Is Bigger Better?

At the end of the recession, growth slowed, and companies were sitting on cash. As a result, there was a flurry of acquisitions. Some large and notable M&A activity in this period were the deals for Kraft/Cadbury, Dow/Rohm and Haas, Pfizer PFE -0.6%/Wyeth, and Merck /Schering-Plough.

Today, we have a similar situation. Growth has slowed, and companies are sitting on cash. M&A is certainly a growth opportunity, but is bigger better? Can a bigger company outperform competitors due to scale? I thought yes; but, now I think that this only happens with the right leadership. It is not a sure bet. Here I share my thoughts.

Some Context:

The supply chain leader manages a complex system in a world of increasing complexity at the intersection of customer service, cost and inventory.  These metrics are tightly inter-related and non-linear; and as a result, they need to be managed as a complex system using advanced analytics.

The rise of complexity in business processes makes this a tougher nut to crack. Recently, in preparation for the book that we are publishing Metrics That Matter, we analyzed data on corporate performance on revenue/employee, operating margin and inventory turns. We wanted to answer the question, “Is Bigger Better? And, do larger companies have an advantage?” In Figures 1-3, we share the results.

Rohm and Haas Corporate Headquarters (Photo credit: Teemu008)

The Results:

The impact of scale is the most pronounced in the area of operating margin. Scale has been used the most effectively in chemical, consumer packaged goods and pharmaceutical companies. Food and beverage, and mass retail companies have not been able to leverage scale. Why? The basics of the businesses are very different. Food and merchandising/assortment preferences are very regional, and these companies have not been able to leverage scale in distribution, or procurement. They are also not as mature in the adoption of supply chain processes as consumer packaged goods companies.

Not surprisingly, there is positive relationship between size and revenue/employee productivity; however, it is important to note that we are surprised in the research that the results are not even more pronounced for companies greater than $5B. The results are not proportional to size.

When it comes to inventory turns, there is almost an inverse relationship by company size. The larger the organization, the tougher it is to manage inventories. Some of the gaps, in some of the industries — like retail, medical device, and pharmaceutical– are significant. Companies that are improving inventories, operating margin and productivity are the best are more advanced in the use of inventory technology solutions to evaluate form and function of inventory, have a clear understanding of Sales and Operations Planning (S&OP), and clarity of regional/global governance. It requires skill, discipline and a clear understanding of the operating strategy. The larger the company, the greater this importance, and the harder it is to close these gaps. It also requires patience. Progress in corporate performance happens in small increments.

Conclusions:

So in conclusion, bigger is not always better. It comes down to leadership. The larger the company, the more skill it takes to manage the trade-offs between costs, customer service and inventory. While many companies attempt to accomplish this through supply chain centers of excellence, we find that one out of two centers fail because of a lack of definition of the operating strategy and clarity around the definition of supply chain excellence. In the words of Philippe Lambotte now SVP Global Supply Chain at Mattel MAT -1.57% and prior leader of the Merck and Kraft supply chain organizations through their respective mergers, “When a merger happens, it is important to work on consistent processes. There is not enough time to debate what are best practices. A company needs to get consistent before they can determine what is best.”

Is Bigger Better?