Is Big so Beautiful?

I very much enjoyed the obituary of Norman MacRae in the Economist, which you can find on http://www.economist.com/node/16374404?story_id=16374404 . I had never heard of the man, despite being an avid reader of the publication. The obituary whined that no other publication saw fit to recognise his death, but then accepted that one reason was the anonymity of Economist contributors.

After reading the excellent piece, I felt I knew the man well, idiosyncrasies included. And then I could recall his presence in so many of the articles I had read, since he clearly made a large footprint on the style and opinions of his paper right up to his death. Hopefully, beyond death as well, as the Macrae strengths are the Economist strengths.

Macrae had great faith in progress driven by individuals, small teams and technology. He felt passionately that the main role of the state should be to get out of the way. This came from a positive belief in human power, rather than the negative selfish or class-based motivation for a small state you find among some conservatives.

Over time, this anti-state view has become mainstream, and its zenith came with the fall of communism. The current mini comeback of the state after the financial crisis will probably be a blip against the wider trend.

Yet the line that most struck me in the obituary was where it stated that Macrae had almost as much disdain for big corporations. He apparently predicted that by now such beasts would be in retreat, beaten away by small, nimble, focused enterprises with few staff. After all the large corporation suffers all the weaknesses of the state – remote from customers, slow moving, self serving, mired in bureaucracy, lacking in genuine incentive for staff. I agree, I have seen it close up.

It is strange when you think about it. The strident capitalists running and advising big companies disdain the public sector, yet try to make their own enterprises so big that they share many of the same characteristics. Hmmm. Perhaps we should not believe everything these people say. Maybe some other factors are at work, such as their own greed or ego?

So why have such beasts not died? Should they? Will they?

Many actually have died. Manufacturing has died in many sectors, only to be reborn like Doctor Who in different guises on different continents. Detroit basically died, only it happens slowly like in the movies. Large airlines are all basically dead. If you are British, remember ICI? GKN? Hanson? The main survivors have been in sectors with special relationships to the state and hence regulation inhibiting competition, such as Energy, Pharma, Utilities, Banks, Military Equipment or Mining. Who is to say any of these sectors are actually efficient? It is interesting that the big players in all these sectors tend to vulnerable on their flanks.

One story from Shell tells all you need to know. I was sitting in a meeting earlier this year when we were looking at bench mark results for one part of our industry. Lo and behold, the majors mainly seemed to be in the pack. The leading player was a small supplier. Someone in the meeting stated “well we can’t really compete with them, they are small”. Everybody nodded sagely. Somehow, the small player seemed to have some unfair advantages. Wow. Diseconomy of scale demonstrated in a sentence.

Another factor of growing importance even in protected sectors is the problem of deep pockets. In former days, one advantage of scale was the ability to take more risk and hedge more. Now markets scarcely value this at all, since capital is generally so freely available. And those with deep pockets can be attacked, by lawyers, lobby groups, or even states. Look at BP just now. They are a sitting target, while their equally culpable suppliers can duck and weave. It is the scale of BP that makes this so.

At first glance, an exception to my rule could be computing. Even there, the first incarnation of IBM died from size, and Microsoft seems at last to be suffering rather than benefiting from scale. But Google or Apple don’t, yet. Indeed in these younger industries there is a clear benefit in scale, as customers and partners seek to choose winning platforms.

So, back to my own questions. Why not? Well, some have, most that haven’t are in protected, somewhat distorted sectors or emerging sectors. Should they? In the distorted sectors, yes, I believe Macrae is right and the world would be better off with more, smaller players. Will they? Yes, but too slowly, because of interference and greed. Even Google will get too big one day.

I have a parallel theory. In the post manufacturing age and with the exception of emerging or distorted industries, scale is a net disadvantage. What is good is growth, or momentum. Many things we see as economy of scale are actually economy of growth or economy of momentum. The player on a roll has an advantage over the player in decline, whatever their relative size.

I’ll explore this more next time. It has implications for how to manage companies. Creating internal competition might be just what big companies need, contrary to the belief in vogue.

Do you agree? Big is bad, momentum is king?