Scale, Scalability – and the Imponderable of Culture.

Scale? Scalability?

What if our whole concept of how big we have to be to be successful needs revising?

What if success in this economy is about small things that can grow larger, faster, with fewer resources rather than big things that need to stay big or grow bigger to compete?

What if we need to be less interested in scale – how big a business needs to be to be adequately profitable; and more interested in scalability – how easily a business model can expand a company from small to big?

What if the model for companies of the future are not companies of scale – say, Bank of America –  that require size to justify the economics of billions of transactions and millions of customer points of contact?

What if the model is for scalable companies like Google that are remarkable for how small they can be to handle almost 2 trillion searches a year from over a billion unique users per month^{1 2}

What if?

All this came to mind when I read a BLOG post written in the Harvard Business Review3 entitled “Our Obsession With Scale Is Failing Us.”

Available but not accessed.

The author’s  two basic points are:  one – scalable businesses, like many Internet or big-data businesses, are more buildable today than ever4; and two – many big, lumbering companies5 could improve their scalability by being earlier to recognize and integrate scalable businesses founded by others. To use her examples:  there are more PayPal-like scalable companies around;  but too many scale companies like Bank of America never find or integrate these scalable companies, thereby losing opportunities to build scalability into their businesses.

The author, Nulifer Merchant, has a somewhat one-sided thesis but she makes a very important business point.

On point.

The thesis may be a bit lop-sided because she underestimates, in my view, the huge benefits of scale and, in many mature businesses, the requirement of size for success. Size may be a problem for Bank of America. But if it can manage size, it can use it to advantage.

I think she also overestimates how easy it is to scale up.

For example, Google may have scaled up through a lot of organic growth. But between 2002 and 2011 but it also made 107 acquisitions!

Of course, she could correctly make the case that Google did what Bank of America did not: it identified and bought many companies that were scalable – such as, most recently, Zagat’s which, when independent, was much harder to scale but which, in conjunction with Google Maps, is making both itself and Maps more scalable.

But let’s let her speak. 

Her thesis.

While size matters in some industries, she says, and certainly has mattered in the Industrial Revolution, it matters less today than it did. PayPal, Kickstarter, Square – all sorts of companies whose business models are based on manipulating information, are popping up under the noses of much larger companies like Bank of America.

Scalable upstarts are routinely given short shrift by larger companies. They’re regarded as too small to matter. Yet these upstarts are often turning out to be much bigger and more successful than large companies ever imagined.

Her explanation: the reason why larger companies are failing to appreciate and incorporate the innovations of the smaller is that they are so convinced that size matters that they look for opportunities that leverage their size rather than opportunities that could grow to size.

As she puts it:

“Size is not the advantage it once was, because the nature of scale itself has changed…The ability to scale is no longer a direct function of size…We’re at an inflection point where work and value creation can reach “scale” without having to be done by a large, single firm…Today, value creation can happen through the organizing and connecting individuals together…Giants have a view of the world that often makes new markets “too small” to pursue…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…Profits are not going to be a function of size…The systematic dodging of what is deemed “small innovations” works for a while — until entire markets grow up around the giants, causing them to pursue “efficiency” cuts over and over again instead of investing in innovations that matter…We won’t fix our industries or jumpstart growth until we realize that size and scale are no longer one and the same.”

It’s the culture, stupid!

While, in addition to underestimating the importance of size in business, and also overestimating how easy and effective it is to connect individuals together in a  functioning business, Ms. Merchant  has one undeniable point that I would put this way:

More companies than ever have scalable business models while more companies of scale have unscalable models.6 And wouldn’t it be nice if they would get together more often!

So why are big companies, that could benefit so much from integrating scalability into their mix, not doing so? Or to put it another way, why do all those smart people at big companies – and there are lots of smart people at big companies! – not do what Ms. Merchant says is the blindingly obvious thing to do – leaven the cake of scale with the yeast of scalability?

The answer, I think, is one word: culture.

You can take a horse to water but you can’t make it drink.

Same with culture. You can bring the latest and greatest idea to any organization – business, non-profit, governmental – and it will not fly if the culture is not only not predisposed to recognizing the idea, but not predisposed to wanting the idea.

Culture – the very thing that helps give us our identities becomes our most formidable barrier to changing our identities.

True of individuals. True of companies. True of scale. True of scalability.

– John Allison

1 Statistic Brain. Number of Google searches in 2011: 1.7 trillion.

2 SearchEnginePeople.com: number of unique Google users per month now exceeds 1 billion.

3 Nulifer Merchant. HBR Blog Network, 9.25.12.

4 One of the most notable business developments of the recent past is how many more businesses there are that scale well and scale fast. Facebook had its first users 8 ½ years ago;4 as of October 4^th it now has 1 billion.4 Google incorporated in September 1998 and 14 years later had revenues of $45.5 billion for the latest 12-months but only 34,000 employees in its base business (plus another 20,000 from its acquired Motorola business). See Google’s quarterly report June 2012.

5 Airlines by contrast are a good example of a difficult-to-scale business because the product is not an airplane that carries passengers. The product is a highly complex network of lego blocks – airport gates, planes, maintenance facilities, reservations centers and so on. It takes a lot of lego blocks stuck together to create enough size – enough scale – for an airline to be profitable. The number of mega-mergers in the industry – most recently that between United and Continental or Air France and KLM – testifies to that.

6 These are my words not hers.

© 2012 UNIO Holdings, LLC.
UNIO® and the UNIO® Logo are registered trademarks of UNIO Holdings, LLC.

The information contained in this communication is proprietary to UNIO Holdings, LLC.  Reproduction or retransmission of this information, in whole or in part, is prohibited without the prior written consent of UNIO Holdings, LLC.  This information does not constitute investment advice.