Business Decision Models Inc.

Geoffrey Moore of "Crossing The Chasm" fame, asked a question on his LinkedIn page concerning possible limitations to the growth of market gorillas ("Why Gorillas Don't Rule Everything").  Understanding the effect of corporate size and concentration is important for both individuals and organizations that must operate in a world defined by monster organizations.   The purpose of this note is to identify the top five factors limiting the optimum size of organizations.

Note that that your host is not making any assumption that corporate size is necessarily a bad thing.  Although it's a separate topic, and acknowledging that there are clearly many downsides to large organizations, there are all also examples, supported by research, showing that large organzations can also have many positive attributes, and that by

comparison, extremely competitive markets characterized by a large number of smaller players can also be very uncreative.

What then are the five main factors influencing organizational size?

(1)  ECOSYSTEM-BASED SELF-ORGANIZATION -- The first factor limiting organization size is an exciting and audacious suggestion by Mr. Moore himself, in his original question.  Mr. Moore identified a phenomenon whereby players in an ecosystem would act in self-interest to limit the size and power of the dominant players in that ecosystem.  Although Mr. Moore's note on this process was very short, it is quite interesting.  He seems to be suggesting a "virtual intentionality" that can be ascribed ecosystems, that it would "self-organize to curtail further expansion". 

 (2) ECONOMIES OF SCALE -- Clearly any discussion of organizational size has to start with the inexorable logic of economies of scale. Such economies are usually driven by technological and/or microeconomic factors. And these factors "apply until they don't", i.e. at some point there are likely no further economies of scale, rather dis-economies of scale, and thus a limit on size of gorilla.

(3) SOCIOLOGY OF LARGE ORGANIZATIONS -- In the research associated with Christensen's Innovator's Dilemma, we see a sociological/organizational phenomenon whereby dominant incumbents cannot "for the life of them" change their established ways of doing business. In a market characterized by technology evolution, this inability to adapt spells doom. (Apparently some organizations have successfully attempted to organize their way out of this dilemma.)

(4) TRANSACTION COSTS -- Next, we can add to the hurdles facing would-be gorillas the well-studied idea of transaction costs as defining the optimum size of organizations (from economist Ronald Coase). At one point Ford's Rouge River plant was a vertically integrated (all the way to rubber plantations) manufacturing behemoth, but the model collapsed of its own accord due to economics and changing technologies. (Transactions costs are not exactly the same thing as economies of scale.)

Perhaps the issue of changing technologies can provide us with a clue uniting the first four approaches (ecosystem self-governance, economies of scale, sociology and transaction costs), at least where the business of technology is concerned.

In his role as a software sales person, your host looks to represent technology which provides leverage for better business value. And now with the arrival of ever more powerful business process technology (and associated technologies around business rules and business semantics), we see that technology is not merely "electricity" but about explicitly surfacing the deep DNA of organizational life.  (The term "electricity" here is used as a proxy for all commoditized infrastructure technology.)  

The appearance of such powerful business-oriented technology gives rise to "gorilla-limiting-factor-number-five".  And whereas the previous four factors applied to all organizations, this fifth factor applies only to organizations operating in business services and business process outsourcing markets (BPO).

 (5) INCREASING TECHNOLOGY-DRIVEN TRUST DEFICIT -- The CEO of consumer packaged goods provider (CPG) Proctor & Gamble probably doesn't care if IBM does his or her SOA or database, the commoditized "electricity" of computing. But, the CEO would be leery of giving IBM or SAP or CGI control over P&G CPG-specific business process and business semantics. Because the same vendor would likely have relationships with other large CPG organizations and P&G would consider CPG-specific business processes to be about P&G's unique differentiators. For this reason (technological evolution such that technology leverage is now "at the top of the stack" instead of only about commodity IT) we will begin to see increasing difficulties for the IBMs and SAPs of the world where business value is concerned.

(It's worth noting that P&G has apparently outsourced its HR functions to IBM.  On the basis of the model proposed here, this event would indicate therefore that P&G does not consider HR to be a CPG-specific strategic function.)