In a previous post, I wrote about how the margin and stakeholder commitments of large enterprises make them ripe for disruption by smaller competitors. In the post, I mentioned how large companies have been able to remain nimble by creating separate, standalone units with their own leadership team and full autonomy. In this post, I want to discuss how this strategy can cause even greater problems and use a strategy consulting firm and a telecommunications company as examples.
BCG was started by Bruce Henderson in 1963 and has developed well-known business concepts such as the experience curve, the growth-share matrix, and the advantage matrix (more to come on these in future posts). Henderson firmly believed in the power of competition to spur higher performance. In the late 1960s after reading books on Darwinism, Henderson turned BCG into three separate groups, a red team, blue team, and green team, to go out and compete against one another for business. Henderson got exactly what he wanted. The three teams pushed each other and one clear team, the blue team, ended up becoming so successful that they set out on their own. Less than three years after the creation of the three teams, almost the entire blue team, led by Bill Bain, left BCG and went on to create Bain & Co., which today is one of the “Big Three” strategy consulting firms.
Henderson’s plan worked to perfection but not in the way he had envisioned.
The three teams pushed each other and one clear team, the blue team, ended up becoming so successful that they set out on their own. Less than three years after the creation of the three teams, almost the entire blue team, led by Bill Bain, left BCG and went on to create Bain & Co., which today is one of the “Big Three” strategy consulting firms.
Another example to consider is Lucent Technologies which in the late 1990s reorganized their three operating companies into eleven “hot” businesses. This was during the dot.com boom and management thought that created smaller, independently managed business would allow each company to run like an internal start-up. Senior executives believed the maneuver would propel the company’s growth and profitable by pushing the decision making process closer to the marketplace and therefore delivery better and faster innovation.
While decentralization and autonomy had helped other large firms and were in vogue due to the boom in internet startups, the plan had the opposite effect. Instead, Lucent became slower and less flexible in responding to the customer’s needs while adding a new layer of costs. Why didn’t the strategy work?
The strategy “used, forming small, product-focused, close-to-the-customer business units to make their company more innovative and flexible,” actually does work when your business is selling modular, self-contained products. However, Lucent’s leading customers operated massive telephone networks.
Lucent’s customers were buying complicated system solutions whose components needed to be intricately formed to ensure they worked correctly and reliably. “Such systems are best designed, sold, and serviced by employees who are not hindered from coordinating their interdependent interactions by being separated into unconnected units.”
BCG and Lucent used a theory that wasn’t appropriate to their circumstance with disastrous results. It is crucial that companies understand management theory and their own business to ensure that their business doesn’t become disrupted, and they don’t permanently disrupt it themselves.
** BCG example comes from “Lords of Strategy” by Walter Kiechel (currently listening to on Audible).
** Lucent example comes from the article by Clayton Christensen, “Why Hard-Nosed Executives Should Care About Management Theory.”