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How PepsiCo are trying to control diseconomies of scale

Tuesday, October 18, 2011
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Big firms often face huge organisational difficulties that can slow them down and cause costs and problems to spiral.  So I was drawn to a BBC article the big businesses learning how to think small which appeared soon after Steve Jobs’ death.  His insistence on “no committees” and talking to everyone at least once a week was, he said, enough to keep Apple focused, efficient and successful. 

I don’t know if that’s true, but for big corporations, with their vast resources and bewildering bureaucracy, operating with the attitude of a technology start-up is a distant dream (but with exciting possibilities).  Poor communication, low levels of motivation and a shortage of innovative ideas are classic diseconomies of scale that are typical of larger organisations.

The article quotes the general manager of Walker’s Crisps, part of global giant PepsiCo:

“Start-ups try, they fail, they adapt, they move on. They try, they fail, they adapt, they move on.  In our marketing, we tend to make a campaign, put it out there and hope it works.”

For the first time in many years, Pepsi opted to ditch their advertising slot during the Superbowl and to the great surprise of many they splashed out on a $20m social media campaign.  The business is enlisting the help of small, nimble companies to get expertise which they might never hope to produce from within.  The supporting firms - PepsiCo10 – are a group of UK and European technology start-ups that will be receiving financial help in return for working with the corporate giant.

The same PepsiCo manager is quoted as saying: “We’ve got lots of folks in our marketing team who I think are really going to enjoy working with these start-up businesses because they do come at the world from a different place.  One of the things I hope it will do is just breed a much more entrepreneurial spirit and mood in our marketing. It’s infectious. It sets your mind spinning - they’re people who just operate in a completely different way, and think in a totally different way.  You can try 10 different approaches and see which one works the best.  And then build on that, rather than put all of your faith and hope in one 30-second TV ad that you’ve spent months making. Five years ago we weren’t thinking in that way at all. It’s a totally different mindset.”

What’s very interesting is that Pepsi are not buying the smaller companies, or even acquiring a stake. To do so has proven fatal for start-ups in the past.  That is because, according to one expert, “They think that the company will continue to innovate in its old form as part of their big bureaucratic organisation.  When they do that, they usually kill the very thing they’ve bought. They kill the spark in the company.” 

The founder of social bookmarking site Delicious sold the site to Yahoo for reportedly about $10-$15 million.  He told the BBC that running his start-up from within Yahoo! was “suffocating”.  “I’d make a decision and my boss would decide he didn’t like it and just block me.”

So it will be interesting to see if these small firms can help PepsiCo, or if they will be crushed – or simply ignored.

Back and bigger than ever
Corporate culture: how a huge firm like Google tries to foster innovation
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