Big Enough to Fail: Is it Time to Get Over our Quest for Scale?

Sweeping generalizations about what size of firm is best or optimal are usually ill-considered and sometimes down-right nonsensical. But on the other hand, there is much to consider when looking at the effects of size on organization performance. In the U.S. a “mid-sized firm” is defined by the National Centre for the Middle Market at Ohio State University, as ranging between $10 million and $1 billion in sales (sounds pretty broad to me, but that is another matter) and that there are about 195,000 such firms employing 40 million people and accounting for one-third of the U.S. private sector GDP.

A profile in The Economist notes:

America seems to have a two-size-fits-all view of business. The country is home to many of the world’s biggest firms, which increasingly look abroad for growth. Meanwhile the engines of growth at home, according to a new conventional wisdom, are the hundreds of thousands of small businesses whose struggles in recent years have become a focus for policymakers. Yet this binary big-or-small discussion leaves out an important third-party: mid-sized firms, which even in the difficult past few years have performed impressively, creating lots of new jobs (see chart).

Some 82% of medium-sized firms survived the dark years of 2007-10, compared with 57% of small firms. And although the survival rate among the 2,100 big firms (with revenue over $1 billion) was 97%, these giants shed 3.7m jobs during those years. Mid-sized companies, by contrast, added 2.2m jobs. This trend has continued as the economy has struggled back to its feet. In 2010-11, medium-sized firms increased employment by 3.8%, compared with growth of 2.5% by small firms and 0.8% by big business.

[Mid-sized firms] have typically been around a while; the average age is 31 years. And they tend to be privately owned: 31% by a family, and a further 40% by some combination of private equity and family. Only 14% are traded on a stockmarket. By contrast, two-thirds of big firms are publicly owned. The freedom from short-term stockmarket pressures is one reason why middling firms have been more willing to invest for the long term despite the tough economy, says Anil Makhija, who runs the National Centre for the Middle Market.

Lately, they have done strikingly well in industries where a dominant big firm has run into trouble. In the motor-vehicle parts industry, in 2010-11, after Lear Corp filed for Chapter 11 bankruptcy protection, its medium-sized competitors such as Standard Motor Products in Long Island City increased their combined revenue by 13% and their employment from 106,000 to 147,000. After Borders was liquidated in 2011, medium-sized booksellers such as Books A Million (from Alabama) and Half Price Books (a Texan chain) have together increased employment by 4.1%, to 49,150.

Mr Makhija has studied the fastest-growing mid-sized firms, to see what they were doing differently. They turn out to be more focused on what their customers want (those with social-media strategies did especially well) and to use more state-of-the-art management methods. They also tend to be remarkably globalised.

My experience is that although not all mid-sized firms are more progressive than larger firms, it is noticeable that those mid-sized companies that have kept things simple (as in a simple and understandable lines of accountability, product lines, and processes) often are much more nimble and focused. One wonders how much real versus imagined value is actually derived from so-called “economies of scale” in large companies as compared to the hidden costs of a more complicated organization that so often seems to arise in larger organizations unless a constant vigil for and regular pruning of non value-added complexity is maintained.

Another thing to consider is perhaps not so much the size of revenues (which the study above used to characterize mid-sized firms) but the number of employees and contractors required to generate that revenue. A small but simple organization able to apply huge leverage to generate outsized revenues and profits is perhaps another, better way to think about scale.

Other posts on the issue of scale includes:

The Beginning of the End of Scale Production Thinking and

What is the Profit per Employee at Your Company?