in Business Design

Big companies as collections of small companies

A completely nascent idea: are big companies more successful when they are organized as collections of small units, as opposed to bigger, less personal, hard-to-manage large units?

I asked this question while commiserating with a friend whose medium company was swallowed up by their giant competitor last year after a prolonged and contentious aquisition period. What is the future for this smaller business unit? As a thought experiment I conjured up Wal-Mart. While not the poster child of PR these days, they are extremely good at many things. And we could think of them as a collection of many small units, each store being one unit.

And then I looked at the rest of the Fortune 10…

1 Exxon Mobil
2 Wal-Mart Stores
3 General Motors
4 Chevron
5 Ford Motor
6 ConocoPhillips
7 General Electric
8 Citigroup
9 American International Group
10 Intl. Business Machines

Let’s disregard the oil companies since they sell an expensive commodity we’re addicted to. Let’s also disregard the auto companies who have decades of growth on which to coast and aren’t doing well lately. That leaves us with Wal-Mart, GE, Citigroup, AIG, and IBM. Each of these is broken into many smaller units. In fact, in AIG’s case there are so many units working autonomously from the corporate hand they actively compete with one another. These companies seem to go beyond the modern corporation structure to become cluster corporations.

  1. It’s a great question.

    I see a lot of frustration with my clients when they have needs that are beyond their business unit. I think a lot of the success of this approach has to do with how their customers are perceiving them.

    If you are a customer of Wells Fargo, you can probably manage the split between Wells Fargo Home Mortgage and Wells Fargo Bank Accounts. You could deal with inconsistent branding, websites, and whatever else. You could see those as separate businesses and judge them differently, based on different experiences (yes, it’d be nice if everything lined up, but I bet the straddle wouldn’t break your relationship).

    If you are a customer of Hewlett-Packard, you want something in common between your printer and your digital camera and your laptop. Message, design language, ease-to-buy-together, I dunno.

    What is the method by which the business units are created? Are they standalone customers? Or standalone customer experiences? Are they customer-facing or internally-facing?

    When the business unit hampers your ability to do something (say, provide a new search tool on the website because you see how customers are really thinking and talking about your products) because it’s beyond your unit, then that’s a problem. If your structure mirrors your customers (say, GE Plastic versus GE Water versus GE Capital) then it’s probably more advantageous than not?

  2. Hi. I’m sure I’ve seen some similar concept suggested, probably in an episode of the British TV series “The Money Programme”, probably broadcast about 1991. I think the company in question may have been Asea Brown Boveri, who I believe were said to be organised rather like a collection of relatively small, relatively autonomous units. The aim was to avoid the kind of bureaucratic deadlock that can arise in large organisations which are run from the centre.

    Sorry I can’t be more specific (and I’m not 100% sure of either of the details!)

  3. There is a case to be made on both sides, there is a single vision on which company is created, there is a loss in translation across hierarchy as the company grows and become many units each with their own vision, finance, practices etc.. and as you said about AIG start to compete. Such structure can work counter productive towards overall vision.

    It also depends on how is a unit evaluated, if it is purely based on measures like top line, bottom line, # of clients, etc.. then it can drive these numbers to higher levels, but also creates incentive for each unit to work against others if it means more business for them.

    I see the especially true in service industry as services a comparatively more difficult to define .. overlaps between roles are very common.

    Even the cross sell opportunities cannot be realized that well in such cases. Continuing from example of Wells Fargo, how do you convert a banking customer to a mortgage customer and so on.

    Managing of these kind of intersection points and selection of right metrics to evaluate performance of units is important.

  4. William Ouchi (http://www.williamouchi.com/) has professed this in the past. “I had spent 35 years studying the management of very large companies, and one of the most consistent principles is decentralization. In a competitive world, you must make decisions in the smallest operating units possible, or you will go out of business.”

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