Everyone knows that big companies suck. We hate to deal with them. Once a company becomes a certain size, they layer on bureaucracy and inefficiency, lose their focus on customers, and fail to react to market demands as a result of things like the Innovator’s Dilemma. At the same time, we like the fact that size brings ability to scale, reach a wider audience, and broaden a product portfolio. A topic for another day will address the optimal size of a business, but today I bring this discussion into the tech sector. Since companies today are built differently with a new DNA, will they be able to scale in size while overcoming the big company law of diminishing returns?
As an example, E-commerce is in its infancy right now (~8% of retail purchases) and poised to grow rapidly. Amazon rules this space both in terms of sales and customer service. They’ve made it easy to purchase, easy to deal with, and profitable at the same time. But what happens when Amazon triples in size? Or when they are forced to build brick and mortar stores (which i think they will in 5 years)? Can they retain their competitive advantage or will they fall prey to the many retailers that lose their edge sauce in times of rapid expansion?
There is a tipping point where companies start to decline. A good metric used to be sales or employee counts, but not anymore. A sheer growth in revenues used to automatically add layers of inefficiency to the process, but technology has changed that trend. It doesn’t matter how many users Facebook adds or how many songs you buy on ITunes because there is very little incremental cost to process and distribute. Simply put, the internet has allowed businesses to scale much quicker (Amazon does so with 1/2 the employees of Best Buy). While productivity gains have always occurred in the past, not at the level of today’s pace. Companies can ramp up sales and production in a matter of weeks, but they can fall just as fast. Just look at the pressure on Netflix, which was Wall Street’s darling just months ago. Barriers to entry have dissipated, technology has leveled the playing field forcing big companies to remain on their toes. Its good for customers, and ultimately good for companies themselves since they have to focus on competition despite significant growth.
I also think the culture has changed in today’s companies. Concepts such as hierarchy and process are seemingly outdated. Perhaps its partly a generation shift in mentality from the Gen Y’s or the fact that the new workforce is built to be flexible (gone are the 50 year careers at Ford). Most of these new companies are founded by engineers not corporate folks. They are more concerned with coming out the best product than the bottom line. You’ve seen the perks at Valley companies like Google; tech companies seem to be more youthful and humble than their predecessors. Sure deep pocketed VCs have funded their teenager portfolio company lifestyles on the backs of bubble valuations, but today’s corporations feel different. Working at Google or Apple will yield you a much different experience than General Electric or even the old tech companies like Dell.
But like all teenagers, they eventually will have to grow up. And to really take a bit out of the old world apple, these new concerns are going to have to move into areas where they struggle such as customer service, offline transactions, and enterprise sales. While Microsoft has robbed companies for years with their licensing fees for Office and Windows, for example, try to find an 800 number if you are struggling with your corporate Gmail account. These “freemium” business models most tech companies employ are good for certain niches but not on a large scale. Its hard to balance a free/ad based offering with a fee-based one at the same time. Companies like Amazon who have mastered old world logistics and new world technology have a better shot at managing growth without adding too much inefficiency. Other companies will have to adapt and incorporate old world processes in order to expand beyond early adoption. Lets hope the next generation of companies have a better shot at avoiding red tape as long as they maintain their focus on product and customers.