Why are large companies not more successful?

We have followed the T&D business since decades, large global as well as smaller local companies. On several occasions, we have believed that the large ones would become too strong for the small ones, with their superior financial muscles, global sales networks and powerful R&D-organizations.
Some 10-15 years ago, the large T&D companies started to specialize their factories. They talked about ‘focused factories’, that would have a narrow product scope, but that would get access to more markets. The idea was that if you make more of the same, you will become more cost effective, can grow the market share, get a higher quality and as a positive consequence you make more money. Looking at the development especially in the transformer sector the past 10 years is very sobering. The market shares have not grown, rather the contrary is true for the large companies. Recent contacts with representatives from large utilities give a picture of constantly delayed deliveries and high test-failure rates i.e., quality and efficiency do not seem to have improved. Financially, it is doubtful whether the approach really has improved profitability. This gives us reason to ask two questions:

1. Why is it like this?
2. How will Top Management act to make large companies great?

Larger factories, with higher revenues are more profitable than small ones! This has been the logic behind several investments and expansions that have taken place in the sector. We decided to look into this and found that in reality, smaller independently owned factories often are more profitable than larger ones owned by multinational corporations. We see small distribution transformer factories with revenues in the range 10-20 MEUR making higher margins than 100 MEUR factories owned by large groups, despite the fact that they are competing for the same customers. It gets even more surprising when we add that the small, profitable companies are located in European high-cost countries while the bigger competitors are based in lower cost countries like Hungary or Poland. Furthermore, our research show that the smaller, not so focused independently owned companies also have outgrown the larger ones the past few years. A brief study of available data shows that smaller factories seem to be more profitable and grow faster than bigger ones. How come?

Large corporations are complex structures where it is difficult to understand who is responsible for what when the organization charts are studied. Customer relations are often managed from central marketing and sales offices, far away from the supplying factories and many decisions are centralized and sometimes hard to comprehend and implement for the individual factories. When dealing with smaller companies, customers talk directly to the people responsible at the factories and get immediate responses. History offers many examples of negative synergies within large corporations. It is very difficult to realize the synergy of having one factory in a lower cost country like Poland or Turkey and a higher cost factory in Germany. The German factory does not get a lower cost base just because it has a sister company in Poland. In order to be successful, the management needs to define and realize benefits in excess of the added costs. So far, this has proven to be a challenge.