November 13, 2005

How Can David Beat Goliath?- Strategy #2: Create the Time Advantage!

Posted in David vs. Goliath, management at 6:51 pm by scottmaxwell

The big company disadvantage…

I used the concept of large companies being like a large snowball in my last post, when I was writing about the insulation that large companies have with the outside world. Another angle using the same snowball concept is from an internal perspective. Imagine that each of the people in the company is a snowflake in the snowball. If you have perfect communication in the company, each snowflake should get to know and share ideas with every other snowflake. So, what happens when the snowball grows?

  • 2 snowflakes- If you have two people (person A and person B) in the company, there is one possible conversation between them (person A can talk to person B).
  • 3 snowflakes- If you have three people (person A, person B, and person C) in the company, there are three possible conversations (A can talk to B, as before, and now C can talk to A and, separately B). Wow, we added one person and got two extra conversations!
  • 4 snowflakes- If you have four people in a company, there are 6 possible conversations (person D can talk to A, B, and C, which adds 3 conversations to the prior number).
  • 1000 snowflakes- You have probably figured out the pattern here. If a large company has 999 people in the company and added a person, they would have an additional 999 possible conversations and the total number of conversations in the company would be 499,500! That is an average of roughly 500 conversations per person…when we had two people, the average was 1/2 a conversation per person!!


So large companies have a problem! If they try to have perfect communication, they spend their entire day communicating internally rather than doing customer-related work. To solve this problem, they break their large snowball into a set of much smaller snowballs (which they call departments) and then they communicate and share ideas at the snowball (department) level rather than at the individual snowflake level. These communication vehicles include phone calls, meetings, e-mails, business process software, blogs, wikis, content/information management systems, videoconferencing and a host of other approaches in order to discuss, review, and approve plans, review progress against plans, adjust plans, review people (and a lot of other verbs, adjectives, and adverbs that describe the communications)

Even with these organization and communication systems, and as companies get even larger, the snowballs (departments) still have the problem of communication between snowballs (adding a snowball when there are 99 existing snowballs adds 99 new communications paths between snowballs, and 4950 total communication paths!).

This is generally resolved by the snowballs (departments) getting organized into groups of snowballs (divisions) and then the snowball groups (divisions) communicating with each other, generally through a low-bandwidth communication pipe called Corporate VPs (or division VPs, SVPs, EVPs, or Presidents) along with all of the other communication vehicles described above (although the most important communications go through the senior people and the most important decisions are made in-person at meetings…the ultimate bottleneck for large companies).

What are the implications?

  • Filtered information– the snowballs and snowball groups pass information with their own interpretation added (note, this is generally not malicious, it is just the grand version of the “telephone game?). Also, because large companies have a harder time of getting external information into the company (see my last post as an example), the bad information tends to be self-reinforced into “internal truths? that become embedded into the company.
  • Priority information flow– The communication bandwidth between the snowballs is still constrained relative to the traffic need (think about trying to download a movie on a dial-up internet connection), which reduced the communication down to the most important elements. A lot of details and nuance does not pass to each snowball, let alone each snowflake. Communication tends to favor the “more important? issues as well as the larger products and markets, rather than the small, emerging products and markets.
  • Stale information– The information that does get through is stale because of communication latency and information queues as it passes from snowball-group-to-snowball-group, snowball-to-snowball, and snowflake-to-snowflake.
  • Internal issues consume the senior managers’ time. The most important people to each snowball end up in meeting lock (endless days of meetings) and inbox lock (endless days of e-mail) trying to communicate, which does not help build product, sell product, or support customers.
  • Lack of decision-making on the issues considered less important like smaller products and newer markets. The senior management just does not have enough time.
  • Bad short-term decision-making due to internal politics. Because of the lack of senior snowflake ability to really determine the best snowflakes, snowballs, and snowball groups because of their inability to know everything, the snowballs and snowflakes start competing in an internal “market? for major projects, bonus pools, titles, additional resources, etc. (The internal market is not generally aligned with the needs of the customers!)
  • Even when part of the organization figures out the “right? answer, the large companies have difficulty changing. Think of all the (two way) communication necessary to agree on the right course of action and then get all the snowball groups, snowballs, and snowflakes moving in the “right? direction!

The result of all these issues is that planning horizons tend to be in years, rather than days, weeks, or even months. It is the only way to keep the snowball groups, snowballs, and snowflakes in rough alignment.

Note that these problems have nothing to do with the quality of the people. The well-run large companies have some of the great, grade “A? people. The problem is simply the geometry of the situation (or the fact that we can’t do a Vulcan mind meld, at least yet, so the methods of communication that we have limit the communication bandwidth).

Bottom line, the time scale for a large company getting something important done is significant and change is very difficult, even for the best companies. The only answer to completely solve the problems outlined above is for large companies to break themselves up into a series of smaller companies, which is essentially competing with small companies by becoming a series of small companies. Lots of other approaches have been or are being tried, but nothing works that well, at least as far as I can tell. The net effect is that large companies could have a time-based disadvantage if your emerging growth company capitalizes on the opportunity.

Creating the Time Advantage

Emerging growth companies can benefit from these observations by creating a time advantage. Some ideas:

  1. Pick a product market that is rapidly evolving or has dynamic needs or tastes. Markets with dynamic needs (needs that change quickly) or tastes (interests that change quickly) are perfect for the small company. A great example a dynamic market is the gaming market, which has rapidly evolving customer “tastes? as new games come out and fulfill older “tastes? and gamers want MORE. These market characteristics are perfect for the company looking for a time advantage, as it is exceedingly difficult for the large company to move at the pace of change of these markets.
  2. Pick a product market that has significant long-term innovation potential. This is really important to the time advantage, as the innovations that can take place between a large company’s release cycles are tremendous. The large company essentially designs and launches its missiles, but by the time they hit, the innovation has moved significantly beyond where they aimed! If there is enough innovation left, you can do this again and again.
  3. Build your market before the large companies know what hit them. The extreme approach here would be staying in stealth mode until all the release details are worked out, and then explode into the market. (Note, this is much easier said than done, but thematically the idea is to build your early market quickly before the large companies have time to act).
  4. Use newer technologies and business model components. You are probably aiming at the early adopters, at least initially, so this approach will be advantageous, or at least somewhat expected, for a smaller company. Also, both you and the large company have to go “up the learning curve? on the new technology, and you should be able to do it more quickly due to the problems outlined above. (The effects of this approach are amplified when the newer technologies and business model components are evolving rapidly.)
  5. Package your “whole product offering? so that the package includes innovations in product, marketing, sales, and service all at once. When the large company must create change in multiple snowballs (departments) and multiple snowball groups (divisions), the time-based advantage is amplified (due to the communication and decision-making issues).
  6. Rapidly evolve all aspects of your business. Use your information advantage and the observations that large companies must have long time horizons to rapidly evolve all aspects of your business, such as your product, your marketing messages, your distribution approach, and your customer service. Again the key is to not be there when the large company missiles land!
  7. Put your senior management, particularly your CEO, out in the field as much as possible. Your senior management team will have much more time available than the senior management of the large company. Get outside the company and meet with customers, prospects, the press, industry analysts, and others. It will give you better information and will give you the edge relative to the large companies.

Time is an important strategy to have on your side. The large companies have a natural disadvantage with respect to time. You can have a large impact on your strategic position by exploiting the opportunity!
My next post: Strategy #3: Create a Scope Advantage!

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8 Comments »

  1. […] Create the Time Advantage! Because the number of potential conversations in a company grows quadratically with the number of employees, large companies spend huge amounts of time on internal communication. Messages travel slowly and inaccurately. Small companies can take advantage of the problem by focusing on markets that move quickly or have lots of room to innovate. […]

  2. btwohig said,

    This problem gets even worse when you apply it to a large company opting for a matrix-org chart. At, Yahoo felt this problem was especially prevalent. I think it is one of the reasons they have chosen a fast follower strategy in many of their areas of operations. The layers of communication can be quite stiffling and I often saw them pass up large opportunities because they couldn’t coordinate outside of a limited definition of their core capabilities.

    -Hey I’ve started a blog check it out: http://btwohig.wordpress.com

  3. scottmaxwell said,

    The matrix org chart looks good on paper, but the problem is that each employee leans toward one direction or the other in terms of being influenced (generally based on where they think their bread is better buttered). Another approach is to change reporting authority periodically, which has some benefits. Nothing works perfectly, as the communication problem is very difficult…

    I like the new blog!

    Scott

  4. “I have a product and some customers, now what??

    Your math is a bit off–the equation is x! (factorial), or 4*3*2*1=24 possible connections between 4 people.

    We just went from 205 customers in August to 1200 now. This is a great blog–a lot of the specific issues we’re working on at the moment. Thanks.

  5. scottmaxwell said,

    Charlie, thanks for the note. It wouldn’t be the first time my math was off, but I think that this time my math is right. Each additional person adds connections to all the previous people. It is a sum rather than a multiplier.

    Awesome growth with your company!

    Scott

  6. […] This niche approach has been around forever, but continues to be important. It is very difficult for large companies to attack or even be interested in small, special need, markets, which effectively gives you an opportunity to grow relatively undisturbed until you are notices. (And when you are noticed, you will still have the time advantage!). This idea is easier said than done, but here are several ideas to help your thinking: […]

  7. […] At the senior manager level, it is true that some of the best senior managers are at the well-run large companies (I have not met anyone more impressive than Steve Ballmer, CEO of Microsoft, for example), but the amount of time the senior managers can spend on a given product market is very small as they have too much to do (see my prior posts on the information advantage and the time advantage, for example); therefore, the senior manager advantage is more perceived than real for an emerging growth company in a given product market (As you become large and gain more of the senior manager’s focus, this will become more of an issue…it will also be a great “problem” to have!). […]

  8. […] The large companies have economies of scope and economies of scale. This is true. But, fortunately for the emerging growth company, in most cases these are economic benefits but not strategic benefits for the large company (see the strategic benefits for the emerging growth companies in “Create a Time Advantage,” “Create a Scope Advantage“, and “Create a Scale Advantage,” for example). The emerging growth company can compete with the larger company’s scale and scope economic advantage by following the thoughts in my last post on attenuating Goliath’s financial strength advantage, as scale and scope economies lead to a better economic model and, therefore, better financial strength. The emerging growth company competes with, and attenuates this large company strength by running a very efficient business and having plenty of capital to take it through tough market climates, which I discussed in that post. […]


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