scale

Bigness, Too Big To Scale: How Companies Change With Size

Too big to scale is a phenomenon where a company has passed a threshold that makes it much more fragile to scale. In short, an additional level of scale instead of creating growth efficiency generates at best diseconomies of scale. At worse congestion and collapse.

Understanding the implication of Scale and Size

For years, Facebook’s founder’s — Mark Zuckerberg– motto has been “move fast and break things.” This motto helped the company scale from a single computer in a dorm room to one of the largest tech companies in the world.

Yet, back in 2017, that motto changed to “Move fast with stable infrastructure.” This is a paradigm shift from both a technical and business standpoint and it might fool you into believing that the decision to change its motto came centrally, from Mark Zuckerberg.

However, the key lesson I want you to bring home is that as Facebook size reached a certain threshold, the company completely transformed. And this transformation was not the consequence of a drafted plan, written down and executed. But instead, it was the consequence of size.

In short, as Facebook grew and scaled, it automatically changed as an organization. If at all, as the Facebook executive team realized that, they had to change its motto to fit this new reality.

Breaking things was no longer an option for Facebook. Indeed, the cost of breaking something at Facebook’s scale was so high (not only for the company but for society) that keeping this mantra would have resulted in the company’s collapse under its own size.

Just like an ant, that turns into an elephant, Facebook had transformed. Scale had changed it all.

Thus, a software bug, that once was not expensive to fix, with billions of interactions through the platform, that same bug would have meant a huge effort from the engineering team to fix it. Together with the reputational and legal risk coming with it.

When that level of scale is achieved, where size makes the company a potential burden to society, the company loses its ability to experiment fast (as each of those experiments carries a too high potential negative cost to society), and it becomes a market monopolist.

Size prevents quick experimentation, also the pace of innovation is significantly slowed down. Therefore, the Too Big To Scale player’s only option is to limit competition in the market, by means of acquisitions, bad business practices (like knock-offs, or copycat products), and lobbying.

As we’ll see here though, not all scale is bad, and scaling to a certain size might actually help the business become more effective.

What scale does to companies?

While scale and size might seem two separate things at a first sight. In reality, scale and size move in an infinite loop, that determines a sort of “science of growth.” As we move within complex systems, scale can help that system grow, yet as the system grows it changes, it becomes something new.

Business people that have transformed companies from startups, to scale up, mature, and (in some cases) monopolies know that well.

In his book, Scale, Geoffrey West gives an incredible account of how scale changes things, from physical to more complex things (like cities and companies). Some of the key points of this study highlight how things scale in most cases in a non-linear fashion.

In short, they fall under what we know as power laws. Growth is analyzed as a mechanism between incoming energy + the energy required for the organism’s maintenance (Geoffrey West divides it into repair and replacement) + new growth.

From this simple equation, we can determine how growth looks like.

Thus, the metabolic rate (or how the metabolic energy is distributed across maintenance of existing cells/physical structure and the creation of new ones) can increase sublinearly or superlinearly.

This will trace the difference between sublinear (thus bounded) and superlinear (unbounded) growth.

Bounded vs unbounded growth

In biology, as organisms increase their size, something interesting happens. As a reminder, growth in biological terms can be seen as the difference between metabolism (the energy generated by the organism) and maintenance (that needed for regenerating).

As size scales, metabolism scales sublinearly. It, therefore, slows down, and it’s not able to pick up with the energy needed for maintenance, thus creating over time (as size increases) a situation of growth stagnation.

In the opposite scenario, where metabolism scales superlinearly, it’s able to pick up more quickly with the maintenance needed, and therefore has the potential to keep growing, as size increases (one of such examples are cities).

In a scenario of unbounded growth, the underlying mechanism is superlinear scaling. In short, the underlying organism that scales superlinearly, could, in theory, keep growing forever.

These examples that Geoffrey West gives in the book “Scale” are enlightening. In short, according to the research of the book, the metabolic rate of companies is stuck in the middle, where they do grow quickly as they first scale. This is why younger companies – if investing back their resources into the business can quickly gain traction.

There is a stage in which, a large, mature organization stops growing altogether.

As we’ve seen companies do grow quickly as they are young, and small in size. Yet, as they become large and mature, there is a point in which growth might stop altogether.

Size, fragility and decentralization

Let’s plug another piece of the puzzle here. In his book series, Incerto, Nassim Nicholas Taleb gives us another important piece.

In a lecture, on “Small is Beautiful” Taleb highlighted:

We use fragility theory to show the effect of size and response to uncertainty, how distributed decision-making creates more apparent volatility, but ensures long term survival of a system. Simply, economies of scale are more than offset by stochastic diseconomies from shocks and there is such a thing as a “sweet spot” in optimal size. We show how city-states fare better than large states, how mice and small species are more robust than elephants, and how the canton mechanism can potentially solve Near Eastern problems.

As Taleb also highlighted in a tweet “What works on a small scale almost NEVER expands to large scale.”

How monopolies negatively affect markets

Conventional economics attributes to economies of scale, thus size, the ability of companies to become so efficient to build so-called “moats.” Or along with lasting economic advantage. This belief has led to the creation in many industries (since the 1980s) of massive monopolies, that do look like states.

However, the reason why monopolies developed is the opposite. They developed because market concentrations were not only allowed, but also favored in many industries. Yet, the overall effect of monopolies on marketplaces lead to:

  • Reduced competition.
  • Reduced innovation.
  • Negative externalities.
  • System fragility.
  • Higher overall costs for consumers.

How do you scale without turning into a monopoly?

  • Place bets.
  • Create independent spin offs: do not try to align cultures across companies
  • If you stay small keep control, if you become large flat up the organization: we’re used to the opposite scenario. Where companies that are big are pretty much beurocratic, centralized and follow a gerarchic decision-making structure. Instead, while it’s fine to keep tight control as the company is small, after a certain size it should be decentralized.

How do you enter a market dominated by a monopoly?

What might seem a strength of the monopolist, that of encompassing a whole market. It’s in reality a weakness, as it creates the opportunity for new companies to create value with a Blue Sea Approach. And we’ll see how the Strategy Lever Framework can be used to enter a market dominated by a monopoly.

Read: Business Scaling, Developing A Business Strategy.

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