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The untapped competitive advantage of large mature organisations

Introduction

New research suggests that large mature organisations should have a natural advantage over smaller organisations due to power-law scaling; however, experience shows that this advantage is seldom realised and small organisations are leaving them for dead.

It doesn't have to be this way. Things could be different but first they need to eliminate their silos, increase their speed and substitute small-thinking for big-thinking; then they would become as innovative as small organisations, and far more efficient.

Size matters, lets look into the issue more deeply.

The case for smallness

It seems we are hard-wired to work best in small organisations of no more than 150 people. 150 appears to be a tipping point, smaller is okay but when the organisation is even a little bigger it leads to division and alienation.

Robin Dunbar the British anthropologist studied many different sorts of primates (including monkeys, chimps, baboons and humans). He's found a close correlation between the size of the neocortex (part of the brain that deals with complex thought and reasoning) and the size of the tribe they live in. Dunbar has developed an equation, which works well for all primates. When he plugs in what he calls he calls the neocortex ratio of a particular species (the size of the neocortex relative to the size of the brain overall) the equation spits out the expected maximum size of the social group for that animal (and this proves to be remarkably accurate). When he does this for humans he gets 147.8.

Dunbar argues that brains in all primates got bigger in order to be able to handle the complexities of larger social groups. As the size of the group goes up the number of relationships increase strongly. Humans socialise in the largest groups of all primates because we are the only one with a brain large enough to handle the complexities at this level. Anyway 150 appears to be the maximum number of individuals with whom we can have a genuine social relationship, the kind where we know who they are and how they relate to us. Dunbar has also found that 150 is the maximum size of the group in the 21 different hunter-gather groups he has studied.

Dunbar argues that below 150 it's possible to achieve cohesion and loyalty without complicated hierarchies or rules or regulation. In small groups people are a lot closer. They knit together, which is very important if you want to be effective and successful at community life. When things get even a little larger than 150, people become strangers to one another. It's a tipping point, smaller is okay but bigger leads to division and alienation.

When it comes to work teams and project teams it appears we are hard-wired to prefer groups sizes of between 10 and 15 - reflecting the size of extended family groups and the maximum number of people that most of us can spend enough time with to know well enough to really care about.

The conclusions are clear: to achieve effective communication, cohesion and loyalty, organisations should obey human scale and be no larger than 150 and have work teams of 10 to 15 people. I know, from all the team development work which I do, that teams structured well and taught some basic skills around relating, communicating and selling ideas can blow the socks off management expectations.

The case for bigness

In the HBR February 2007 as one of the 20 "Breakthrough Ideas for the Year" it argues that organisations are like living organisms (I certainly have no argument with this) and are subject to mathematical laws governing how organisms metabolise, grow, evolve, and die. These laws that appear to hold for cities and other social organisations also.

In biology, different species are in many ways scaled versions of one another. Bacteria, mice, elephants, sequoias, and blue whales may look different, but most of their fundamental characteristics, including energy and resource use, genome length, and life span, follow simple mathematical rules.

These take the form of so-called power-law scaling relationships that determine how such characteristics change with size. For example , metabolic rate increases as the 1/4 power of mass. Put simply, the scaling law says that if an organism's mass increases by a factor of 10,000 (four orders of magnitude), its metabolic rate will increase by a factor of only 1,000 (three orders of magnitude).

This represents an enormous economy of scale: the bigger the creature, the less energy per kilo it requires to stay alive. This increase of efficiency with size - manifested by the scaling exponent 3?4, which we say is "sublinear" because it's less than one - permeates biology. These ubiquitous scaling laws have their origin in the universal properties of the networks that sustain life, such as the cardiovascular and respiratory systems.

Social organisations, like biological organisms, consume energy and resources, depend on networks for the flow of information and materials,and produce artefacts and waste. So it would not be surprising if they obeyed scaling laws governing their growth and evolution.

By almost any measure, the larger a city's population, the greater the innovation and wealth creation per person. A doubling of population requires less than a doubling of certain resources. The material infrastructure that is analogous to biological transport networks - gas stations, lengths of electrical cable, kilometres of road surface - consistently exhibits sublinear scaling with population. Also the scaling phenomenon applied to innovation and wealth creation.

Organismic growth, constrained by sublinear power-law scaling derived from the dynamics of biological networks, ultimately ceases,with the equations predicting what size organisms will reach. In contrast, the equations predict that growth associated with superlinear scaling processes observed in social organisations is theoretically unbounded. This would seem to bode well for organisations. Unfortunately, however,the equations also predict that in the absence of continual major innovations, organisations will stop growing and may even contract, leading to either stagnation or ultimate collapse. Furthermore, to prevent this, the time between innovations (the "innovation cycle") must decrease as the system grows.

How to reconcile these positions

I am still thinking this through so I'd really value your thoughts. My thinking at present goes something like this:

Big organisations may have a natural advantage due to power-law scaling, however because they are too siloed and slow they are unable to achieve the short innovation cycles needed to survive and prosper, therefore small outfits are leaving them for dead.

If large organisations could eliminate their silos, increase their speed and substitute small-thinking for big-thinking they could increase their innovation cycles and become as innovative as small organisations, and far more efficient (due to power-laws) ... leaving them for dead!

What do you think?

Bruce Holland
Virtual Group Business Consultants
Liberating the human spirit at work

I really believe there is a better way of making work happen - It's mostly about breaking down silos and creating more depth, connection and meaning.

Key words: strategy, strategies, business strategy, business strategies, strategy management, strategic management, strategy development, implementation.