Smaller Beats Bigger

An excerpt from Exponential Organisations

“Size Does Matter, Just not the Way You Think…

Ronald Coase won the 1991 Nobel Prize in Economics for his theory that larger companies do better because they aggregate assets under one roof and, as a result, enjoy lower transaction costs. Two decades later, the reach delivered by the information revolution has negated the need to aggregate assets in the first place.

For decades, scale and size have been desirable traits in an enterprise. A bigger company could do more, the argument went, because it could leverage economies of scale and negotiate from strength. That’s one reason why, for generations, business schools and consulting firms have focused on the management and organization of extremely large companies. And Wall Street has gotten rich trading the stock of giant companies, which often merge to create even more gigantic organizations.

All that is changing. In The Start-up of You, Reid Hoffman shows that transaction costs are no longer an advantage and that each individual can (and should) manage himself or herself as a business. Why? One reason is the unparalleled and unprecedented ability of a small team today to do big things—an ability that grows ever greater if the exponential technologies described in Chapter One are put to use. Both now and in the coming years, adaptability and agility will increasingly eclipse size and scale.

A telling example is how Netflix, with its centralized DVD rentals and small footprint, easily outmaneuvered and eventually destroyed Blockbuster, despite its 9,000 stores and distributed geographical assets. In the software world, Salesforce.com, which operates 100 percent in the cloud, can adapt to changing market conditions much faster than can competitor SAP, given that the latter requires customized installations onsite.

We’ve already discussed Airbnb, which by leveraging its users’ existing assets, is now valued at more than the Hyatt Hotels chain worldwide. While Hyatt has 45,000 employees spread out across its 549 properties, Airbnb has just 1,324, all located in a single office. Similarly, Lending Club, Bitcoin, Clinkle and Kickstarter are forcing a radical rethinking of the banking and venture capital industries, respectively. (No retail outlets are involved in these new financial tech startups.)

Richard Branson’s Virgin Group is structured to maximize the benefits of a small-form factor. Its global research center is home to the company’s R&D department and a unit that spins out new businesses under the umbrella brand. The Branson group now consists of more than four hundred companies, all operating independently. Collectively, they are worth $24 billion.

As Peter Diamandis has often noted, one key advantage of a small team is that it can take on much bigger risks than a large one can. This can be seen clearly in the graph below—courtesy of Joi Ito, director of the MIT Media Lab—which shows how startups are characterized by high upside potential and low downside, while large organizations are characterized by just the opposite.”

Excerpt from “Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)” by Salim Ismail, Michael S. Malone, Yuri van Geest, Peter H. Diamandis)

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