TCS Daily

How Big Can Small Get?

By Glenn Harlan Reynolds - November 16, 2005 12:00 AM

A while back, I wrote on the question of whether small is the new big. But I think we're really too hung up on bigness, and smallness. Instead of focusing on size, we should probably be thinking more about relationships.

One of the things we teach law students is that a corporation isn't really a thing, but a web of contracts. A big corporation is a bigger web of contracts than a small one, but lots of times the differences aren't as significant as they might seem. A small corporation that contracts out its design work to another company, its manufacturing to various others, and relies on other corporations to do the actual retail selling is doing pretty much the same things as a big corporation that keeps all those activities under one roof. The shape is different, but the web of contracts is just as big either way.

That doesn't mean that there's no difference at all. In fact, for a variety of technological and sociological reasons, the different configurations might behave pretty differently. But it's not really because of size, but because of the way the different components interact.

In the really old days, prior to the industrial revolution, there were no real advantages to hugeness. 1,000 blacksmiths pounding on anvils weren't any more efficient per capita than a single blacksmith working alone. In fact, with the overhead for management, they were probably less so. Powered equipment and division of labor changed things, though, as we learned ways to make 1,000 people working together far more than 1,000 times as productive as a single individual, even allowing for the inevitable management overhead and idiocies.

Now things have changed again. In many fields, the individuals may actually be more productive on their own than they would be as part of big organizations, where time that could be spent on productive matters is instead spent in endless meetings, at diversity-training retreats, and the like. And easy communications and coordination, thanks to computers and other modern technology allow those individuals to be coordinated without nearly as much overhead.

This is where one difference between big and small organizations presents itself. In a small organization, people deal mostly with customers and suppliers. They get ahead mostly by making both (but especially the customers) happy. In big organizations, people mostly deal with other people within the organization, and they get ahead mostly by making those people happy. Pleasing customers is a way to get ahead only to the extent that it also pleases the bosses, and if you have to choose whom to please, you're better off pleasing your boss than your customer.

This is also, I suspect, one reason activist groups like to target big businesses. Small businesses don't care what they think, unless the activists are their customers. Big businesses are run by people who can afford to let other issues -- like how they're treated at dinner parties or on the golf course -- affect their bottom lines. In this sense, giving in to activist demands is just another example of management self-dealing. Like Gulfstream jets or fancy executive dining rooms, it's a way for managers to improve their quality of life at the expense of shareholders and employees.

But if technology is making it easier for loosely affiliated groups of small businesses to do the work of big corporations, then this line of attack may become obsolete. Targeting an industry made up of many small companies is likely to be much harder. Which means that the changes technology is bringing to business may reach farther than expected.

It also means that all sorts of things -- from antitrust to competitiveness policy -- ought to look not just at the size of companies, but at the relationships among them. Loose or tight? Exclusive or multiple? Integrated or dispersed? The important thing is not to let size, either way, blind us to what's really going on. Because where choices about size used to be driven by economics and technology, in the future -- with technology cutting into the traditional economies of scope and scale -- they're likely to be driven as much by philosophy and regulatory environment. In general, I think that small is probably better than big, open is probably better than closed, and inclusive is better than exclusive. But that will vary with the circumstances -- and, most importantly, it will be far more of a choice than it used to be.


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