Playing To Win
Strategy & Scale
Lessons from Architecture
Of late, I have been observing and reflecting on the epidemic of employee disengagement in business, especially big business. I have started writing about it and may do a book on the subject. In advance, I wanted to share a three-part series in my Playing to Win/Practitioner Insights (PTW/PI) on my emerging thinking. The first is Strategy & Scale: Lessons from Architecture.
An Architectural Tour of Mid-Town Manhattan
Thirty years ago, I was killing time before a client meeting by walking mid-town Manhattan with a Monitor Company colleague who was trained originally as an architect. He gave me an impromptu walking tour through the lobbies of some of the grand buildings in mid-town — both commercial skyscrapers and public structures. I can’t remember all, but Grand Central Station (pictured above) was one of them.
After the tour, he asked me which I did and did not like. He explained that my answers were perfectly consistent and expected. While all the buildings were grand in scale, the ones I liked achieved their grandeur without making me, as a human, feel small and insignificant. Those I didn’t like did the opposite. Grand Central Station was on my ‘like’ list, and he helped me see that even though it is monumental, it is designed with all sorts of features — lots of levels and comfy nooks and crannies — that make humans not feel tiny.
I filed the experience away as something interesting. As happens to me frequently, there is a reason that the thing in question holds my interest, but the reason only becomes evident over time. After a couple of decades, it occurred to me that as the world’s companies had become gigantic, the scale differential between companies and humans had dramatically grown. Human scale is obviously fixed (or nearly so, as I watch the next generation grow an inch or so taller on average), but companies have shown they can keep growing ad infinitum.
For example, over the past half century, the median Fortune 500 company (Lam Research at $17.2 billion) has ballooned to 11.5X size of 1963 (Magnavox at $1.5 billion in 2023 dollars) — more than an order of magnitude larger. And large companies employ a wildly disproportionate share of private sector workers. Only 3 of every 1000 US firms have over 500 employees but that small number of firms make up over 50% of private sector employment. Hence, half of employment is in already big firms that are trying as hard as possible to get bigger still. At last count, 237 companies worldwide have over 100,000 employees, 508 have over 50,000 and 918 over 25,000. That is nearly 1,700 unambiguously gigantic companies.
But along with that size has come an epidemic of employee disengagement. Gallup, the organization with the most comprehensive data on employee engagement, shows remarkably low engagement levels. As of early 2024, only 30% of US employees described themselves as engaged in their work. That is, less than one in three US workers are “involved in, enthusiastic about and committed to their work and workplace.” Another 53% — half of all employees — are non-engaged, putting time but not energy or passion into their work. The final 17% — one in six — are disengaged; they are mentally “checked out” and have little if any concern for the performance of their company. These numbers are currently trending somewhat in a negative direction but have been dreadful since Gallup started measuring them in 2000.
Of course, this disengagement is reflected in the phenomenon that has become known as The Great Resignation. More Americans have been resigning from their jobs than at any time in history — nearly 48 million of them in 2021 according to the US Bureau of Labor Statistics. While the media is characterizing this as a post-COVID phenomenon, it really isn’t. For over a decade, resignation rate as a percentage of employed workers has been increasing at almost exactly the same rate every year (with the exception of 2020 when it appears that workers held onto their jobs during the lockdown of the economy).
Scale, Strategy, & How We Got Here
Scale has played a huge role in the history of business strategy. As I have written before, I consider Bruce Henderson to be the father of the practice of business strategy. As the founder of Boston Consulting Group (BCG) in 1963, he catalyzed the widespread use of strategy in the real world of business.
The first major strategy tool commercialized by Henderson and BCG was the Experience Curve. The concept was introduced to the world by aeronautical engineer Theodore Paul (TP) Wright in a 1936 article Factors Affecting the Cost of Airplanes in which he observed that with each doubling of cumulative output of a given airplane model, manufacturing costs fell approximately 30% as the producer learned from experience how to manufacture the same thing ever more efficiently. Wright became an important policy advisor during World War II as military planners needed to project how quickly and cost-effectively, they could produce the new plane models such as the P-47 Thunderbolt and P-51 Mustang fighters and the B-24 Liberator and B-29 Superfortress bombers, the four of which were critical to winning the World War II.
Henderson took that efficiency concept and made it a strategy concept. The key contribution of the Experience Curve as applied to competitive strategy was that if a company achieves leading cumulative scale over its competitors, it will enjoy a lower cost position, which will enable it to price lower than competitors. That will facilitate it in selling more than its competitors, widening its cumulative output differential, giving it a still bigger cost advantage, the ability to price still lower, and so on, in a positive reinforcing cycle.
This conceptual insight gave birth to the first normative business strategy precept, which was to price ahead of your own Experience Curve to generate volume that produces a cost structure that justifies losing money in the short term with the aggressive pricing. That strategy will ensure that you will stay ahead of your competitors perpetually, always enjoying greater cumulative scale than them.
That strategy thinking led directly into the most famous conceptual framework to come out of Henderson/BCG, the Growth/Share Matrix, which featured Relative Market Share (RMS) on one axis and revenue growth relative to average on the other. RMS is defined as your market share relative to the next biggest player in the market if you are the biggest (your RMS will be > 1) and your share relative to the biggest of you aren’t (RMS <1).
Businesses in which you have a leading RMS, and your revenue is growing faster than average, are ‘Stars,’ and justify high investment to keep scaling ahead of competition. ‘Cash Cows’ have leading RMS in a slow-growing industry and should be ‘milked’ to support growth elsewhere. ‘Pets’ (or more commonly ‘dogs’) have trailing RMS in a slow-growing industry and should be divested to redeploy the cash to other growing businesses. And finally, ‘Question Marks’ have trailing RMS in a growing industry and should be candidates for investment to leapfrog competitors to leading share.
In combination, the Experience Curve and the Growth/Share Matrix were extremely influential strategy tools that drove companies to scale as fast as possible — as if their corporate lives depended on it.
The next extremely influential strategy model was from Michael Porter in 1980. He argued in his landmark book, Competitive Strategy, that in addition to the low-cost model advocated by Henderson/BCG, there was the alternative strategy of differentiation, which entails providing something truly unique that customers value, enabling the company to charge a price premium.
While not as obviously scale driven as the Henderson/BCG model, most approaches to differentiation entail building and exploiting scale. For example, leading drivers of differentiation, such as R&D, branding, and distribution, are all highly scale sensitive. If your RMS is (say) 2, you can spend twice as much as your nearest competitor absolutely on (say) R&D, but it will amount to the same percentage of sales as that competitor. That means, it will be equally painful for the competitor to spend half as much as you as for you to spend double it. If anything, the effect has gotten stronger in the modern technology world where network effects make your offering more valuable (i.e., differentiated) to a given customer to the extent that you have many other customers (e.g., Facebook, LinkedIn, Uber). Having stronger network effects is completely dependent on achieving the greatest scale in your industry.
Coordination, Control, and Irony
The result of this scale-driven gigantification of companies has been an obsession with coordination and control. Companies are so big that they fear that they will spiral out of control if they don’t maintain a firm hand. The drive for reliability — the production of a consistent, replicable outcome — begins to drive out validity — the production of an outcome that the organization would really want. Public capital markets reinforce this. Equity analysts generally reward hitting your consensus numbers more than a combination of sometimes meeting, sometimes missing, and sometimes over-achieving — even if the combination of the three outperforms hitting the numbers consistently.
To meet this reliability mandate, planning takes over from strategy — laying out a list of doable initiatives rather than making a unique set of choices that positions the company to win. Technocracy dominates over entrepreneurship. The great irony of entrepreneurship is that successful entrepreneurship generates scale which creates this inexorable drift toward everything that entrepreneurship stands against.
The paradox is that despite all the advantages of scale embodied in the theories of Henderson and Porter, large scale hasn’t protected the biggest companies. This is the challenge of reliability: a system only produces reliable outcomes until it stops doing so — and it is difficult if not impossible to determine in advance when that day will arrive. Planning only works as long as the underlying strategy is sound, and technocracy works only as long as the entrepreneurial vision remains relevant.
The pursuit of scale and its maintenance through aggressive coordination and control hasn’t worked, as illustrated by the ever-changing composition of the Dow Jones 30 Index, which was created in 1896 to track the performance of 30 of the biggest companies in the world’s biggest economy, America. But the turnover in the Index companies is stunning. Companies have been dropped from the index at a rate of nearly one company per year during the entire existence of the Index. Currently, only one company in the Index has been member for over 50 years (Procter & Gamble at 90 years). The current median longevity of companies on the Index is a mere 22 years. Many former behemoths, like General Electric, General Motors, US Steel, Sears Roebuck, and AT&T are gone from the Index — despite their often-impressive RMS advantages.
Practitioner Insights
I talked to architectural friends of mine to understand whether the observation of my Manhattan tour guide/colleague was just the musings of one ex-architect or an important architectural tradition. Friend and award-winning architect Bruce Kuwabara, founder of KPMB Architects, introduced me to the architectural literature on ‘intimate monumentality’ — which is architecture that creates buildings that are by necessity monumental, yet achieve intimacy for users, as Grand Central Station did for me. Bruce, long a fan of my work on integrative thinking, teased me for not immediately seeing this as an application of my own concepts!
Then I spoke with New York based Danish architecture star Bjarke Ingels who helped me understand the degree to which his buildings embody by design this seeming contradiction, including his award-winning ViΛ 57 West condominium building overlooking Hudson River Park and the waterfront on Manhattan’s west side. It is a monumental 830,000 square foot residential high-rise with a unique 22,000 square foot garden as its communal courtyard, combining intimacy with monumentality.
I have come to believe that business strategists must emulate clever architects like Kuwabara and Ingels, and pursue strategies for maintaining their human scale, the intimacy of their company, regardless of how monumental they become.
But they haven’t. Next week I explore how and why not. Then the following week, I tackle how they can.
