“Economies” of scale - are they real?

Big companies make more money - but they are less efficient

You KNOW that the bigger a company gets the less efficient it is. From experience. And it's obvious that there are more complexities, more politics, more difficulties with communication, more losses and more waste. It's true with a tug of war team, and it's true with organisations too.

Almost always they make fewer widgets per person than a one man band does.  They service fewer cars, present fewer training days, build fewer boats, mow fewer lawns, build fewer extensions, fit fewer windows, conveyance fewer houses, create fewer websites, film fewer online training courses, etc – PER PERSON.

I bet YOUR company is less efficient than a one man/woman band! – I bet you produce less product per employeethan a one man band would do.  Or even that you are doing less per employee than your smaller competitors are.

This must be so because imagine if you start as just you, and then you get a PA, or a sales person, you now have to deliver twice as much if you’re going to keep the output per person the same – and if you get a sales person AND a PA/Finance person you now have to sell and deliver THREE times as much in order to be as productive, per person employed, as you were before.

So even though you have all of your time available for delivery now, free from selling and admin, you’ll never do three times as much.  Even with fancy machines and streamlined systems, allowing you to do much more per operational employee (in the factory for example) it’s still less per TOTAL number of people employed.

It’ll be OK though, because if you sell and do just twice as much with your team of three you could still be making more profit.  For example….

Le’ts say you started with 100k sales – 40k wages = 60k profit

Now with your team of three it’s 200k – 120k = 80k profit.  Which is more.

And if you pay them less than you, so it becomes say 200k – (40+30+20k) = 110 profit.  Nice!

But you ARE less productive.

 “So what?”, I hear you say

Well, what if you had three one man bands instead of a company of three...??   You would then have this much profit:

3 x (60k) = 180k profit.

And maybe three people who were more fulfilled…

?Bigger company example:

You started with just you: 100k sales – 40k wages = 60k profit

And now you have 100 people…

Let’s say that sales are now only HALF as productive per person

So turnover is 50x your starting number = 5,000,000 (wow, five million!)

Wages are now average 30k per person* x 100 = 3,000,000

Profit is 2,000,000 = excellent!  I would much rather have THAT per year than 60k!

(Your operations department is maybe 20 people making 50x what you used to do – pretty good.  Pity about all those other 80 people you need in order to keep operations fed – purchasing, design, sales, payroll etc.  You’d make so much more profit, but then of course you have to have them, they are just as integral as the operations people.)

Just going back to that profit calculation:

*Wages were a bit less because you are employing repetitive rule followers rather than multiskilled creators like yourself

But even if you paid everyone a generous 40k you’d still be making 5 million minus 4 million = 1 million.

What’s not to like?

a)     If anything changes you have fixed procedures, and people, and equipment invested – you could get stuck.  And things are changing faster and faster now, it’s not like the old days when you could churn out the same thing for ever, now you only get a few years - if you’re lucky.

b)     If wages sneak up to 50k (or prices drop a bit due to competition or exchange rates etc) you are making nothing, while when it was just you that would have been fine.  You had a much safer margin.

c)     Doing the same turnover a better way: If you had 50 one man bands you could be making 50 x 60k = 3,000,000 profit, with an organisation that is self-running, can grow without pain, and is robust and flexible because each self-supporting part is market focused, in touch with their customers, cares about costs, understands the whole business, and has variety so whoever is doing slightly better or different to the others can react to market changes – like an evolving population of living organisms reacting to changes in their environment.

d)     Employing the same number of people a better way: If the market allowed, (and most markets are far larger than a 100 person company can supply) your 100 people could be 100 one man bands and bring in 100 x 60k = 6,000,000 profit

So how could you have 50 or 100 one man bands?  All doing their own selling and delivering and accounting?  THAT’s the question we should be asking ourselves.  And it CAN be done, it IS being done – more details later….