3 Stubborn Facts That Business Leaders Need To Accept

In the late 90s Fortune magazine named Enron the most innovative company for six consecutive years, right up until the company collapsed in scandal. GE’s strategy of stack ranking was seen as a model to be emulated by other firms, even though there was no evidence it worked. McKinsey advised companies to fight a war for talent.

Today, we know better. It’s obvious that Enron was incredibly dysfunctional, that stack ranking undermines a high-performance culture and that talent is something that you build through upskilling, not something you “win” in a metaphorical war. It’s mind boggling to think of all the damage that was done before those ideas were exposed.

Yet if we accept all that we need to ask ourselves which ideas are widely accepted today that don’t hold water. Every era has its own fictions, things that are accepted because they are repeated, but lack any serious foundation. They become memes replicating themselves throughout the zeitgeist, rarely being questioned. Here are three truths that will surprise you.

1. Bigger Organizations Are More Innovative

We tend to think of innovation as something startups do. Big organizations, with their bloated bureaucracies and cumbersome decision making, are less nimble. Yet a recent book, Corporate Explorer, by Stanford professor Charles O’Reilly, Harvard Professor ​​Paul Lawrence and consultant Andrew Binns finds that larger firms have more resources, talent and ideas.

This may seem surprising, but there is ample evidence supporting the principle that larger enterprises innovate more effectively. A 1969 study of local health departments found that the larger ones serving larger communities were more innovative. A 1986 analysis of footwear manufacturers found that the bigger ones had more technical specialists and adopted more radical innovation. Same thing when researchers looked at German banks’ adoption of telecommunication services.

Clearly startups have advantages. They tend to be less bureaucratic and can make decisions faster. They are also less invested in incumbent systems and technologies, which makes change easier. Yet innovation isn’t just about speed, it’s also about commitment to solving important problems and larger enterprises have more resources and scope to do that.

That’s why when you look at the most cutting edge technologies, like quantum computing, artificial intelligence, materials science, synthetic biology and others, you tend to find large organizations at the core. Don’t get me wrong, not every big company can innovate, but the ones that can come up with new ideas and execute them consistently, year after year and decade after decade, are enterprises with scale.

2. Levels Of Bureaucracy And Hierarchy Are Increasing, Not Decreasing

About a decade ago, the management guru Gary Hamel wrote a highly cited article in Harvard Business Review entitled First, Let’s Fire All the Managers. He analyzed the success of Morningstar, a leading manufacturer of tomato products that operates with a flat management structure and called for other corporations to follow its lead.

“A hierarchy of managers exacts a hefty tax on any organization,” he wrote. “This levy comes in several forms. First, managers add overhead, and as an organization grows, the costs of management rise in both absolute and relative terms.” The article was very influential and helped bolster other flat models, such as Holacracy.

For a while now, management gurus have been advocating for flatter organizations, yet there is little evidence that eliminating managers is a viable model. In fact, when Wharton Professor Ronnie Lee took a close look at game software developers, he found that the number of levels of bureaucracy increased significantly, not decreased, over the last 50 years.

Certainly, the “flat organization” idea hasn’t caught on. “Since 1983, the size of the bureaucratic class—the number of managers and administrators in the US workforce—has more than doubled, while employment in other categories has grown by only 40%,” Hamil recently wrote.

The inescapable conclusion is that we’ve failed to do away with bureaucracies and hierarchies because they serve a useful purpose. While flatter structures can inspire creativity, we need hierarchies to execute complex operations well. That might not play well when your trying to sell consulting projects or on the keynote stage, but it’s the truth.

3. Markets Are Becoming Less Competitive, not More (At least in the US)

Today it’s become an article of faith that everything moves faster. Business pundits tell us that we’re living in a VUCA world (Volatile, Uncertain, Complex and Ambiguous). These are taken as basic truths that are beyond questioning or reproach. Yet are things actually moving any faster than in earlier eras? The evidence is surprisingly scarce.

The data, however, tell a very different story. A report from the OECD found that markets, especially in the United States, have become more concentrated and less competitive, with less churn among industry leaders. The number of young firms have decreased markedly as well, falling from roughly half of the total number of companies in 1982 to one third in 2013.

A comprehensive 2019 study from the National Bureau of Economic Research found two correlated, but countervailing trends: the rise of “superstar” firms and the fall of labor’s share of GDP. Essentially, the typical industry has fewer, but larger players. Their increased bargaining power leads to more profits, but lower wages.

The truth is that we don’t really disrupt industries anymore. We disrupt people. Economic data shows that for most Americans, real wages have hardly budged since 1964. Income and wealth inequality remain at historic highs. Anxiety and depression, already at epidemic levels, worsened during the Covid-19 pandemic.

What You See Is How You’ll Act

When ideas are repeated often enough, we begin to take them as self-evident and don’t even question them. People take it for granted that small organizations are more innovative than larger ones, that flatter organizations outperform those with high levels of bureaucracy and that business is more competitive today than in earlier eras.

If you believe all that, then you would avoid getting involved with a large organization if you want to innovate, you would try to eliminate levels of hierarchy and create a high sense of urgency about everything you do. Yet when you examine the evidence it becomes clear that none of these things are factual.

The truth is that size has little to do with innovation. As we saw during Covid, the most pathbreaking advances came from collaborations between organizations, public and private, large and small. The levels of hierarchy in an organization aren’t nearly as important as its networks. Pushing too many initiatives is more likely to result in a high level of change fatigue  and diminished mental health than lead to genuine results.

When we look back at earlier eras, it’s easy to see the errors in the zeitgeist. It seems obvious that the robber barons undermined society, that excessive tariffs during the depression would impoverished society and that Enron was a fraud. Yet we need to look with the same skeptical eye at prevalent beliefs today.

As Richard Dawkins has explained, memes are selfish. They propagate themselves for their own benefit, not necessarily for ours. We need to learn to be fiercer advocates for our fates.

Greg Satell is Co-Founder of ChangeOS, a transformation & change advisory, an international keynote speaker, and bestselling author of Cascades: How to Create a Movement that Drives Transformational Change. His previous effort, Mapping Innovation, was selected as one of the best business books of 2017. You can learn more about Greg on his website, GregSatell.com and follow him on Twitter @DigitalTonto and on LinkedIn.

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Photo by Ono Kosuki