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When Big is FAIL

Via CJR, this from theoretical physicists Geoffrey West and Luis Bettencourt:

[T]he metabolic rate of a creature is equal to its mass taken to the three-fourths power. This ubiquitous principle had some significant implications, because it showed that larger species need less energy per pound of flesh than smaller ones. For instance, while an elephant is 10,000 times the size of a guinea pig, it needs only 1,000 times as much energy. Other scientists soon found more than 70 such related laws, defined by what are known as “sublinear” equations. It doesn’t matter what the animal looks like or where it lives or how it evolved — the math almost always works...

[West] saw the metropolis as a sprawling organism, similarly defined by its infrastructure. (The boulevard was like a blood vessel, the back alley a capillary.) This implied that the real purpose of cities, and the reason cities keep on growing, is their ability to create massive economies of scale, just as big animals do. After analyzing the first sets of city data — the physicists began with infrastructure and consumption statistics — they concluded that cities looked a lot like elephants. In city after city, the indicators of urban “metabolism,” like the number of gas stations or the total surface area of roads, showed that when a city doubles in size, it requires an increase in resources of only 85 percent.

This straightforward observation has some surprising implications. It suggests, for instance, that modern cities are the real centers of sustainability.

So, for cities, big is not FAIL. How about corporations?

[It] turns out that cities and companies differ in a very fundamental regard: cities almost never die, while companies are extremely ephemeral. As West notes, Hurricane Katrina couldn’t wipe out New Orleans, and a nuclear bomb did not erase Hiroshima from the map. In contrast, where are Pan Am and Enron today? The modern corporation has an average life span of 40 to 50 years.

This raises the obvious question: Why are corporations so fleeting? After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. “Look at this bloody plot,” he says. “It’s ridiculous how well the points line up.” The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. “When a company starts out, it’s all about the new idea,” West says. “And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line [No, they don't. They start worrying about how to loot the company], and so all these people are hired to keep track of the paper clips.* This is the beginning of the end.”

The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility [as in the financial collapse]. Since the company now has to support an expensive staff — overhead costs increase with size — even a minor disturbance can lead to significant losses. As West puts it, “Companies are killed by their need to keep on getting bigger.”

So, if you work in a corporation, the perception you may have that meetings are unproductive, prevent you from doing real work, and are destroying the company, you are correct on all counts.

And when you listen to our Beloved Leader wander on about "competitiveness" tonight, ask yourself whether it's the Bigs of this world -- Big Money, Big Media, Big Food, and all the rest of 'em -- who will benefit from his policies, or actually productive working people.

NOTE * Seriously, not the lack of agency in "get hired." Why blame the accounting drones, when it's the CEOs who put them in place as a means of social control, and then skim the profits and loot the companies?

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okanogen's picture
Submitted by okanogen on

Companies are not killed by their "need" to get bigger, because there is no "need" to get bigger. They are killed by their "choice" to get bigger.

This book is all about companies that made the alternative choice.

Now there are a lot of pushes to make companies bigger certainly, and I would argue there are some worthwhile tasks that are beyond a small company to complete (things like large infrastructure projects), but by and large, most companies aren't big anyway. Of the 25.4 million companies in the U.S. only 890 have more than 10,000 employees.

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