Thursday, March 15, 2007

Instead of Trying to Become Big, Become Small Many Times Over

The Story
There is a sad pattern I have seen repeated over and over again in business. Allow me to illustrate this pattern with two stories.

There once was a man who was a great chef. Let’s call him Antonio. Antonio decided to open his own restaurant. At his restaurant, he personally prepared every meal with love from scratch using only fresh ingredients. One of Antonio’s specialties was his ability to alter his menu daily to adjust to whatever was the best set of ingredients he could buy that day. Customers flocked to his restaurant. They loved to eat Antonio’s meals, because they tasted so much better than the meals at the big chain restaurant down the street.

The big restaurant chain did not have great chefs preparing the meals. Instead, the meals were made in large batches in a factory, frozen, and shipped to the all of the restaurants in the big chain. Then part-time teenagers in the kitchens of the big chain would thaw out the food and reheat it. This may be the most efficient way to run a restaurant, but perhaps not the most effective way. With the big chain as his competition, it was no surprise that the great chef Antonio was very successful with his small restaurant.

In fact, Antonio’s little restaurant became so popular that he had to turn away customers because he could not serve that many people. Friends convinced the chef that he should open another, larger restaurant. So he did.

It was a little more difficult running two restaurants. Antonio could no longer prepare every meal. Fortunately, he had a friend who was also a great chef. Together, they continued to carry on the tradition of serving great food made with love from scratch with fresh ingredients. The second restaurant was also a huge success.

At this point, the chef’s friends could see that he was a great restaurateur. They offered to loan him large sums of money to build a small chain of restaurants. So he did.

Running a small chain of restaurants was much harder than being a chef in a single restaurant. In fact, Antonio became so busy with the business side of running restaurants that he did not have time to cook at all any more or visit with the customers. He ran out of friends that were great chefs to help him, so Antonio hired people off the street and tried to train them to cook like he did. Antonio had to standardize and simplify his recipes to make training easier. Of course, the trainees did not love to cook as much as Antonio, so the quality of the food dropped a bit. As a result, the new restaurants were not as successful as the old ones.

Antonio’s friends started to get angry. They had loaned him money to build those restaurants and they wanted to start getting a return on their investment. The new restaurants were not busy enough to create the profits to repay the loans. Therefore, the chef decided that if he could not create profits with large sales, he would create profits by cutting costs.

Antonio hired professional ingredient buyers assigned with the task of buying his ingredients at a lower cost. Since these buyers weren’t chefs, they started buying some lower quality ingredients, including some canned and frozen items. The buyers convinced Antonio that most of the ingredients were still fresh, so this would probably not change the taste very much, while making the meals less expensive to prepare.

In order to get the food to have greater consistency and to save even more money, Antonio started a huge central kitchen to make the food in large batches, which he then kept under warmers and quickly shipped to his nearby restaurants. He convinced himself that this did not hurt the taste all that much. At least it was not frozen and thawed like the big chain restaurant.

Even though none of the individual acts to save money and create efficiencies hurt the taste of the food all that much, the combined effect of all of these actions meaningfully hurt the taste of the food. Suddenly young, great chefs were building individual small restaurants next to Antonio’s restaurants, creating food with love from scratch, using only fresh ingredients. Customers started leaving Antonio’s chain of restaurants in droves to eat at the new restaurants. Eventually, Antonio had to declare bankruptcy. Without realizing it, Antonio had become just like the big chain he hated.
Mary was a great young fashion designer. She created a small line of innovative clothing that caught on and became popular with the trend-setters and movie stars. This made Mary famous. Suddenly, it seemed like everyone who wore fashionable clothing wanted to wear clothing made by Mary.

To capitalize on her success, Mary decided to become a publicly traded corporation. Things were going fine, until the shareholders started demanding faster growth. These shareholders were not fashion experts, but just investors who wanted a great return on their investment. To please the demands of the shareholders, Mary expanded her line of clothing beyond high-end trend-setting designs to include some clothing to appeal to a broader audience. Now, instead of only being able to find her clothes at exclusive designer shops, you could find her apparel in the nicer department stores. At first, this move was a success, since more people could get access to the great fashion image associated with clothes made by Mary.

Now, the shareholders wanted even more growth. Mary could no longer personally design enough clothing to meet the demand for growth, so she hired lesser designers to work for her. Mary could no longer personally supervise the manufacturing of all the clothing, so she brought in a professional manager who moved production to a remote portion of China where the quality might not be as good, but the costs were cheaper.

After awhile, Mary’s clothing became so popular that the trend-setters and movie stars no longer wanted to wear them. Her clothing was not “exclusive” enough for them. Instead, they started wearing clothing designed by Margot, a new young fashion designer with a small line of innovative clothing. When the trend-setters and movie stars stopped wearing Mary’s clothes, they became less desirable to the rest of the fashion shoppers who were emulating the trend-setters. Now they all wanted clothes made by Margot.

As a result, Mary had a large inventory of clothing and fewer people to buy them. As a last resort, the professional manager started selling her clothes to discount stores. For the first season, that decision looked great, because discount stores can sell a lot of clothes. Mary’s accountants thought they were fashion geniuses. However, once word got out that “anybody” could wear Mary’s clothes, the fashion image associated with her brand disappeared, as did all of the customer and she eventually went bankrupt.

The Analogy
Virtually all businesses are faced with demands for growth. In many places, the pressures to grow are quite extreme. How to grow successfully becomes one of the major objectives of strategic planning. Antonio and Mary tried to grow their businesses, but were unsuccessful. The reason they were unsuccessful was because the pressures to grow and increase profits forced them to make decisions that compromised the very reason that they were successful in the first place.

Antonio’s early success had to do with the special way he prepared his food. This was his competitive edge. As he grew, Antonio’s food became less special, until he no longer had a competitive edge. The same was true with Mary. Her early success had to do with her exclusive, high-fashion, trendy image. The choices Mary made to grow caused her to lose that image. Once she lost her competitive edge, Mary’s company had no reason for existing.

Over the years, I have seen countless companies fall into the same trap as Antonio and Mary. In an attempt to grow, they forget what made them successful in the first place. In the name of volume and efficiencies, they start to make compromises. These compromises change the formerly successful business model until the business model no longer works. Rather than growing the company, they end up killing the company.

The Principle
The key lesson here is to make sure you truly understand what has caused your success in the past before you start to rapidly grow. Otherwise, you will end up losing the secret of your success in the growth process.

This is difficult to do, because the very process of converting from a small company to a large one tends to destroy the uniqueness that caused success in the first place. If your original success was based on a unique skill or competency, like it was for Antonio, it may be impossible to replicate it over a large company, where rules, regulations and standardizations kill off the creative spark behind the unique skill. If your original success was based on a special image of exclusivity, like it was for Mary, it may be impossible to replicate it over a large company, where the demands for larger sales and broader distribution kill the very exclusivity the brand was founded on.

In the conversion from being a small company to being a large company, many changes naturally tend to occur:

• Risk-taking entrepreneurs, who are deeply emotionally attached to their company, are replaced with professional managers who are more conservative and less emotionally attached to the company (and may come and go every couple of years).

• Ad-hoc and flexible decision-making is replaced with formalized, standardized rules and burdensome bureaucracies.

• Generalists, who have an intuitive sense for the entire business are replaced with specialists, who know their particular discipline well but may not understand how everything in the business model fit together.

• Having daily direct contact between top management and the customer is replaced by putting layers of middle management in between the leaders and the customers.

• Art is replaced with science. Bold actions are replaced with incremental micro-management and cost control.

Any one of these actions could serve to destroy that which made the small company great. This is not to say that the practices of large companies are inherently bad. Some additional levels of structure and order are needed to control the chaos that comes with being large. However, placing too much big business structure too quickly on a small business may kill the growth you were trying to build.

Rather than always trying to convert a small company into a large company, there is the option of converting a single small company into a number of small companies. In terms of sheer weight, a giant weighs as much as an entire family of small people. However, a big, lumbering giant may not be able to accomplish as much as a flexible family with many more hands. Replicating as much smallness as you can may be less efficient, but it is often more effective than trying to make something small into something big.

For example, in the restaurant business, there is Rich Melman and his company Lettuce Entertain You Enterprises. He operates approximately 56 restaurants, mostly in either Chicago, Minneapolis, Las Vegas, DC, and Phoenix. But instead of building one giant chain, his restaurants operate under 31 different names—each name being a distinctively different format, be it Italian, Asian, Seafood, Steak, or a number of other creative restaurant formats. His restaurants run the gamut from very haute cuisine to everyday sandwich shops. By keeping the number of restaurants in any given style or brand few, he keeps them from getting too large and institutionalized. At the same time, this has not stopped his creativity or his ability to grow. Instead of growing one big chain, he has grown small many times over. Perhaps this is what Antonio should have done.

In spite of having sales of over $300 million, his corporate staff is quite small—only 70 people. Rich Melman has not forgotten what made him great when his business was much smaller. To quote Melman,

“We're a very disciplined organization. We run restaurants well. People think of us as creative--and I do believe we possess creativity--but more importantly, we play good solid ball. Our costs are good. We surround ourselves with good people and we train them well...not a lot of fancy stuff, just the basics. And, we work very hard. We've had the ability to give people what they want almost before they know they want it. You can call it trendsetting. I prefer to call it the ability to listen to people."

I’m proud that my son works for that organization.

One of the biggest issues facing companies is growth. Therefore, one of the major concerns of strategic planning is looking for the most effective ways to grow a company. This is a difficult assignment, because many of the factors associated with building a large company or large business unit inherently work to destroy the uniqueness that made the smaller unit a success in the first place.

Rather than always trying to force a promising small business into a traditional large model as fast as possible, an alternative approach is to try to find ways to replicate the one small pocket of success into many small pockets of success. Instead of trying to become big, become small many times over.

Final Thoughts
Groucho Marx once said that he would never join a country club that would have such low standards as to invite him to belong. Regarding restaurants, Yogi Berra once said, “Nobody goes to that restaurant anymore. It’s too crowded.”

Sometimes inviting too many people to the business venture is a bad thing—be that too many customers or too many professional business employees. Building a string of small, nimble and exclusive businesses may be better than a single business where everyone is invited, but nobody wants to show up.

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