Recently came across a good post by Oliver Marks (@OliverMarks) covering a brief CNBC interview w/ Deloitte’s John Hagel. The topic was the cummulative economic impact of large scale operations, and the ever-declining Return on Assets (ROA) across industry over the last 40 years. The conclusion derives from basic business economics. As assets get ever larger, returns from those assets, ROA, will trend to zero. Incremental productivity gains lose their impact.
The implications of this are important.
As you watch the Hagel video, you’ll hear him say ”no back to normal”. Complacency, especially in corporate America, seems to have clouded our long-term economic view. As Hagel alludes, executives seem to be waiting for the next economic cycle to bring us back to the good old days. But when we continually build ever larger companies with ever more complex infrastructures and systems, we lose our ability to get meaningful value for that investment.
The operational implication is even more problematic. Due to scale, it becomes increasingly difficult to make strategic or even tactical adjustments. Progress becomes gridlocked. We lose our ability to compete.
Look around your own company. Are you seeing this happen?
The flattened knowledge economy drastically cuts transaction costs, bringing global and niche competition head to head with the traditional market giants. Where scale once provided muscle to fend off competition, that muscle has effectively turned to fat. The extra weight prevents the agility needed to adapt to new demands, upstart competition, and wholly transformed markets.
How can we hope to make money, when the answer to every problem is to buy and/or build more infrastructure? Large scale operations require maintenance and up-keep, care and feeding. It’s a problem that doesn’t go away. A viscious circle.
It’s no longer enough (if it ever really was) to try to ‘think entrepreneurial”. Small and nimble companies are developing a clear advantage in the new global marketplace. They lack the bureaucracy that blocks collaboration, that shields executives from shifting market paradigms, that strands innovators in organizational silos.
If your company is large and getting larger, it won’t be a question of competition. The more important question: will you be lean and agile enough to survive?