value stream is laid out here…However, it seems a little old fashioned to me. I say old-fashioned in the sense that the Marketing Vertical comes a little late in the process. Old economy business supplied products that they ASSUMED customers demanded. Unwanted and unsold inventory was scrapped or sold at steep discounts (even at a loss!). New economy business supplies products that consumers have demanded.
Using the graphic you provided, how would the Design Vertical know what to make without the Marketing Vertical being involved early on? The risk of involving Marketing AFTER design and production is having product and inventory that the consumer doesn’t want. That leaves the very difficult job of selling unwanted product on the Sales Vertical.
Marketing ought to be involved in nearly every Vertical displayed in your graphic, or, at least, in the very beginning (before Design), again in the place you displayed, and at the very end (after Finance) for post-purchase activities.
Steven,
The point of the graphic was just to illustrate the difference between the value being horizontal and the departments being vertical. The names and order of the departments was not meant to be illustrative.
I agree with you about marketing being everywhere - in an ideal company it’s probably not a department, but a skill set (like communication) that’s applied in most every step.
You have opened up a real interesting phenomenon. When does changing a small business into a large business (read bureaucratic corporation) become a better proposition, or does it ever become better? Personally, I feel that the real key to successful businesses is to maintain the small business approach, where the owner/founder/entrepreneur continues to keep his full responsibility for success of the business. The owner/founder/entrepreneur will then grow and improve his or her business and personal leadership to restructure the growing (because it is successful) business into a well run organization that fulfills the original vision of the owner/founder/entrepreneur only adjusted to meet the newer increased business and size conditions.
The key is that the person at the top seeks and takes responsibility for the true success of the business, and leads the business team to focus on winning through business success rather than other business destructive motivations. The bureaucratic behemoths of World Com, Enron, Tyco, Arthur Anderson, and countless other supposedly powerful and successful corporations imploded because the their CEO’s were corrupt and only interested in their own personal wealth creations and personal politics than in the true success of the corporations they controlled. Virtually all of these CEO’s testified, “I am not responsible” Yet they took hundreds of millions of dollars for themselves. Sure.
Even though I do not agree with much Bill Gates sells, I have to admire him for creating the largest small business in the world and clearly the most successful, because it remains a small business. Steve Jobs has done the same, as well as Larry Ellison. Walt Disney built a wonderful small business that was almost destroyed by Michael Eisner and his selfish political ways. Gates, Jobs, Ellison, Disney and others created very successful small businesses that grew into large successful small businesses, because each of them as owners/founders/entrepreneurs rose to the occasion and grew and improved as a person, a business person and a leader to take their businesses with them. Jobs tried the replace himself with the professional CEO from the corporate world when he brought in Scully from Pepsi. Scully converted Apple into the traditional corporate culture, and almost destroyed it. Jobs had to return and rebuild the small business as it had been, and he succeeded.
The reason any start up business succeeds is because the owner/founder/entrepreneur plays by the rules to succeed as a business owner very well and creates his or her business to suit him or her. The reason the successful small business grows is because the owner/founder/entrepreneur grows ahead of the business and pulls it along with him or her. The owner/founder/entrepreneur can be considered the “head” and his or her business can be considered the “body.” As the head goes, so goes the body.
Bill,
If I understand, you’re defining a small company as one with a dynamic CEO who is not corrupt. And that this is the key to success.
There is a lot of research (by Jim Collins and others) to show that charismatic CEO are not necessary for a successful company to grow and may even be an impediment. Not to mention the fact that there are stories of severe moral lapses by many of the folks you’ve mentioned (not on the scale of ENRON or World Com - but Microsoft has had it’s legal problems).
My initial point was that companies succeed when they continue to provide value to their customers at a cost that is less than the customer is willing to pay. When a company is small it is almost impossible NOT to have someone in charge of that value stream. At the same time, the things a bigger company is better at are usually insignificant. When companies become big, it’s easier to get the benefits of creating and storing knowledge by departments and harder to keep control of the value stream.
I guess I left it unsaid that the best companies of all sizes do both.
John,
Points well taken. Especially about providing customers products or services that costs less than the customers are willing to pay. I feel that the continue success of any company only depends upon providing the customers the products at the right prices, assuming of course that the corporations do not create monopolies and such through regulations or devious means. Phone companies, and Microsoft come to mind here.
However, I feel that the conversion of a small business, no matter the size to a bureaucracy is where things change to damage the success of the corporation. Look at Ford, General Motors, Delta, US Air, and the like, who have lost because they lost sight of providing the customer the products and services at the right costs, when their competitors, Toyota, SouthWest and others are thriving. I contend that these corporations lost because the CEO’s followed the bureaucratic rules versus the business rules. When the corporate culture goes bureaucratic, the corporation WILL become more focused on internal politics than on the customers as you mentioned, and will eventually implode, decline, or fall out, UNTIL they refocus on the customer FIRST.
In addition, I feel that no ONE person can drive a business to real successes. It takes a minimum of two maybe three to lead a business. This is because the nature of the functions that the business must fulfill successfully to succeed are extremely different and one person is incapable of handling them all, well enough for the business to succeed.
Small businesses that employ even 5 or less people that were successful, but converted to a bureaucracy full of me only politics at the expense of the business will fail because they became bureaucracies. Bureaucracies can be formed in any size business. It is much more difficult to keep out creeping bureaucracies as businesses gain size. But it is not impossible to keep out the bureaucracy culture. Going bureaucratic virtually insures trouble for the business, whether big or small. Keeping the business or large company focus on the customer and keeping the bureaucracy culture out will insure continued success. I believe we might be saying somewhat the same thing but from different perspectives