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When he led IBM, Lou Gerstner incorporated many of the aspects of running a startup into his management style. (Louie Palu)
When he led IBM, Lou Gerstner incorporated many of the aspects of running a startup into his management style. (Louie Palu)

Management advice

The lessons big companies can learn from startups Add to ...

Harvard Business School’s Lion of Entrepreneurship, Sarofim-Rock Professor of Business Emeritus, Howard Stevenson, argues that startups are different from “administrative” companies (ACs) in six important ways. Those six ways give ACs an advantage over startups in wars of attrition. Conversely, startups win by targeting markets for which an AC response would cannibalize its core.

Interestingly for ACs, Prof. Stevenson offers two examples of companies that have found their way out of this problem — Landmark Communications, parent of The Weather Channel, and International Business Machines (IBM), under Lou Gerstner.

In Prof. Stevenson’s view, ACs and startups differ in six critical ways:

Strategic orientation

Startups pursue opportunity with resources that don’t match the task; they lack all the resources required to win. ACs have become so successful that they have resources, such as factories and distribution channels that they need to decide how to use. In a war of attrition with a smaller company, these resources can provide a decisive advantage. However, if a start-up offers customers a product that obsoletes the assets, they limit the AC’s strategic flexibility

Style of resource commitment

While a startup is quick, agile, and adapts to change; the managers in a successful AC study an investment opportunity before committing resources. And if the manager who makes that study turns out to be wrong, he tries to “reinvent reality” to make sure that he does not take the blame for a bad prediction.

Decision-making approach

Whereas a startup does frugal experiments to prove its business model in stages so it can demonstrate the progress needed to attract additional resources, an AC studies that decision and then commits its current resources all at once.

Attitude towards asset accumulation

Startups use other people’s resources: people, money, and machines and they almost always shun spending on resources that are not essential to their mission. By contrast, ACs reward middle managers based on how many people report to them and the amount of assets they control.

Management structure and style

Startups manage a network of relationships with people and organizations that they don’t control; whereas ACs appoint bosses and make decisions from the top-down — for most of them, authority must equal responsibility; and

Approach to rewards

Startups give almost all their key employees a chance to get rich if the company succeeds — while leaving them with next-to-nothing if it fails. By contrast, ACs give individual promotions and rewards — often assuring that the “top dog takes all the dog food.”

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These differences give ACs the edge in wars of attrition. For example, it is unlikely that a startup will succeed in taking on Wal-Mart directly in the retailing business with an everyday low price strategy nor will a startup office operating system maker make much headway against Microsoft. These ACs’ greater resources will exhaust resource-poor startups.

By contrast, if an AC fears cannibalization, the startup enjoys a competitive advantage. As Prof. Stevenson pointed out, there was nothing in theory to stop a newspaper from inventing Angie’s List — the online local business review site. However, the fear that such a site would cannibalize the newspaper’s classified advertising business deterred the move.

Prof. Stevenson cites Frank Batten, late CEO of Landmark Communications, as the rare example of an AC CEO who was able to run a big company in some ways more like a startup — and hence to avoid the strategic paralysis resulting from the typical AC’s fear of cannibalization.

Mr. Batten took a different approach to the six dimensions outlined above:

Strategic orientation

Mr. Batten focused on how to exploit resources to create new businesses. To that end, Landmark decided to “obsolete itself or the competition would.” So it went from print to cable, to the Internet — and then started offering online buying services — such as Auto Trader.

Style of resource commitment/Decision-making approach

Mr. Batten encouraged people to try new ideas once, and if they worked, he did more. If they did not, Mr. Batten tried to learn from it.

Attitude towards asset accumulation

Like a startup, Mr. Batten tried to rent assets, such as satellites, and preferred not to own real estate.

Management structure and style

Mr. Batten encouraged a team approach to management because he wanted his board and his people to challenge his thinking and offer new ideas “at least once a year, or I don’t need you.”

Approach to rewards

When Mr. Batten sold Landmark, it was clear that his approach to rewards was more like that of a startup. Its broad group of employee-shareholders did quite nicely after NBC Universal, Blackstone Group and Bain Capital acquired The Weather Channel in 2008.

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IBM’s Mr. Gerstner also led his company more like a startup when he joined in 1993 as it was getting close to running out of cash. Steve Jobs did something similar when he returned to Apple in 1997.

The biggest takeaway: CEOs who can run ambidextrous ACs that preserve their valuable legacy businesses while inventing new ones, are few and far between. The rest remain vulnerable to their fear of cannibalization when competing with the smart startups.

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