The Demise of Size

By : Jim Pinto,
San Diego, CA.

Evidence shows that there are significant limitations to sheer size. Getting bigger has not helped most big companies. Indeed, size inhibits growth. In the new economy, some of the biggest companies are ailing and failing.

This article was published by:
October 2009

The prevailing logic is that unless you are big enough to dominate your market, large enough to squeeze suppliers and global enough to operate in every corner of the world, then you do not have the resources necessary to stay in the game and win.

But that logic is flawed. Getting bigger has not helped most big companies. Indeed, size inhibits growth. In the new economy, some of the biggest companies are ailing and failing.

Sure, size counts, especially in addressing complex problems that span geographies and need lots of financing to function. But bigger doesn't make a company better at serving customers. Bigger isn't more rewarding to work for. Bigger doesn't attract investment.

There are much higher correlations between scale and good performance when companies have also developed distinctive, difficult-to-replicate capabilities. Classic examples include Toyota, with its production system, and Wal-Mart, with its distribution systems. In these cases, scale may result from the capabilities, but it is not the cause of their growth.

General Electric was for many years the paragon of a size-driven business. Its ruthless insistence on a number-one or number-two market-share position in every business in which it participated is cited as the driver of its extraordinary revenue, profit and stock-price growth. However, GE's real accomplishment was building organizational attributes that enabled it to tackle changes more effectively than any other company. Under its current Chief Executive Officer Jeffrey Immelt, emphasis has changed to innovation and organic growth.

In the past, an axiom of growth was that all industries consolidate as they mature, and those companies that scaled up and survived the shakeout inevitably won big. By extension, in an era of global markets, global consolidations are presumed to win very big. In fact, during the past two decades, industrial automation has moved through consolidation by acquisition and all of the automation majors have explicitly been built on the strategy of dominant size in global markets.

But big companies tend to be hierarchical and myopically self-reinforcing, organized to minimize new threats to the existing order. Management is focused inward, and resources are directed toward preserving structures based on past successes, rather than future opportunities. They develop barriers to innovation by allocating resources based on what has worked in the past instead of on what could determine the future.

The core dynamic in the failure of large companies is failure to process information effectively because of addiction to central, power-based, decision-making protocols. By contrast, small companies use radically different mechanisms - fast-acting and much more effective. The fundamental value of an organization (large or small) today is informational capacity and speed. Failure in these aspects is a severe restriction.

Leaders fade

Size as the key strategy retains a powerful hold on business thinking. But, the evidence shows that there are significant limitations to sheer size. High-performance businesses are very rarely the biggest. From automobiles to computers, most leaders dominate their industries only for a time, and then fade away as shifts in demand, technology or business models erode their base.

With today’s technology acceleration, information is the basis of competitive advantage. Strategy and execution should be organized around information, using it to gain unique market insight that can rapidly be turned into products and services. In the information economy, the relationship between strategy and agility attains great importance; most big companies just cannot be agile.

In this environment, strategy feeds off of market research, transaction data and business intelligence. Early investments in information-based strategies produce new products and services that obsolete the old frighteningly fast. High-performance companies can achieve extraordinary success by balancing growth efforts with focus on the rapid development of innovative new products and services for global markets.

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