How often does it happen that a rule works for thousands of years, then switches polarity?
I'm not a historian, but as far as I know from reading various books by Drucker, large corporations didn't exist for much of the last thousand years. In fact, I remember he made the point that looking at the turn of the last century, even the largest business of that day would be considered small to medium by today's standards (and goes on to ascribe that to a lack of management knowledge - it's impossible to manage a huge corporation without management).
If "larger is better" has only been with us for a hundred years, it may well slink back into the shadows sooner than we think.
I think the order in which this will unfold will be highly dependent on what kind of business you're in. Car manufacturers and pharmaceutical companies are unlikely to get small any time soon, at least not until we have perfect simulated models of the human body to get rid of all the human trials, and until we have instant, near-free manufacturing processes available to all. By the time those happen, it seems unlikely that "corporations" will look like they do now....
I don't think 'corporation' is a required title for the concept to apply. Large command-oriented economic drivers have existed for a long time. The Roman army was one, it's economic function the looting of conquered territory. Notice that when it could no longer accomplish that function, things began to turn south for Rome.
We are observing the decentralization of economic authority, common throughout history, but usually a side-effect of economic decline and/or societal collapse; maybe more correctly a side-effect of the movement from specialized occupations back to subsistence farming.
This decentralization seems to be different, and appears to be driven by the unprecedented communication, access to information, and wide audience granted by the Internet.
But for most of the previous thousands of years, the rule "larger is better" apparently didn't apply to companies, just armies and the like.
The US didn't experience its dramatic economic growth in the 1800s by assembling a large and disciplined army; instead, it disassembled large and disciplined slave plantations, moving the agricultural center of the country to smaller, more productive farms in the North. (Farm productivity per acre continued to vary inversely with farm size, worldwide, until the 1970s.) I think it was its network of what we would now consider small industrial companies, coupled with its relatively low level of violence (due to geographic isolation), that enabled it to outstrip many of the Great Powers in economic growth.
By contrast, during the Edo period, Japan was an extremely large and disciplined organization --- which produced some remarkable art but also made it militarily and economically weak.
So I think the picture is much more complex than, "The success of a society was proportionate to its ability to assemble large and disciplined organizations." I suspect Drucker and Coase's insights may help to provide a more nuanced view.
No, it did apply to companies too: larger commercial operations tended to be more successful than small ones. It's just that the big ones weren't very big by modern standards. (Neither were armies, though.)
Edo Japan is a pretty unique case. A famous historical curiosity, in fact. And indeed the power latent in Japanese society became visible in its unprecedentedly rapid industrialization in the second half of the 19th century.
larger commercial operations tended to be more successful than small ones. It's just that the big ones weren't very big by modern standards.
In your essay you predict that "large organizations will probably never again play the leading role they did up till the last quarter of the twentieth century". Are you suggesting that average company size will revert to a level lower than even 1900? Or are you saying that average company size may remain roughly the same, it's just that economic dynamism will come from startups, rather than corporate laboratories?
The latter. Big companies might get a bit smaller, but more because automation means you no longer need armies of workers than because of the shift in power to startups.
I find your essay a bit confusing because you never define what "success" or "better" means. There are many different ways of measuring organizational success.
When you say that traditionally, bigger organizations were better, do you mean they were better:
a) militarily
b) in developing new technologies that make lives better
c) in producing goods like trains and cars
d) better at generating revenues/profits
e) better at attracting the best and the brightest
f) producing achievements that are remembered by historians
g) all of the above
It is important to clarify this, because some of these measures of success oppose each other. For instance, the Egyptian governments were great at f) but at the expense of b).
I at first took your essay to define success as b) improving technology. But if so, the thesis is obviously wrong. Most of the great inventions of the industrial revolution were created by tinkerers and small enterprises, not large organizations. Just look at the development of the textile technology http://en.wikipedia.org/wiki/Timeline_of_clothing_and_textil... . Almost every single invention from 1600 to 1900 was developed by a startup (and many of these startups were funded by outside investors, Kleiners Perkins has nothing on the Boston Associates http://en.wikipedia.org/wiki/The_Boston_Associates ).
Edo Japan is a pretty unique case. A famous historical curiosity, in fact. And indeed the power latent in Japanese society became visible in its unprecedentedly rapid industrialization in the second half of the 19th century.
Is there a particular book you read that discusses this idea? I'd be interested in reading it.
> larger commercial operations tended to be more successful than small ones. It's just that the big ones weren't very big by modern standards.
It seems that you have a different idea than Coase about what limited the size of companies; he believed that companies stopped getting bigger because as they got bigger, they started becoming less "successful", in the sense of "profitable". What's your alternative explanation?
If you mean a "join-stock company", large corporations are probably less than a thousand years old. The first were alledgely shipping combinations organized in London and Dutch coffeehouses, but I have also read suggestions that Medieval Japan and China may have had something like a modern joint-stock corporation.
But what Graham means, is corporation in it's true sense of the word as a generic "body". The Catholic Church, Roman and Ottoman Empires, Hanseatic League, various hybrid religous orders such as the Teutonic Order and etc, can all be considered corporations. And in general, larger was better, with occasional shifts and retreats.
I think car manufacturing can be done by much smaller organizations. I suspect that pharmaceutical companies will have to change a lot; for all they spend on research, they simply don't prolong human life enough to justify being 14% of the economy.
Regarding the pharmaceutical industry, there's a lot of redundancy. As soon as one company develops a blockbuster molecule, others begin testing chemically similar molecules, hoping to "get in" on the category (e.g. statins). This is because there's a higher rate of success in developing a profitable brand in an established category where one successful molecule is already known. It's not necessarily a bad thing-- for example, it's quite good that Lexapro is available for those who might otherwise resort to the older and more side-effect-ridden Prozac-- but this leads to a proliferation of very similar molecules and devices, instead of research into entirely new approaches. In other words, the market ends up favoring optimization and refinement over innovation.
There are lots of small pharmaceutical companies already; they are a major focus of current VC funding, in fact. The majority of "biotech" firms are actually working on pharmaceuticals, not food crops or spider-goats or biological weapons.
Yes. As Adam Smith sort of points out, they also make greater specialization possible. When you get access to a larger market (through dropping trade barriers, improved transportation technology, population growth, or whatever) you can either expand your business or increase its specialization (making it, one hopes, more efficient).
What's interesting is that in the 20th Century the big trend was that people expanded their businesses; now, it seems that people are instead specializing more. Presumably some of the reasons for this are to be found in The Nature of the Firm, but while I don't think Coase has the whole story, I think his viewpoint is helpful here. It's not that people are collaborating in smaller groups than before; we're all still collaborating with everyone else in the economy. It's that the nature of that collaboration is changing from intra-company collaboration to inter-company collaboration. Coase focuses on inter-company collaboration through market mechanisms, but another important kind of collaboration is non-market exchange of information. The vast common body of free software and knowledge that we all share access to is a major reason that we can launch an innovative web site today with one or two people working together for a few months.
If you wanted to launch Reddit (or HN) in 1990, you would have had to write client software, set up a modem bank, and ship starter kits to our clients with a CD-ROM and a modem inside. The fact that you can just buy access to the internet cheaply instead is collaboration through the market. So is being able to buy a multi-gigahertz machine with gigabytes of RAM for US$500.
But in 1990, you would have had to do a lot more. You would have had to drop US$500 on a compiler from Borland or somebody and write your code in C++. (If you preferred Lisp, you could drop US$3000 or so on a MacIvory from Symbolics instead; they weren't dead at the time. Or Lucid Common Lisp on a Sun, maybe; how much did that cost?) Now we can write our software in PLT Scheme or Python instead.
If you wanted to do cool AJAXy effects, even assuming that you could transfer the Web software of 2000 back to 1990, you'd still need to implement all the AJAXy stuff yourself, as I did in 2000, instead of just using Prototype or MochiKit or jQuery. A couple of years earlier, you would have had to use Java.
And today, you can run the whole thing on Linux. In 1990, you would have had to buy SunOS, or HP-UX, or Ultrix, or some other such horrible abortion, and the minimum price for that hardware was around $5000. And you probably would have had to recompile your kernel.
And when you have trouble load-balancing, you can Google to find out how people set up reverse proxies and round-robin DNS and the like, rather than inventing it for the first time and publishing a paper about it.
This growth of the information commons means that you can afford to be much more specialized today. You can focus on the unique aspects of your site, rather than figuring out how to run the first or second global information service.
I'm not a historian, but as far as I know from reading various books by Drucker, large corporations didn't exist for much of the last thousand years. In fact, I remember he made the point that looking at the turn of the last century, even the largest business of that day would be considered small to medium by today's standards (and goes on to ascribe that to a lack of management knowledge - it's impossible to manage a huge corporation without management).
If "larger is better" has only been with us for a hundred years, it may well slink back into the shadows sooner than we think.
I think the order in which this will unfold will be highly dependent on what kind of business you're in. Car manufacturers and pharmaceutical companies are unlikely to get small any time soon, at least not until we have perfect simulated models of the human body to get rid of all the human trials, and until we have instant, near-free manufacturing processes available to all. By the time those happen, it seems unlikely that "corporations" will look like they do now....