Theories/discussions about corporate inertia
October 12, 2009 9:43 AM Subscribe
I'm looking for interesting theories/discussions around the phenomenon of corporate inertia
I'm trying to find out as much as I can online about corporate inertia - in other words, how companies and management get bogged down, fail to innovate, make stupid decisions etc, because of internal issues which may be organisational, cultural, attitudinal or similar.
So far I've found a few things - e.g. Warren Buffett's "Institutional imperative", as well as the Peter Principle and Parkinson's Law, but am eager to hear of more!
I'm trying to find out as much as I can online about corporate inertia - in other words, how companies and management get bogged down, fail to innovate, make stupid decisions etc, because of internal issues which may be organisational, cultural, attitudinal or similar.
So far I've found a few things - e.g. Warren Buffett's "Institutional imperative", as well as the Peter Principle and Parkinson's Law, but am eager to hear of more!
Best answer: Underlying most manifestations of what you call "corporate inertia" are two healthy survival strategies most successful corporations need: risk aversion and appropriate financial performance. Companies seek to minimize risk, because unsuccessful risk generally results not just in lost opportunity, or lost profit, but loss of capital. There is nothing harder to recover from, for a corporation, than loss of capital; losing capital is effectively shrinking the business, in a world where corporate size does matter, particular in terms of international business. Companies seek to maximize financial performance, in the terms by which their investors understand and measure financial performance, in order offer the best returns on equity, which enables them attract capital when they need it, and to have the flexibility to grow.
Particular strategies for risk aversion, that can look like corporate inertia to inexperienced employees, first line supervisors and middle managers include maintaining internal investment "hurdles," such as having a rule that any new equipment or program must be able to show an Internal Rate of Return exceeding the companies cost of money by, say, 10%. Or, stated another way, that internal projects must have a 1 year or 18 month payback period. That artificially forces any internally generated investment proposals to be much more profitable than the company, as a whole, might be currently, or that competitors might be in aggregate, with the result that many projects that might be profitable, are not profitable enough to jump the internal "hurdle". But what upper management is doing in setting such rules is simply to put forth a discipline that demands that all really egregious cost savings, or investments, should be made first. Projects which jump the "hurdle" are so obviously necessary, that they can generally be authorized sooner, at lower levels of the management structure, often without taking the attention of upper management. However, when times get tougher, and capital's interests more conservative than in better times, senior management may tighten new project investment still more, not just by raising the "hurdle," but by insisting on direct review of all investment. That's essentially a corporate governance policy change, to offer greater accountability to equity interests in times where profitability may be challenged, as much as it is a risk aversion measure.
Maximizing financial performance is another tricky goal of senior management, that is sometimes hard for lower level managers, supervisors and employees to understand. For example, management must generally develop and study an appropriate strategy for operating the business, that will be followed at every level. One such strategy is profit maximization. Another is cost minimization. Many non-financial managers are very surprised to learn that the maximum profit strategy for their business is rarely the minimum cost strategy. It seems intuitive that maximizing profit would involve minimizing costs, but in most businesses, in fact, one does not dictate or support the other. So, senior management is generally responsible for modeling the business numerically, adding operational judgement so that reasonable work schedules and plant application is possible, and then delivering on a strategy that is acceptable to the equity interests, and appropriate for the business and regulatory environment in which the organization operates. Unfortunately, doing that can look to lower level employees as if the business is stuck with some hidden source of "corporate inertia" when it appears they are intentionally forgoing the maximum profits they could be making, or not pursuing every last penny of cost reduction that could reasonably be had.
posted by paulsc at 10:53 AM on October 12, 2009 [2 favorites]
Particular strategies for risk aversion, that can look like corporate inertia to inexperienced employees, first line supervisors and middle managers include maintaining internal investment "hurdles," such as having a rule that any new equipment or program must be able to show an Internal Rate of Return exceeding the companies cost of money by, say, 10%. Or, stated another way, that internal projects must have a 1 year or 18 month payback period. That artificially forces any internally generated investment proposals to be much more profitable than the company, as a whole, might be currently, or that competitors might be in aggregate, with the result that many projects that might be profitable, are not profitable enough to jump the internal "hurdle". But what upper management is doing in setting such rules is simply to put forth a discipline that demands that all really egregious cost savings, or investments, should be made first. Projects which jump the "hurdle" are so obviously necessary, that they can generally be authorized sooner, at lower levels of the management structure, often without taking the attention of upper management. However, when times get tougher, and capital's interests more conservative than in better times, senior management may tighten new project investment still more, not just by raising the "hurdle," but by insisting on direct review of all investment. That's essentially a corporate governance policy change, to offer greater accountability to equity interests in times where profitability may be challenged, as much as it is a risk aversion measure.
Maximizing financial performance is another tricky goal of senior management, that is sometimes hard for lower level managers, supervisors and employees to understand. For example, management must generally develop and study an appropriate strategy for operating the business, that will be followed at every level. One such strategy is profit maximization. Another is cost minimization. Many non-financial managers are very surprised to learn that the maximum profit strategy for their business is rarely the minimum cost strategy. It seems intuitive that maximizing profit would involve minimizing costs, but in most businesses, in fact, one does not dictate or support the other. So, senior management is generally responsible for modeling the business numerically, adding operational judgement so that reasonable work schedules and plant application is possible, and then delivering on a strategy that is acceptable to the equity interests, and appropriate for the business and regulatory environment in which the organization operates. Unfortunately, doing that can look to lower level employees as if the business is stuck with some hidden source of "corporate inertia" when it appears they are intentionally forgoing the maximum profits they could be making, or not pursuing every last penny of cost reduction that could reasonably be had.
posted by paulsc at 10:53 AM on October 12, 2009 [2 favorites]
Throw "The Innovators Dilemma" by Clayton Christensen to your pile.
posted by Good Brain at 12:34 PM on October 12, 2009
posted by Good Brain at 12:34 PM on October 12, 2009
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But trust me, I get it. It will make you more frustrated to want change/innovation to occur than to roll with the punches, be glad you have a job, and go home and foreget about it. I know it's frustrating, unsatisfying, and just wrong but hey, in the grand schemes of life, it doesn't matter.
posted by stormpooper at 10:04 AM on October 12, 2009