Wednesday, February 10, 2010

Speed, not scale

Since the dawn of the Industrial Revolution, businesses have done everything they can to get big. Bigger companies can produce more at lower costs, allowing them to either lower prices and increase demand, or maintain prices and increase profits. More revenues and more profits enable you to get even bigger. To oversee a growing organization, you need more and more layers of management. You also have to do extensive planning and forecasting in order to anticipate the future. And to keep the wheels from flying off, you need detailed policies and procedures to cover just about every possible situation.

This model works fine in large, relatively stable markets, but as soon as the rate of change increases (due to technological or customer demand changes, competitive pressure, the availability of desirable substitutes, or any of a number of other causes), large organizations are unable to respond rapidly. As Nassim Nicholas Taleb demonstrated in his book "The Black Swan", there's no business or economy that's immune to rapid, and sometimes catastrophic, changes. What that means is that the bigger an organization gets, the less able it becomes to withstand sustained change.

Scale certainly still matters in some industries, especially those that require enormous capital investments. However, the value of being small, nimble and able to rapidly adapt to change outweighs the value of size and scale. Thanks largely to the Internet, small players are no longer at a significant cost disadvantage vs. big competitors, and geographic location is no longer essential for success. Speed, not scale, will win the race.
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