Bigness, Too Big To Scale: How Companies Change With Size

Too big to scale is a phenomenon where a company has passed a threshold that makes it much more fragile to scale. In short, an additional level of scale instead of creating growth efficiency generates at best diseconomies of scale. At worse congestion and collapse.

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Understanding the implication of Scale and Size

For years, Facebook’s founder’s — Mark Zuckerberg– motto has been “move fast and break things.” This motto helped the company scale from a single computer in a dorm room to one of the largest tech companies in the world.

Yet, back in 2017, that motto changed to “Move fast with stable infrastructure.” This is a paradigm shift from both a technical and business standpoint and it might fool you into believing that the decision to change its motto came centrally, from Mark Zuckerberg.

However, the key lesson I want you to bring home is that as Facebook size reached a certain threshold, the company completely transformed. And this transformation was not the consequence of a drafted plan, written down and executed. But instead, it was the consequence of size.

In short, as Facebook grew and scaled, it automatically changed as an organization. If at all, as the Facebook executive team realized that, they had to change its motto to fit this new reality.

Breaking things was no longer an option for Facebook. Indeed, the cost of breaking something at Facebook’s scale was so high (not only for the company but for society) that keeping this mantra would have resulted in the company’s collapse under its own size.

Just like an ant, that turns into an elephant, Facebook had transformed. Scale had changed it all.

Thus, a software bug, that once was not expensive to fix, with billions of interactions through the platform, that same bug would have meant a huge effort from the engineering team to fix it. Together with the reputational and legal risk coming with it.

When that level of scale is achieved, where size makes the company a potential burden to society, the company loses its ability to experiment fast (as each of those experiments carries a too high potential negative cost to society), and it becomes a market monopolist.

Size prevents quick experimentation, also the pace of innovation is significantly slowed down. Therefore, the Too Big To Scale player’s only option is to limit competition in the market, by means of acquisitions, bad business practices (like knock-offs, or copycat products), and lobbying.

As we’ll see here though, not all scale is bad, and scaling to a certain size might actually help the business become more effective.

What scale does to companies?

While scale and size might seem two separate things at a first sight. In reality, scale and size move in an infinite loop, that determines a sort of “science of growth.” As we move within complex systems, scale can help that system grow, yet as the system grows it changes, it becomes something new.

Business people that have transformed companies from startups, to scale up, mature, and (in some cases) monopolies know that well.

In his book, Scale, Geoffrey West gives an incredible account of how scale changes things, from physical to more complex things (like cities and companies). Some of the key points of this study highlight how things scale in most cases in a non-linear fashion.

In short, they fall under what we know as power laws. Growth is analyzed as a mechanism between incoming energy + the energy required for the organism’s maintenance (Geoffrey West divides it into repair and replacement) + new growth.

From this simple equation, we can determine how growth looks like.

Thus, the metabolic rate (or how the metabolic energy is distributed across maintenance of existing cells/physical structure and the creation of new ones) can increase sublinearly or superlinearly.

This will trace the difference between sublinear (thus bounded) and superlinear (unbounded) growth.

Bounded vs unbounded growth

In biology, as organisms increase their size, something interesting happens. As a reminder, growth in biological terms can be seen as the difference between metabolism (the energy generated by the organism) and maintenance (that needed for regenerating).

As size scales, metabolism scales sublinearly. It, therefore, slows down, and it’s not able to pick up with the energy needed for maintenance, thus creating over time (as size increases) a situation of growth stagnation.

In the opposite scenario, where metabolism scales superlinearly, it’s able to pick up more quickly with the maintenance needed, and therefore has the potential to keep growing, as size increases (one of such examples are cities).

In a scenario of unbounded growth, the underlying mechanism is superlinear scaling. In short, the underlying organism that scales superlinearly, could, in theory, keep growing forever.

These examples that Geoffrey West gives in the book “Scale” are enlightening. In short, according to the research of the book, the metabolic rate of companies is stuck in the middle, where they do grow quickly as they first scale. This is why younger companies – if investing back their resources into the business can quickly gain traction.

There is a stage in which, a large, mature organization stops growing altogether.

As we’ve seen companies do grow quickly as they are young, and small in size. Yet, as they become large and mature, there is a point in which growth might stop altogether.

Size, fragility and decentralization

Let’s plug another piece of the puzzle here. In his book series, Incerto, Nassim Nicholas Taleb gives us another important piece.

In a lecture, on “Small is Beautiful” Taleb highlighted:

We use fragility theory to show the effect of size and response to uncertainty, how distributed decision-making creates more apparent volatility, but ensures long term survival of a system. Simply, economies of scale are more than offset by stochastic diseconomies from shocks and there is such a thing as a “sweet spot” in optimal size. We show how city-states fare better than large states, how mice and small species are more robust than elephants, and how the canton mechanism can potentially solve Near Eastern problems.

As Taleb also highlighted in a tweet “What works on a small scale almost NEVER expands to large scale.”

How monopolies negatively affect markets

Conventional economics attributes to economies of scale, thus size, the ability of companies to become so efficient to build so-called “moats.” Or along with lasting economic advantage. This belief has led to the creation in many industries (since the 1980s) of massive monopolies, that do look like states.

However, the reason why monopolies developed is the opposite. They developed because market concentrations were not only allowed, but also favored in many industries. Yet, the overall effect of monopolies on marketplaces lead to:

Reduced competition.
Reduced innovation.
Negative externalities.
System fragility.
Higher overall costs for consumers.

How do you scale without turning into a monopoly?

Place bets.
Create independent spin offs: do not try to align cultures across companies
If you stay small keep control, if you become large flat up the organization: we’re used to the opposite scenario. Where companies that are big are pretty much beurocratic, centralized and follow a gerarchic decision-making structure. Instead, while it’s fine to keep tight control as the company is small, after a certain size it should be decentralized.

How do you enter a market dominated by a monopoly?

What might seem a strength of the monopolist, that of encompassing a whole market. It’s in reality a weakness, as it creates the opportunity for new companies to create value with a Blue Sea Approach. And we’ll see how the Strategy Lever Framework can be used to enter a market dominated by a monopoly.

Key Highlights:

Too Big to Scale: This phenomenon occurs when a company becomes so large that further scaling leads to inefficiencies, congestion, or even collapse, rather than growth efficiency. The implications of scale change how a company operates and its impact on society.
Facebook’s Transformation: Facebook’s motto transitioned from “move fast and break things” to “move fast with stable infrastructure” as it reached a threshold of size. Size drove this transformation, leading to a shift in the company’s approach to maintain stability and avoid negative consequences.
Scale and Size Interaction: Scale and size are interconnected in a continuous loop that influences growth dynamics. Business leaders transitioning from startups to mature companies understand how scale shapes organizational behavior.
Non-linear Scaling: Geoffrey West’s research highlights that many phenomena, including growth, follow power laws, resulting in either sublinear (bounded) or superlinear (unbounded) scaling. Metabolism and maintenance determine growth patterns.
Bounded vs. Unbounded Growth: In biological terms, metabolism scales sublinearly as organisms grow, resulting in growth stagnation due to insufficient energy for maintenance. Superlinear scaling enables unbounded growth as metabolism outpaces maintenance.
Company Growth and Fragility: Nassim Nicholas Taleb’s fragility theory explains that distributed decision-making enhances the resilience of systems. Monopolies can become fragile due to their size, while smaller entities remain robust. Large states vs. city-states exemplify this concept.
Monopoly Effects: Monopolies, often formed due to market concentration, reduce competition, innovation, and market efficiency. They lead to negative externalities, fragility, and higher costs for consumers.
Scaling Strategies:
- Place Bets: Companies should strategically invest in different areas to avoid dependence on a single revenue stream.
- Create Independent Spin-offs: Spin-off companies with distinct cultures maintain innovation and reduce centralization as organizations grow.
- Control vs. Decentralization: Start small with tight control and gradually shift to decentralization as the company scales.
Entering Monopolized Markets: Monopolies, though seemingly strong, create opportunities for new companies to innovate and offer value. The Blue Ocean Strategy approach can help new entrants thrive in monopolized markets.

Table Summary

Concept	Description	Advantages and Benefits	Considerations and Applications	When to Use
Implication of Scale and Size	Scale and size have a significant impact on businesses, shaping their strategies and operations. As companies grow larger, they undergo transformations that affect their ability to innovate, experiment, and compete. Understanding these implications is crucial for business leaders.	– Scale can lead to growth, efficiency, and increased market power. – However, excessive size can hinder innovation, experimentation, and responsiveness. – Companies need to find a balance between growth and maintaining agility.	– The relationship between scale and innovation is complex. – Superlinear scaling can lead to unbounded growth, while sublinear scaling can result in stagnation. – Decentralization and distributed decision-making can enhance resilience. – Monopolies can negatively impact markets.	When evaluating strategic decisions, growth plans, and market entry strategies. Understanding the implications of scale and size is essential for businesses of all sizes and industries.
Scale-Driven Transformation	As companies reach a certain size threshold, they often undergo transformational changes. These changes may include shifts in corporate culture, decision-making processes, and strategic priorities. Scaling can lead to unintended consequences and challenges.	– Transformation can result from organic growth rather than a predetermined plan. – Changes in culture and priorities may be necessary to adapt to the new reality of a larger organization. – Strategic shifts can help address challenges associated with increased size.	– The decision to change or adapt often arises organically as the company scales. – Maintaining the status quo may not be viable at a larger scale. – Balancing innovation and stability becomes a key challenge.	When a company experiences significant growth and reaches a size where its existing strategies and approaches are no longer effective. Recognizing the need for transformation and adapting accordingly is crucial.
Bounded vs. Unbounded Growth	Growth in biological and organizational systems can be categorized as bounded or unbounded. Bounded growth implies that growth slows down as size increases, while unbounded growth suggests continued expansion even at a larger scale. The nature of growth affects long-term sustainability.	– Bounded growth can lead to eventual stagnation and limits to size. – Unbounded growth allows organizations to keep expanding and evolving. – Understanding the metabolic rate and scaling characteristics is vital for predicting growth outcomes.	– Metabolic rate, maintenance, and energy allocation determine growth characteristics. – Recognizing when a company’s growth is slowing down is crucial for strategic planning. – Unbounded growth can lead to sustainability challenges.	When analyzing the growth potential and sustainability of a business or organization. Recognizing the growth patterns and whether they align with the company’s long-term goals and objectives is essential for making informed decisions.
Fragility and Decentralization	Nassim Nicholas Taleb’s fragility theory highlights the relationship between size, response to uncertainty, and system survival. In many cases, distributed decision-making and decentralization contribute to system robustness and long-term viability.	– Decentralization can enhance resilience and adaptability in the face of uncertainty and shocks. – Economies of scale may be outweighed by stochastic diseconomies caused by fragility. – Finding the optimal size, or “sweet spot,” can lead to better system performance.	– Distributed decision-making can create apparent volatility but ensure long-term survival. – Smaller entities may be more robust than larger ones. – Achieving the right balance between centralization and decentralization is crucial.	When designing organizational structures and decision-making processes. Recognizing the role of decentralization in enhancing resilience and adaptability can guide businesses in managing uncertainty and volatility effectively.
Impact of Monopolies on Markets	Monopolies, often formed due to market concentrations and reduced competition, can have significant negative effects on markets and consumers. Understanding the consequences of monopolistic practices is essential for policymakers and market entrants.	– Monopolies can reduce competition, leading to higher prices and reduced consumer choice. – They may stifle innovation by limiting incentives for improvement. – Negative externalities and system fragility can result from excessive market concentration.	– Policymakers need to address antitrust issues and promote competition. – Market entrants can explore opportunities to disrupt monopolistic markets by offering innovative solutions. – Balancing economies of scale with the negative impacts of monopolies is a key challenge.	When analyzing market dynamics, considering entry strategies, or advocating for competition and consumer welfare. Recognizing the potential harms of monopolistic practices is crucial for policymakers, entrepreneurs, and businesses seeking to enter markets dominated by monopolies.
Strategies to Scale Responsibly	Scaling a business or organization while maintaining responsible growth involves several strategies: placing strategic bets, creating independent spin-offs, and adjusting organizational structures. Responsible scaling requires balancing growth with adaptability and control.	– Placing strategic bets involves calculated investments in areas with high growth potential. – Creating independent spin-offs allows for innovation without compromising the parent company’s culture. – Adjusting organizational structures, such as decentralization, can support responsible growth.	– Companies should carefully select areas for strategic investments and avoid overextending resources. – Spin-offs should maintain their independence while aligning with the parent company’s mission. – Balancing control and adaptability is essential in different growth stages.	When planning for business expansion and growth. Recognizing the need for responsible scaling and choosing appropriate strategies to achieve it is essential for long-term success.