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In Small Firms Beware, I warned that a big firm will string along an innovative small firm and then dump them without making a deal. Here, I want to talk about what it is like from a big firm’s perspective.
Amar Bhide, in The Origin and Evolution of New Businesses, classifies business opportunities along two dimensions: capital and ambiguity. If a project requires a lot of capital, then it is not suitable for a small business, unless it can somehow obtain a lot of funding from venture capitalists. If a project has a lot of ambiguity, meaning that the path to success is unclear, then it is not suitable for a large, established business.
Large, established businesses are sluggish for a reason. The middle managers who are coming to senior management with project ideas do not have much skin in the game. If the project fails, the cost will almost all be borne by top managers and shareholders.
Senior managers have to be selective in choosing which projects to undertake. At some point, every project that requires effort from multiple departments is going to require active senior management support. At least one of the necessary departments will refuse to give the project priority unless senior management steps in. So a project can succeed only if it has senior management’s attention. But senior management support for a project is a scarce resource. You only have so much time and cognitive focus.
In order to limit their commitments, senior managers will try to surface potential problems with a project as soon as possible. An initiative will be subjected to a careful process of evaluation, with all affected departments involved in studying and criticizing the project. This process has been characterized as “the culture of ‘no’.”
In a large corporation, the naysayers tend to prevail—and they should.
When there is considerable ambiguity about the ability of a project to succeed, there are going to be naysayers who point out ways that the project could fail. In a large corporation, the naysayers tend to prevail—and they should. Because senior management time is scarce, it makes sense for the corporation to limit its commitments. It should focus on large initiatives that have a high probability of success. Small projects are not worthy of the attention of senior management. Projects with high ambiguity are too dangerous for the corporation to undertake.
If a middle manager has an idea that he thinks will succeed and does not require a lot of capital, then he should quit the company and try his idea as a startup. It is not worth spending time trying to get the idea past the culture of ‘no.’
If the middle manager’s idea requires a lot of capital and has high ambiguity, it will not get past the culture of ‘no.’ Before the corporation will undertake the project, it will have to resolve the ambiguity and become convinced that the project is likely to succeed. This may require years of study, evaluation, and persuasion.
The bottom line is that it is very natural for large, established corporations to behave sluggishly when confronted by new ideas. A small firm that wants to approach a big company should be aware of this. Trying to sell to a large company is going to be frustrating and may not result in a favorable outcome.
Middle managers at a large corporation also have to be aware that sluggishness is rational. To you, it looks like the company is overly risk averse. But it makes sense for the corporation to reject your idea if it thinks it is too small to be worthy of senior management’s time. If you have an idea that requires only modest capital investment, consider leaving the firm to execute it yourself.
If you have an idea that requires a lot of capital, steel yourself for a long and difficult process of obtaining corporate buy-in for the project. My personal experience of trying to obtain corporate buy-in for a big project was mixed. It was emotionally wearing trying to get past the culture of ‘no.’ Then the worst part was that once a project was approved, other people in middle management saw it as an opportunity for advancement, and they elbowed me out of the way. I described this phase of the initiative as “handing the project over to the credit-takers.” On the other hand, as miserable as such an experience was at the time, I look back on it with some pride.
This essay is part of a series on human interdependence.
Big Firms Need to be Sluggish
Limited liability is a much bigger benefit for a small company than a large one. If you look at an bet to either make 100 million or lose 100 million on a coin flip, but your company is only worth 20 million, the corporate structure transforms that into a +40 million expected value. If your company is worth 20 billion, that bet is worth zero.
There's a lot of debate right now about how quickly big corps will adopt AI tech. The AI influencers/SV set seem to think that AI's takeover of tradcorp America is imminent, while the realists think that big tradcorps move much more slowly. On balance I suspect that the realists are correct. Your points in this post reinforce my view.