It is the decade of acquisitions, start-ups, young people, youthful energy breaking through new products, and old behemoths buying them out. It is not surprising how in the recent years, the old giants have been going for acquisitions to grow their businesses and open up new frontiers.
Coca Cola acquiring Costa, Pepsi acquiring Soda stream, Kellogg’s acquisition of Multipro Consumer Products Limited (in Nigeria), these are some examples of old and large organizations resorting to growing their revenue stream through acquisitions. And they are only a few of the examples. In the past years, the top FMCG companies have grown majorly only through acquisitions, while their main products saw declines in organic sales growth, and in some cases, reduced sales due to category shrinkage.
A report from OC&C consultants quotes that mergers and acquisition (M&A) deals amongst the largest consumer goods businesses has been the highest in 2017, considering the past 15 years. And the revenue growth in these companies was at a paltry 0.5% in 2016, while in 2017, it grew to a decent 5.7% due to M&A.
Although it gives a good signal to shareholders in public companies, I feel it doesn’t really speak of good health of the organization. In this post, I am going to look at some of the reasons why larger, more resource-endowed organizations are failing to innovate, while younger ones thrive.
Owner’s Mindset, the essential ingredient in Start-ups, goes missing in older companies
When new organizations start, the teams are small. Everyone knows everyone else, and since everything is small, responsibilities are shared. The hardships are more and bonds are strengthened. Founders, early employees feel more attached to the company like a family, and hence, they have an owner’s mindset.
When members of an organization have an owner’s mindset, they treat every aspect of their work like its their own. They treat the business as their own. Everyone is capable in someway or the other to step into each other’s shoes, so there is more cross-functional capabilities. They think about every penny spent, and how to get the most out of it. They think of improving something about the business every day. Every bit of energy spent is towards growing the business.
This kind of an owner’s mindset is exactly whats missing in larger organizations. Larger organizations have less cohesiveness and employees are more of 9-5’ers. Employees work in silos and think only about their specialization or their jobs. They have fixed job descriptions (JD) and there is no drive to go beyond what is given in the JD. This kills innovation, because there is no passion here, there is no involvement.
Even if larger organizations build huge R&D labs and even hire hundreds of scientists from top institutes, the drive to improve is often not matched to smaller organizations.
In case you are interested, you can go through this short video about Owner’s Mindset.
There is also a book named “The Founder’s Mentality: How to Overcome the Predictable Crises of Growth”, available on Amazon. I would recommend one reads that to gain more insights.
Larger organizations become bureaucratic and slower than the leaner start-ups
A strong massive army could falter in battle if the leaders are indecisive and hence ineffective. Quickness of decision making and lack of politics results in more effective executions and builds confidence in the armies.
Likewise, larger organizations have, more often than not, complex matrix structures. Decision making is often a long process weaving through multiple egos and difference of opinions. Winning over oppositions, and getting people to agree is itself a steep task. Also, since there are many people with stakes involved, often nobody wants to take the decision, in order to avoid stepping on anyone’s toes. These obstacles often obscures the real objective of obtaining great products, or delivering great services.
In start-ups, often the decision lies in the hands of one or two people who drive the business. There is less resistance and the entire team drives in one direction, instead of dragging each other down. In such synergies, work gets done in result oriented manners and hence delivering faster, and better outcomes.
The taller you are, the harder you could fall: the fear of failing
Again, larger organizations have reached great heights. They have tasted success. But once you reach the top, failures become less acceptable. Anyone who makes mistakes is not looked at in good light. Managers who strive to achieve something different and fail could see their career path decline very rapidly. This is catch 22 situation for larger organizations and rather difficult to break from. Some organizations do this well, but that would be maybe 5-6% of the organizations of the world.
So, essentially, the fear of failure will keep these big guys from trying new things and innovation dies.
Why bother with small stakes when one has bigger fish to fry
Successful organizations are often too attached to their past successes and latch on to their cash cows and invest more energy into them. For instance if 90% of revenues for an organization comes from a single brand, then almost the entire set of employees would put all their energy to save this brand, simply because its the bread and butter. I have seen this myself in my experience, smaller newer brands often get neglected due to this “bigger fish to fry” attitude.
There is some truth too in that, however. Since, the larger brands are the key, leaders spend most of their time talking about them, questioning subordinates about them. When top down, everyone just likes to talk about the big fish, down the line all executives get the message and focus on what is important.
Only with conscious efforts and strong determination on the part of senior management, can this attitude change. If this attitude can be changed, then such organizations can start nurturing the newer brands/products.
Secure in the safety net, why move out?
Humans have a tendency to prefer security and certainty over risks and uncertainty. When organizations become large, everyone likes things to remain at status quo. Nobody likes too many changes, especially into new untested scenarios. People get comfortable swimming in familiar waters. This is a big hindrance to innovation.
Young organizations are bolder. Everything is new for them, therefore, there is no safety net. Each unfamiliar zone is an equal opportunity, and thus, these start-ups strike gold more often than multi-nationals. Organizations must learn to venture out more into open waters and test new areas. If employees are not taught to be bold, then nobody drives innovation. If one never tries, one would never get to see anything new.
Older stronger cultures, less ability to adapt
Older organizations have stronger, more deep rooted cultures. People are more unwilling to change their old habits. Complacency, lethargy and arrogance about existing norms hinders adaptation and transformation. Due to this, the environment created is not conducive to inspiring new ideas, or experiments.
In fact, some organizations become so rigid that in order to change the mindsets, entire senior management teams undergo changes. This reminds me of the Pepsi case. When Indira Nooyi had become the CEO of Pepsico, she wanted to overhaul the way things are done, get more into snacking category, change design concepts, usher in new thinking, etc. She had to send a lot of older senior management people away from the company due to the rigidity of their thought processes and the influence of old non-innovation oriented cultures. So, yes, older cultures are difficult to transform.
Some may argue, that stronger cultures are strengths. But sometimes, such strengths make you bulky and adds to your inability to move.
Easier to buy out than innovate
Innovation is a lot of hard work and time. MNCs do not have much patience since they are answerable every quarter. So, whats the easiest option: acquire new companies with new technology or new products. And whats the add to the convenience is the huge cash reserves that such organizations are sitting on after their years of success. Therefore, many of these top FMCG companies are taking the route of M & A to show growth in their businesses to their shareholders.
Well, these are some issues I feel that the top FMCG companies are ailing with. It is not a one size fits all framework, but roughly speaking, in my experience, these failure modes exist in companies in some form or the other. It requires a very strong leadership and fresh thinking on the part of these leaders to be able to transform organizations and make them leaner, faster, bolder and more adventurous. Until that happens, I guess we will be seeing many more acquisitions in the market in the coming years too.