11. Combinations of large and small

In view of opposite strengths and weaknesses of large and small firms, one should not choose between them but seek fruitful combinations of the two.

As I noted in the preceding item in this blog, when a new enterprise is successful and grows, more managerial control is needed, in the specification and delegation of tasks, in an increasingly complex division of labour, and some formal reporting and control. Then the need for the advantages of a larger firm size emerges. Leadership of the firm may need to be replaced, or the firm is taken over by a large firm.

However, large firms sometimes aim to revitalize themselves by taking over a small, more entrepreneurial company, and often that fails. Instead of vitalizing the large firm, the small firm is smothered in the inertia of the large one.

This reflects the fundamental difficulty to combine exploitation and exploration in a single organization. I will discuss that more extensively, and show how the two can build upon each other, later in this blog, when I discuss processes of learning, invention and innovation. Here I note that experience in exploitation can yield a useful basis for successful exploration based on relevant experience and knowledge, provided that it can wrench itself loose from the conservatism of what is established.

An avenue for this is the phenomenon of the spin-off. There, an employee with an original idea that is uncertain and is not seen to fit well in established perspectives, structures and procedures, steps out to develop the idea as an independent entrepreneur. This may be seen as a ‘betrayal’ by the parent firm, but that is a mistake. It is much better to see it as an opportunity, as follows.

Encourage the wayward employee to make the step, help him/her to compensate for weaknesses of the small firm, in providing specialist support or advice, provide venture capital, and promise the possibility of return to the company if the venture fails, as is by far the most likely outcome. In this way one creates several options.

In case of failure a daring and original worker is recovered for the firm: it is often not the worst employee who has the vision and courage to spin off, and after failure he/she has renewed motivation to make the best of the work inside the parent firm.

If the venture succeeds but the result turns out not to fit well in the portfolio of products and markets of the firm, or in its strategic vision of expansion, then its share in the spin-off can be sold at a profit.

If the venture succeeds and the result is attractive to the parent firm, and the small firm runs into its limitations to exploitation and expansion, and the need to make to transition to management, the innovator can be invited back into the parent company to lead or guide the further development of the innovation inside it. The risk of getting smothered in the large company is still there but is limited by the returning employees knowledge and experience with the company.  

This theoretical merit of spin-offs is amply confirmed in a large number of empirical studies that show that indeed spin-offs form a major motor of innovation.