🏢 Big Firms Need to Be Sluggish →May 16, 2023 • #
Arnold Kling raises interesting points here about the nature of big companies. The incentives and physics of large company dynamics essentially demand that they move slowly. Sometimes this slowness looks like indecision or lack of conviction (and sometimes those are in there), but for the most part it’s a function of the upside/downside balance. As a business expands, the downside for failure starts to outweigh the upside of success:
Amar Bhide, in The Origin and Evolution of New Businesses, classifies business opportunities along two dimensions: capital and ambiguity. If a project requires a lot of capital, then it is not suitable for a small business, unless it can somehow obtain a lot of funding from venture capitalists. If a project has a lot of ambiguity, meaning that the path to success is unclear, then it is not suitable for a large, established business.
A useful explanatory reasoning from Kling here.
There are exceptions that prove the rule, though. One could argue that the Amazons, Shopifys, and Teslas are able to maintain a sense of forward progress and risk comfort out of band with their size. Disruption theory tells us that the conservative, rear view mirror-oriented view of a large business is baked into the cake. In a lot of ways it’d be rash and illogical not to service your existing customer base and prioritize preservation of business over creation of new markets. But even given these rational perspectives, BigCos have more control over their destiny and their internal cultures than they’d admit. Maintaining “builder” mentality is entirely possible.