Our Obsession with Scale

Nilofer Merchant has a terrific blog post on HBR today.   She describes "our obsession with scale."   She explains:

Giants have a view of the world that often makes new markets "too small" to pursue. When we see scale as the thing they must do all by ourselves, then only "big" opportunities are worth investing in. Scale, in the traditional view, means that what they produce and how they function has to be about efficiency, productivity and being bigger than the other guy — because that is, above all, the source of profits. And for sure, it means they skip right past $50M or $100M or even $500M opportunities because they are not "big enough" to work on. And it is this thinking — this mindset — that is the central reason so many industries (automotive, financial, health care, and even education) and their companies are failing all around us today. It's not that our economy is stalled, but that our thinking has stalled. It means that industries are stagnating because nothing new ever shows up as a $1B market right away — market opportunities show up first as the $50M or $100M opportunities. And markets that need to be served should not be killed off because the giants can squash it. 

I agree wholeheartedly.  I have argued on this blog that executives often convince themselves that:

a.  economies of scale exist in every industry
b.  further economies of scale can be exploited in their industry
c.  no such thing as diseconomies of scale exist (or they are far from reaching that point

 We know that these three beliefs are often proven incorrect... yet, companies and their leaders continue to adhere to these notions.   Why?  In some cases, executives like to lead large organizations.  Slimming down, divesting units, and reducing scale doesn't prove very popular.  In other cases, we see leaders whose firms are struggling... and they see a merger to capitalize on supposed scale economies as a "easy" way to juice profits when organic growth opportunities don't seem apparent.   At the same time, leaders often are looking for new organic growth opportunities that will "move the needle" - i.e. impact the top line in a significant way.  Of course, knowing which new ventures will become very large businesses is hard to predict in advance!   Thus, we see too many large firms rejecting new opportunities because they think they will be small revenue generators... only to be proven incorrect years later.