Monday, June 6, 2011
People have compared companies to living organisms before. People like Arie de Geus have argued that, just like organisms, companies learn, evolve, and eventually die. Now there's data to suggest this comparison is not just New Age and metaphorical. It's scientific and mathematical.
Geoffrey West, a physicist who has studied quarks and dark matter, has been looking to see if any of the scientific principles that apply in astronomy and physics also apply in the worlds of biology and the social sciences. He has zeroed in on "scaling" phenomena, taking a look at how the various characteristics of a system change when size changes.
What he's discovered is that, for all their inherent complexity, both companies and organisms scale in a predictable way, actually according to a simple power law. Size predicts growth rates, metabolic rate/profitability and life expectancy.When you compare an elephant to a mouse or an ExxonMobil to a Twitter, you see very consistent scale effects.
West has also determined that organisms and companies do not scale linearly with size--they scale sub-linearly. For every x times bigger an organism or company is vs. another, its system characteristics only change at a fraction of the size increase. For companies that means that operating costs only increase at a fraction of the rate of increase in the size of the company, leading to economies of scale benefits for large companies over smaller ones. That sounds good but the same formula also suggests that companies, like organisms, are eventually doomed to die. (Death for companies comes from the fact that profitability will decline towards zero.)
An important difference between companies and organisms is that the company data show a lot more variation than the organisms data. There are many more outliers, suggesting that companies have more control over their destiny than organisms do. If large companies are aware that the natural scaling laws are dragging them down and they look out for and react to the warning signs, they may be able to stop and even reverse the aging process before it's too late.
Photo: Paramecium by cesarharad.com on Flickr