Our Obsession with Scale is Failing Us

Bank of America just announced they will cut 16,000 jobs by year-end, an acceleration of a previously announced “efficiency effort.” After this, they’ll no longer be the largest banking employer.

Now, it’s easy to think that Bank of America is failing, that it’s yet another bad situation related to a down economy. But there’s something else going on here. Something affecting not only Bank of America, but nearly every big giant. And it’s affecting our entire economy.

Let’s use the Bank of America situation to illustrate the point: size is not the advantage it once was, because the nature of scale itself has changed.

In the last 10 years, several important consumer financial innovations have been created: for example, Paypal — a simple form of online peer to peer payments, Kickstarter to allow crowdfunding of projects, and Square, which can make anyone (an author, an artist, a hairdresser) a merchant without having a banker first “validate” you.

Yet, the banking industry — including Bank of America — largely continues to ignore these innovations and their categories as “anomalies”. Instead of adapting to the changing landscape, Giants like BofA resist them, arguing that those markets are “too small” to be meaningful. At the same time, they actively fight new entrants; for example, they have fought peer-to-peer lending legislation for years, putting a halt to how others served an unmet need.

Why all the resistance?

The answer lies in the way we measure success. In the industrial era and even the early web era, size was central to scale. People first began to organize together inside centralized organizations to do things “at scale” because the cost of coordinating work otherwise was just too much, and too hard. Over time, the ability to scale and “reach” an ever larger number of customers caused organizations to keep growing and growing until they became “too big to fail.”

 

The new reality is this: The ability to scale is no longer a direct function of size.

The Social Era — in which information efficiency is taken for granted, and people can easily self-organize without having to belong to a singular organization — dramatically decreases the cost of communication (e.g., finding people and collaborating with them), changing one of the fundamental reasons that centralized scale once created strength. The competitive advantages of scale have been commoditized.

We’re at an inflection point where work and value creation can reach “scale” without having to be done by a large, single firm. We can see today that Social is more than tools, information-enabled efficiency, products, services, or processes. It is not that we have more ways to be social. It is that the cumulative difference of all these ways of being social allows for an entirely new way to scale — through and with connected individuals. The improvement in what is possible creates new economic effects that add up to a new way of doing business. Organizations that get this are changing the way they create, deliver, and capture value — in essence, creating entirely new business models.

Today, value creation can happen through the organizing and connecting individuals together. Look at what Etsy has done to marketplaces, where many individual artisans have a shared platform to sell their unique offerings. Look at what TED has done with TEDx to allow many people to curate events (and video content) on ideas that matter. Look at what Apple has done for mobile developers, or what Microsoft has done with its Xbox Kinect controller, allowing it to be a platform for artists and roboticists.

Let’s go back to the banking industry. Square is a peer-to-peer money exchange platform that is highly scaled, but doesn’t require a huge centralized organization to be “huge” in impact. Businesses large and small are using Square to sell their products and services. Square competes with BofA offerings using a much smaller footprint, while still remaining “scaled.”

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.

Profits are not going to be a function of size. It’s not enough to get big, get efficient, and control the supply chain. It might have made sense in the 20th century, and might still be a winning combination for McDonalds and Exxon, but there are other options available to us if we consider what scale means.

Many organizations that once dominated now struggle to meet the rapidly changing demands of a volatile, global marketplace. And the issue isn’t stupidity, or lack of urgency. No. It’s that Giants are systematically eliminating options that they need to actually embrace. 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.

Business leaders are limiting innovation by refusing to change the way we see scale — even as scale itself is changing, radically, all around us.

We won’t fix our industries or jumpstart growth until we realize that size and scale are no longer one and the same.

 

As is true for all my HBR-related posts, I ask you to add comments at the original post site so we can have a conversation about the implications of this and learn from each other. Link here, or in long form: http://blogs.hbr.org/cs/2012/09/our_obsession_with_scale_is_fa.html. Thanks!

7 Responses:

  1. alexlearning. September 25, 2012 at 11:37 am  |  

    I’m an absolute disciple of your way of thinking. It reminds me of hearing Liz Danzico talk about frameworks about 4 years ago (a seminal talk for me) in which she says our work is to create frameworks that facilitate co-creation. She compared old structures to the required new ones as classical music scores compared to modal jazz. In the former every note is defined and must be played as such. In the latter, a framework is given but the creator riffs within it. I’ve held that analogy as a guiding principle for community, connection and co-creation. Love your book, Social Era, too.

    Reply
  2. David McIntee. September 26, 2012 at 3:19 am  |  

    You make so much sense!

    Reply
  3. Ralph-Christian Ohr. September 26, 2012 at 3:31 am  |  

    Great post Nilofer – I think you’re on to something here: value is likely going to be created more and more through appropriate networks.

    I’ve tried to outline this point from a slightly different perspective in my post too – to me, both arguments seem to go quite well together.

    http://timkastelle.org/blog/2012/09/why-the-future-of-innovation-is-open/

    Those networks enable companies to cut across silos and boundaries to enhance value. Further, bigger complanies may “outsource” invention and validation of innovation when the market is typically small.

    Reply
  4. Jesse Lane. September 26, 2012 at 6:50 am  |  

    Great article. Thank you.
    We are absolutely going through a shift in times, and have been for several years.

    From my perspective, most “giants” see the need to innovate and are trying desperately to do so.
    However, it seems that they are rarely able to effectively re-invent themselves or compete with the small, agile, and fresh perspectives in their industries.

    To me it seems the challenge is to understand what it takes to innovate effectively and embrace the new (despite the size), in a well established organization.
    That “pivot” seems to be the step very little will/can take.

    Reply
  5. Sangeet Paul. September 26, 2012 at 9:19 am  |  

    Very well put, Nilofer.

    I feel there are several factors, including scale, that are at play here:

    1) Business Model Shift: Most business has essentially been one-sided. Companies source inputs, add value and distribute to consumers. The networks through which business flows are relationship-based (with suppliers or with distributors etc.) Businesses are moving from one-sided to multi-sided models connecting one or more groups of producers with one or more groups of consumers and themselves acting as intermediaries. The network through which business flows is open and democratic, namely, the internet.

    2) Scale: The inputs to business have traditionally been land, capital and labor. Businesses scale by scaling along these parameters, each of which require investments. The inputs have changed to talent, community and data. Talent is different from labor, it’s not assembly-line… and it’s rare. Community is not controlled, only orchestrated. Businesses scale by scaling these parameters.

    3) Innovation vs. Optimization: Businesses traditionally needed optimization (spreadsheet analysis to save the next penny). But in the new context, Businesses don’t need optimization when they scale well. Optimization is largely automated. Innovation is what businesses invest in.

    4) Businesses compete on the basis of lack of transparency in information. Pricing, channel & supplier negotiation and much of consumer perception are all based on inefficiencies in information. Network businesses differentiate themselves by enabling information discovery and efficiency. Google’s adwords bidding model is a classic example where pricing is optimized by the market, not by the platform.

    Of course, the revised definition of scale is at the crux of this. I’ve worked a lot on exploring these shifts and write often about these at http://platformed.info and would love to discuss further. 

    Reply

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