Eps 1614: You Don't Have To Be A Big Corporation To Have A Great Engine
— The too lazy to register an account podcast
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Dylan Stephens
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One of the great insights from that research is you could be at a big corporation, but be doing that at a steel plant, a pharmacy, or a grocery store.
The anti-big business crowd loves to argue that large corporations have found ways of keeping a larger share of these profits. Whatever market power large corporations have, big companies are doing an awful job at turning that into surplus profits. Big companies are also far more likely than smaller ones to get audited, and face stiff penalties for bad behavior.
Large companies are also much more likely to be organized into labor unions, employing far greater shares of women and minorities than smaller firms, making large businesses unlikely enemies of progressives. Business professors Anne Marie Knott and Karl Vieregger found that big firms not only invest more in research and development than smaller firms, but they get more out-of-innovation products for every dollar invested.
Those with slower-growing cores, by contrast, may be using nearby businesses to compensate for slower growth elsewhere. For companies with fast-growing core businesses, expanding into new areas can help to position their portfolios for the trends ahead. Outgrowing ones industry involves having a stronger business model - a benefit that is rewarded in the capital markets regardless of whether one is in a fast-growing industry or one that is slower to evolve.
Just as you have trouble getting growth as a whole unless your core business is thriving, you are not likely to get ahead on growth paths without winning your local markets. This reality could explain why companies that are growing strong at home are so much better off when expanding globally: They are more likely to have winning business models, aspects of which can transfer to new regions.
Key To Success Companies must identify markets with expanding profit pools, make sure their offerings are differentiated, and imbue new businesses with an entrepreneurial spirit, leveraging skills and assets from their initial engines of growth. The good news is there has never been a better time for companies to look at building new engines for profitable growth.
Instead of just messing with the edges of the market with new products and services, companies should be in the process of changing it right now. Transformation of the marketplace requires new concepts of corporate purpose, concepts of consumption, and models and metrics for corporate success.
Corporate consolidation is biased against the measures of present-day success; market transformation will assist companies in creating the measures of tomorrow. Instead of waiting for a shift in the marketplace to create incentives to adopt sustainability practices, companies are creating these shifts in order to create new forms of corporate sustainability. As more investors decide to shift investments toward companies focused on sustainable development, the tectonic shifts we are seeing will accelerate even more.
People are also becoming more and more concerned about the substantial economic opportunities this shift will create, and about how it can be carried out fairly. Real people, working for real companies, want to feel excitement and fulfillment from being a part of something that is just plain working. No one has any right to complain about their company, industry, or what type of company they are never going to get back.
People have had General Motors on our board of directors for decades, they get a voice every single year, and if they exercise the voice, they actually get to make quite a bit of accountability and change. GM does not have to use the vote, and it puts the onus on the rest of the financial sector to make sure people use those votes, on those environmental issues and the social issues.
We still do not know how to make transformation happen, but we know that it cannot happen with one company or product. The companies who make a change from good to great have no names for their transforms and definitely no programs. On average, a company going from good to great takes four years to crystallize its hedgehog concept.
The good-to-great companies on average had a compounded return of 6.9 times the general stock market within 15 years of their turning points. Over the last 15 years, companies that expanded in ways that maintained or increased their exposure to high-growth, profitable segments generated an extra TSR of between one and two percentage points per year.
The companies in our sample that used these "shrink-to-grow" strategies shed assets in one to two years, but steadily grew over the remaining years. The most common driver of success for building a new core business was a firms ability to ride a tech adoption curve into markets with larger margin pools, or quickly pivot toward players with novel forms of competitive advantage. Most successful engines-two businesses were in markets where the profit pools--the total profits earned at all points in the value chain--were either substantial, expanding quickly, or shifting.
This would certainly be surprising to many Americans, who were sold a tired legend about how small businesses were engines for job creation. To Republicans, small businesses are a purest expression of the free-markets creative potential; to Democrats, small businesses are the ramparts against the incursions of rapacious, heartless corporations.