Three Surprising Truths About “Scale”
The concept of “scale” is having a moment. Scale is often cited by leaders in business as the solution to so many problems. Startups need scale. Mature businesses need to scale new lines of business or growth areas. Everyone talks about scale, but few people understand it or implement the concept correctly.
Geoffrey West, the author of the book Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life, in Organisms, Cities, Economies, and Companies is here to fix that problem. I discovered the book on Vinod Khosla’s list of 2017 Book Recommendations, and proceeded to read it in one sitting.
Once I completed it, I felt many multiples smarter than when I started (which isn’t something I can say of every book I read.) The book though is very long and written in tiny print. And luckily I finished the book, so you don’t have to.
Three insights are worth noting:
1.Scale Is Synonymous With A System’s Growth Trajectory
Most things in our world are interdependent. For anything that is, there is an underlying relationship between those variables. Movement in one variable will trigger a reaction in another.
Scale defines the relationship between a change in size of a system and its subsequent reaction. In West’s words: “Scaling simply refers, in its most elemental form, to how a system responds when its size changes.”
Scale comes in a few flavors. Our brains, though, incorrectly identify most relationships as linear ones.
2.You Have A Bias For Linear Thinking
As human beings, we’re wired to think linearly. Even for the most complex systems, like cities. We assume that most things in life are linear. As West puts it, we have a “natural propensity to think linearly.”
We gravitate to this type of thinking even when it isn’t correct.
The example I recently used in a conversation to explain this is we incorrectly assume that 1 unit of work will yield x units of results. And that this relationship is constant. There are many reasons it’s not, one being diminishing returns to work.
Linear scale is especially rare in complex systems, like companies or cities. Nonlinear scale is much more prevalent. “Nonlinear behavior can simply be thought of as meaning that measurable characteristics of a system generally do not simply double when its size is doubled.”
So what is a nonlinear system?
3.Complex Systems Usually Scale Sublinearly Or Superlinearly
Simply put there are two types of nonlinear scale:
- Superlinear: increasing returns to scale
- Sublinear: economies of scale
West describes each as follows: “Sublinear scaling and economies of scale that dominate biology lead to stable bounded growth and the slowing down of the pace of life, whereas superlinear scaling and increasing returns to scale that dominate socioeconomic activity lead to unbounded growth and to an accelerating pace of life.”
Understanding whether companies experience sublinear or superlinear determines its growth trajectory. And according to West’s preliminary conclusion, companies scale sublinearly. In other words, all companies eventually die.
“The fact that companies scale sublinearly, rather than superlinearly like cities, suggests that they epitomize the triumph of economies of scale over innovation and idea creation. Companies typically operate as highly constrained top-down organizations that strive to increase efficiency of production and minimize operational costs so as to maximize profits. In contrast, cities embody the triumph of innovation over the hegemony of economies of scale.”
Here is another way to think of it simply. Humans are another example of a sublinearly scaling system. We grow very quickly at the start, at birth, and over time our growth slows, and we are all ensured mortality. We don’t know when, but we know it will come. Companies scale the same way as humans.
Trying to put some numbers against this to bring it to life, West cites that “of the Fortune 500 companies in 1955, only sixty-one were still on the list in 2014. That’s only a 12 percent survival rate, the other 88 percent having gone bankrupt, merged, or fallen from the list because of underperformance.” This is one anecdote among many, but case is convincing.
And yet, CEOs repeatedly state the objective of wanting to build a company that will last. I can’t imagine that their definition of “last” is a mere sixty years. In light of Geoffrey West’s view, is such a goal doomed?
Maybe. RIP to several companies cited as models of excellence in Jim Collins’s book From Good To Great.
I bought into West’s argument and analysis. I’m waiting for one outlier to prove it wrong.