The dangers of ‘corporate blob syndrome’

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

I’ve long believed the biggest risk a business faces as it grows is turning into a ‘corporate blob’. 

Once this takes hold, there is often no way back and a steady loss of relevance usually ensues.

What is ‘corporate blob syndrome’? Why is it so dangerous? And how can companies avoid falling into this trap? 

Important: The information on individual company shares represents the view of Charlie as portfolio manager but it is not a personal recommendation to buy, sell or hold shares in any company. Experienced investors should form their own considered view or seek advice if unsure. Charlie personally holds shares in Diploma and Judges Scientific. This article is original Wealth Club content.

What is ‘corporate blob syndrome’?

In a nutshell, a ‘corporate blob’ is a large unwieldy bureaucracy, typically with multiple layers of middle management. 

It typically happens when a company gets large. Common features include:

  • Centralised teams and committees set budgets and make decisions on behalf of front-line workers
  • Too many people are involved in decisions
  • Constant meetings, usually requiring some form of consensus 
  • Extensive processes, policies and procedures
  • Highly formulaic remuneration structures based on hierarchy rather than merit
  • Regular pay freezes and recruitment bans applied to all departments (regardless of performance) 

Why is it so dangerous?

The dangers of ‘corporate blob syndrome’ are too many to list, but include a bloated cost base, lack of accountability, loss of agility and innovation, reduced focus on the customer and a tendency to fail conventionally, rather than succeed unconventionally. 

Decisions often don’t get made or come too late. Independent thought, common sense and judgement are eschewed in favour of preserving the status quo. And there is usually an extreme aversion to risk-taking and experimentation. All of which tends to result in demoralised employees, waning customer satisfaction and ultimately, a steady loss of relevance.

Why do so many companies fall into this trap? 

It’s inevitable that every company will introduce more processes and systems as it grows. But from there, it can be a slippery slope into full-blown blobbishness. 

Hire a head of anything and before you know it, they’ll be looking for an assistant and a deputy assistant (incidentally, I haven't nor do I intend to). More people will lead to more meetings, policies and committees, all of which results in the company’s leaders becoming even more out of touch. 

Companies have to fight bureaucracy tooth and nail as they grow, or else it will naturally take hold. Once its wheels are in motion, it can easily become a self-fulfilling prophecy that is very difficult to stop. 

Is there a vaccine against ‘corporate blob syndrome’?

I believe there is, but it requires turning the traditional corporate ‘playbook’ on its head. 

No one admits to it, but I think unwieldy bureaucracies exist because, from the top of the organisation down, no one is trusted to do their job. If they were, they would be allowed to get on with things, and 90% of the meetings, policies, committees etc. would be unnecessary.

Enter the decentralised business structure.

‘Decentralisation’ is a fancy word for putting power back into the hands of front-line workers and trusting them to do their jobs. Instead of functioning as a single ‘corporate blob’, a decentralised business will typically split itself into multiple smaller, self-contained units.

Amazon’s founder, Jeff Bezos recognised the power of this early on. He coined the concept of a "two-pizza team", to emphasise the importance of small, agile, and autonomous teams. The idea is that a team should be small enough to be fed with just two pizzas, typically consisting of about four to eight people. This undoubtedly helped Amazon remain agile and innovative, even as it scaled rapidly.

Some companies go even further and operate as a collection of independently run businesses.

The best-known example is Berkshire Hathaway, led by Warren Buffett and Charlie Munger. Throughout its history Berkshire has embraced a highly decentralised business structure, with managers of individual units given huge autonomy. This system has worked brilliantly for many decades. 

This decentralised approach is replicated in many other successful businesses. In the UK, for example, the likes of Halma, Judges Scientific and Diploma all function as collections of smaller businesses, operating with considerable autonomy. Their long-term track record speaks for itself.

Morningstar, 31/10/2003 - 31/10/2023. The graph shows total return in GBP. iShares Core FTSE 100 UCITS ETF tracks the performance of the FTSE 100. Past performance is not a guide to the future.

Why can a decentralised business structure be so powerful?

Decentralised businesses can be more entrepreneurial because front-line employees are empowered to make decisions and don't have to wait for orders from above. This can result in greater responsiveness, agility and deeper customer relationships.

There is usually a high degree of accountability if business leaders are incentivised on the performance of their own company or division. And because these leaders are trusted, they tend to want to do a better job. It's the power of reciprocation in action. Conversely, there is nothing like someone constantly looking over your shoulder, questioning your every move (common in an unwieldy bureaucracy), to sap morale and motivation. 

A decentralised business structure may also be easier to scale, especially with regards to acquisitions. Acquired businesses can be kept independent, minimising integration risk and distraction to other business units or divisions. By contrast, acquisitions within a ‘corporate blob’ structure may bring significant integration challenges, rarely achieve the anticipated ‘synergies’, and often accentuate existing risks and complexities.

Are there drawbacks to decentralisation?

A decentralised business structure isn’t a panacea. Like anything, it will only work if it is effectively managed.

It’s crucial to have skilled and trustworthy people to run each independent part of the business. Without good leaders, a decentralised business isn’t going to work well. Effective oversight and monitoring of business leaders (but without imposing unnecessary shackles or constraints) is also critical. This isn’t always an easy balance to strike.

However, I believe the biggest potential drawback of a decentralised structure is duplication of functions and the attendant inefficiencies. A decentralised business consisting of 50 independently managed units may have 50 different IT systems, finance teams, suppliers etc. On the surface, this seems very inefficient, providing a huge incentive to merge these functions and extract ‘cost synergies’.

And sometimes, centralising functions does make sense, especially in industries that lend themselves to economies of scale. 

Take the brewing and spirits industries. Large-scale manufacturing and bulk purchasing mean lower costs and higher margins, which in turn can fund large marketing budgets. In addition, a pub or bar only has room for a certain number of brands which plays into the hands of large incumbents. It takes a lot of corporate blobbishness to outweigh those advantages and this explains why there has been so much consolidation in those industries over the last few decades.

But scale advantages may be reducing

That said, size itself is arguably less of an advantage now than it used to be. Success for a consumer goods giant used to rely largely on two things: dominating shelf space in stores and large TV advertising budgets. 

The internet has levelled the playing field to some extent. Smaller players who were previously locked out of stores can take advantage of ‘unlimited’ online shelf space, while the advent of social media offers scope for smaller brands to reach a mass audience quickly and efficiently. This is what enabled the likes of Dollar Shave Club to emerge from nowhere and steal share from Gillette. And it explains why YouTube star Mr Beast’s chocolate brand (Feastables) could pose a credible threat to Hershey’s and Mars. Both would have been almost unthinkable 15 or 20 years ago.

In other words, ongoing success for consumer goods giants and many other industries is likely to rely much more on the very things that ‘corporate blob syndrome’ threatens. Namely, speed, agility and innovation. The risks of corporate blobbishness have arguably never been greater.  

Duplication – a price worth paying? 

The benefits of scale are often easily apparent, while the disadvantages of ‘corporate blob syndrome’ are often hidden. Procurement gains from combined purchasing can be boiled down to precise numbers on a spreadsheet. But the loss of accountability, agility and focus from mashing two companies together is virtually impossible to quantify.

To me this suggests the point at which ‘corporate blobbishness’ overrides scale advantages may be much closer than many businesses think. Once that point is reached, size becomes a drag on growth and margins, rather than an accelerant and the whole becomes less than the sum of its parts. This is why duplication within a decentralised structure can be a price worth paying.

Businesses that can maintain an entrepreneurial edge as they grow are at a huge advantage. A well-managed decentralised structure is a fundamental ingredient to achieving this, in my view. There are many other advantages too, not least the ability to scale more effectively through acquisition.

It’s no coincidence that many companies in the Quality Shares Portfolio have highly decentralised business models. 

See five-year performance of the shares listed above:

Apply online now: Quality Shares Portfolio, managed by Charlie Huggins 

The Quality Shares Portfolio, managed by Charlie Huggins and exclusively available through Wealth Club, is a portfolio specifically designed for people who are genuinely interested in investing.

It’s a portfolio of 15-20 global businesses chosen for their resilience, financial strength and pricing power.

It is profoundly different from any other investment you might hold in two key respects. The first is the level of information, insight and transparency it provides (you can see an example here). The second is in the investing approach itself.

You can invest in the Quality Shares Portfolio online, if you’re a high net worth or sophisticated investor. You can invest in an ISA, SIPP or in a General Investment Account, subscribing new money or transferring existing investments. The minimum investment is £10,000 (£8,000 in a SIPP). 

Liked this article? Register to receive the next one straight into your inbox.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.