Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech(wsj.com)
wsj.com
Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech
https://www.wsj.com/articles/why-do-the-biggest-companies-keep-getting-bigger-its-how-they-spend-on-tech-1532610001
34 comments
You may appreciate the book Scale[1], by Geoffrey West. I don't know if I completely buy all aspects of the book, but he looks at organisms, cities, and companies and suggests that there are certain fundamental scaling properties of these collections. IMHO, there are some fascinating ideas here, although the book seems more like a collection of papers with a bit of editing.
[1] https://www.amazon.com/Scale-Universal-Innovation-Sustainabi...
[1] https://www.amazon.com/Scale-Universal-Innovation-Sustainabi...
It's mentioned in the above WP article, but see also: Preferential Attachment. It's a notion from Network Science that helps explain this kind of phenomenon.
https://en.wikipedia.org/wiki/Preferential_attachment
https://en.wikipedia.org/wiki/Preferential_attachment
Large companies get larger due to the inefficiency of larger companies. It's like trying to get another 5 mph after hitting 200 mph.
After hitting 201-500 employees, it becomes almost impossible to avoid politics, bureaucracy, wasted time communicating, oversight, management, etc.
Based on a graph that showed peak productivity with a team size of 6 (https://www.getflow.com/blog/optimal-team-size-workplace-pro...), one layer of management results in 43 employees (1 CEO + 6 managers/executives + 6 * 6 individual contributors). Two layers results in 259 employees (1 CEO + 6 executives + 6 * 6 managers + 6 * 6 * 6 individual contributors). More than two layers adds more inefficiency/employee than is taken away and such a downward trend continues.
If a fictional 4.6 team members is used, those numbers become 26.76 and 124.096.
After hitting 201-500 employees, it becomes almost impossible to avoid politics, bureaucracy, wasted time communicating, oversight, management, etc.
Based on a graph that showed peak productivity with a team size of 6 (https://www.getflow.com/blog/optimal-team-size-workplace-pro...), one layer of management results in 43 employees (1 CEO + 6 managers/executives + 6 * 6 individual contributors). Two layers results in 259 employees (1 CEO + 6 executives + 6 * 6 managers + 6 * 6 * 6 individual contributors). More than two layers adds more inefficiency/employee than is taken away and such a downward trend continues.
If a fictional 4.6 team members is used, those numbers become 26.76 and 124.096.
Uh, the article is about revenue, not headcount.
Increased revenue among larger companies is usually due to either having a monopoly, or financial engineering. In the case of larger tech companies, it's a maintained monopoly (and maybe financial engineering) combined with a massive increase in the number of online users.
Clickbait antidote: "IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. [...] Today’s big winners went all in"
It's not even true. The "biggest" companies still use the same software (SAP, DB/2, ...) that other companies use for finance, legal, logistics, ...
Example article: http://www.erpsoftwareblog.com/2012/11/why-does-microsoft-hq...
(not sure if still accurate in 2017, but I think it is)
Example article: http://www.erpsoftwareblog.com/2012/11/why-does-microsoft-hq...
(not sure if still accurate in 2017, but I think it is)
At a company the size of Microsoft, the software they use to run their corporate HR and financial analytics on is of little consequence - the key is the software/platform that they sell to their customers, IE Azure, AWS etc.
The amount of resources that go in to SAP, while large, are a rounding error compared to the resources spent on building a compute platform.
The amount of resources that go in to SAP, while large, are a rounding error compared to the resources spent on building a compute platform.
“Companies that got big, continue to get bigger, instead of instantly stopping once big. News at eleven.”
I’m only half-joking. The companies are big to begin with because they did something better than their competitors. Also they can attract and afford to hire the best in key roles.
I’m only half-joking. The companies are big to begin with because they did something better than their competitors. Also they can attract and afford to hire the best in key roles.
This is a really strange, naval-gazing article. "Company builds tech needed to serve their business." News at 11. I keep looking for some nugget of actual wisdom, but haven't found it yet. There's a point about competitors trying to build from scratch + competitive advantage of being able to extend a technology into a new line of business, but none of that is a particularly new concept; incumbents who are smart enough to move into new businesses and well-capitalized are hard to beat, color me shocked.
>"Company builds tech needed to serve their business."
From a tech worker's perspective, this seems super obvious, because that's how they generate their value in the market.
But this actually isn't "News at 11" material, because in the majority of non-engineer dense industries, companies purchase tech solutions when they become available and aware of them on the market rather than build out what they need when they need it.
Those are tremendously different modes of execution. When Goldman Sachs ramped up their spending on developers to produce proprietary solutions, for instance, it was a newsworthy development.
From a tech worker's perspective, this seems super obvious, because that's how they generate their value in the market.
But this actually isn't "News at 11" material, because in the majority of non-engineer dense industries, companies purchase tech solutions when they become available and aware of them on the market rather than build out what they need when they need it.
Those are tremendously different modes of execution. When Goldman Sachs ramped up their spending on developers to produce proprietary solutions, for instance, it was a newsworthy development.
*navel. Looking at one's own stomach, an internally-focused meditation. Nothing to do with the sea :)
But yes, it does seem rather obvious.
However, I do think it's illuminating in that this business practice is really only relevant to big companies. It's more effective the bigger you are. If you can have a team of a dozen programmers, testers, and sysops engineers employed full-time to make 10,000 other people more effective, your company will be more efficient than mine. A small business will be much better off spending a couple hours creating a website on Squarespace and calling it good, because the ROI just is not there. Software scales, and this makes big companies bigger.
But yes, it does seem rather obvious.
However, I do think it's illuminating in that this business practice is really only relevant to big companies. It's more effective the bigger you are. If you can have a team of a dozen programmers, testers, and sysops engineers employed full-time to make 10,000 other people more effective, your company will be more efficient than mine. A small business will be much better off spending a couple hours creating a website on Squarespace and calling it good, because the ROI just is not there. Software scales, and this makes big companies bigger.
"Software scales, and this makes big companies bigger."
This seems less obvious the more I think about it. You are saying proprietary home grown software scales. You can just as well say software provided by external sources scales, which is why you don't need a big company with a lot of employees. If you can argue it both ways, then the real question is what tips the balance? Maybe we just have a bimodal ecosystem where the big get bigger and the small get more numerous.
This seems less obvious the more I think about it. You are saying proprietary home grown software scales. You can just as well say software provided by external sources scales, which is why you don't need a big company with a lot of employees. If you can argue it both ways, then the real question is what tips the balance? Maybe we just have a bimodal ecosystem where the big get bigger and the small get more numerous.
I believe the truth is that it is as hard to integrate an existing software solution as it is to build an integrated software solution from scratch. The latter will also be much more focused to your specific business needs, and will be able to evolve along side your business.
The biggest loss I've seen in buying software (and I've been in large companies that have gone both ways) is agility.
If you're using a vendor solution w/o source rights, and you need a new feature to pursue a new opportunity... you can't.
Best case, the vendor is persuaded they can make money from it, develops it, and offers it to all their other customers. Middle case, they charge you an arm and a leg for custom functionality (more than it actually costs to develop), and now you're off the main tree. Worst case, they ignore you or refuse.
So the primary benefit to owning your own software development is the ability to pivot to new opportunities.
E.g. You think AWS would exist if Amazon had outsourced their server management software?
If you're using a vendor solution w/o source rights, and you need a new feature to pursue a new opportunity... you can't.
Best case, the vendor is persuaded they can make money from it, develops it, and offers it to all their other customers. Middle case, they charge you an arm and a leg for custom functionality (more than it actually costs to develop), and now you're off the main tree. Worst case, they ignore you or refuse.
So the primary benefit to owning your own software development is the ability to pivot to new opportunities.
E.g. You think AWS would exist if Amazon had outsourced their server management software?
Exactly. The real secret is distribution. Software makes building new products easier. But scaling them to the full market is as hard as its ever been and competition and noise gets worse as it becomes easier for new entrants. So firms with a durable mechanism to scale, or platform to push new products can maintain or grow in market provided they leverage their distribution to build or buy enough products to keep their distribution engine running.
I do believe the idea to be a tech company first, and a wtv else company you actually are second is quite unique and novel and not widespread.
It's very different to say "We build things that make X product" or "We build things that provide you with service Y". Then to say, "We make product X" or "We provide you service Y".
We clean floors...
We build floor cleaning technology that we then use to clean your floor more quickly and for less money.
It's very different. It means you'll need to really invest in tech, hire engineers and scientists, put money in R&D, understand how technology is built, the cost of it, how to iterate on it, and leverage it. While at the same time integrating your business in actively using it, driving the tech based on the exact concrete needs of the service or product you target, etc.
This is hard to not half ass, to really commit to this mentality, and have everything designed around it is hard.
It's also higher risk, higher reward. If you fail to build useful tech that does end up delivering a better product or service to more people for less money, you might lose out and have ended just spending all your money on trying. If you succeed though, your growth will be massive, and your tech an unprecedented competitive advantage, you'll get bigger and bigger and eat away at your competition. And then an article will say, why do big companies get bigger, because they invest in tech.
It's very different to say "We build things that make X product" or "We build things that provide you with service Y". Then to say, "We make product X" or "We provide you service Y".
We clean floors...
We build floor cleaning technology that we then use to clean your floor more quickly and for less money.
It's very different. It means you'll need to really invest in tech, hire engineers and scientists, put money in R&D, understand how technology is built, the cost of it, how to iterate on it, and leverage it. While at the same time integrating your business in actively using it, driving the tech based on the exact concrete needs of the service or product you target, etc.
This is hard to not half ass, to really commit to this mentality, and have everything designed around it is hard.
It's also higher risk, higher reward. If you fail to build useful tech that does end up delivering a better product or service to more people for less money, you might lose out and have ended just spending all your money on trying. If you succeed though, your growth will be massive, and your tech an unprecedented competitive advantage, you'll get bigger and bigger and eat away at your competition. And then an article will say, why do big companies get bigger, because they invest in tech.
Sure nothing here is "new" but its amazing how many companies/people/organizations are flabbergasted by a lack of growth whiles not not investing in themselves.
There seems to be this weird obsession in a lot of the corporate world that the way to grow is to cut spending. This increases profit% in the short to mid term, at the cost of actual absolute profit, especially in the longer term.
Shrug.
Shrug.
This is not quite correct in any company I've seen besides companies that were literally about to go under (and to try to save money to pay off creditors more or less) - companies that are struggling to grow cut spending in order to free up revenue to pivot into more lucrative revenue streams. The usual innovators' dilemma problems historically happened on much longer timelines prior to modern software and even still plenty of businesses are basically coasting on reputation alone (it's taken McDonald's how long to really embrace technology? Now take a look at Chik Fil-A and how they've built their brand and user engagement combined with a solid, distinct product suite). Most companies find a business model and fail to grow I've noticed because their leadership is simply... not very innovative. Everyone and their dog knows to cut costs and to acquire companies to get into new customerbases / markets when you've got the means, but it takes a bit of guts / risk-taking by leaders to focus and execute on established companies on key initiatives such as Apple with the iPod in the early 2000s. Most companies (especially b2b ones that are the typical company IMO) are basically lifestyle companies that exist to give leaders a cushy living and a great deal of them will simply sell their companies instead of working their tail off to try to make things work. For those companies, by the time business starts to turn bad it's basically over and you're just fighting against the inertia that has already built against you (see: Sears, K-Mart). This isn't to say that running companies is easy, but many, many businesses are pretty darn low-risk (public storage facilities is a great example) and the industry is very safe from disruption by technology either through past rent-seeking or by intrinsic factors.
Agreed, but that's a different nuance than what the author and other posters here seem to be stressing, that it isn't just reinvesting in your business, but _writing your own software_ that is creating this magic multiplier. That's the part I think is an unsubstantiated stretch. Possible, but I don't see the data presented in this article.
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Heavy-weight regulations like GDPR also help to keep status quo.
s/Tech/Lobbyists
Big companies get bigger because of market consolidation. Competition is a lie. News at 11.
Competition is so real that big companies spend large amounts on market consolidation, just to escape it.
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They still escaped it. Competition was the driving force for companies to become big and monopolistic. The "intended" effect of the market resulted in the opposite.
Copyrights, patents, and lawyers weakening or blocking competition helps. Then have buildings near top colleges to pull their talent. Then, throw in some labor and price fixing plus other cartel behavior in some sectors for the win. :)
There's a lot more to it. These just get ignored by the media and studies the most. The corporate media is doing similar stuff. No surprise they'd downplay it. Author covered talent snatching but misses most of the rest. Even the too hard to clone requirement comes from IP law (trade secrets). And a lot gets cloned anyway.
There's a lot more to it. These just get ignored by the media and studies the most. The corporate media is doing similar stuff. No surprise they'd downplay it. Author covered talent snatching but misses most of the rest. Even the too hard to clone requirement comes from IP law (trade secrets). And a lot gets cloned anyway.
I have no idea what you’re talking about
People have limited energy to store and rank objects, so they settle on one or two per field/subject, and all future energy goes into maintaining that categorization.
An example would be "Hulk Hogan", even though I am not interested in wrestling, I do know that name. If I am similar to others, such as journalists, this would explain why that name is getting bigger and bigger: people just add on energy on the current most popular choice.
[1] https://en.wikipedia.org/wiki/Matthew_effect