AIRPORT BOOKSHOPS teem with guides that promise to teach executives the secrets of success. Read this tome, follow this philosophy, change your habits and you too can be a management titan. As a moment’s reflection on business history demonstrates, there is no sure-fire route to glory. Instead, running a company is a permanent exercise in juggling trade-offs. What is the right course of action may vary at different times, and in different industries.
Take, for example, the pace of expansion. The fashion is for “upscaling”—creating a business model that can dominate its niche within a few years. This model’s turbocharged version, “blitzscaling”, is beloved of venture capitalists who dream of recreating the “network effects” that fuelled the rise of Google and Facebook. That is, in part, because most venture investments fail and a few big successes are needed to make up for all the duds.
From the point of view of the entrepreneur, however, upscaling may well be a mistake. For a start, not all businesses are subject to network effects. Secondly, by expanding too fast companies risk losing control of product quality and messing up the management structure. Building a business is like running a marathon, and few people win a long-distance race by setting off like Usain Bolt. The first Walmart store was opened in 1962 and it took another six years before the retail chain expanded outside its home state of Arkansas.
The fashion for upscaling means that companies are encouraged to get their product to market as quickly as possible. The theory is that customers get a rough-and-ready prototype at the start, which is improved over time. This may work for smartphone apps, which are easy to update, but not for most other products, where a reputation for substandard goods may be impossible to shake off.
In his book on financial frauds, “Lying for Money”, Dan Davies, a former financial regulator, explains how companies must balance the goals of cost, quality and customer satisfaction. Focus too narrowly on cost and the quality of goods may suffer; concentrate on quality and costs will rise. Try to ensure both and the business may become so obsessed with its own production processes that it ignores customer needs.
Another trade-off is between centralisation and delegation. Early Victorian businesses resembled the army: generals (executives) handing down instructions to non-commissioned officers (foremen and overseers) who in turn directed the foot soldiers (workers). This hierarchical structure was devised for a world in which employees were required to follow a clear set of instructions.
As businesses became more sophisticated in the 20th century, organisations became much more elaborate. Companies were split into divisions by geography and product type. Middle managers took charge of functions such as marketing and finance. Eventually, though, businesses started to view these structures as expensive and overly bureaucratic.
In the past 20 years or so management layers have been stripped away. A flat structure, with delegated decision-making, seemed more appropriate for a service-based economy. The idea of “agile” management, in which workers are regularly reassigned to multidisciplinary teams, is all the rage.
But this trend, too, can eventually go too far. When power is dispersed, the result can be a confused mess. Some firms may be better off under centralised command.
The final trade-off is between focus and diversification. The relegation of General Electric from the Dow Jones Industrial Average last year seemed like another nail in the coffin of the industrial conglomerate. Institutional investors can diversify their portfolios by investing in a range of sectors; they don’t need a conglomerate to do it for them. Yet cash-rich tech giants are similarly buying promising startups, often with no obvious relation to their core business (think of Google’s purchase of Nest, which makes thermostats).
Eventually the growth prospects of even the best products falter. For businesses to survive, they must find new things or services to sell. Choosing the right time to expand and diversify, and the right organisational structure to do it, is a matter of judgment. That judgment, and the flexibility to change plans, is what makes a good manager. It cannot be reduced to an in-flight read.
This post was originally posted at https://www.economist.com/business/2019/08/28/running-a-company-is-a-permanent-juggling-act.