Small versus large scale

Small versus large scale

This week we were guests on a Danish national radio show that investigates how business and the green transition overlaps and conflicts. 

We presented the idea behind economies of small and appropriate size. The journalist kept circling back to one type of question that compares large and small.

In this email, we will look at what makes that question complicated to answer and what we should have answered:

1. A mechanistic versus systemic approach to economics

2. Success or ruin in business

1. A mechanistic versus systemic approach to economics
   
   

The journalist highlighted that economies of large scale are easy to understand. You scale your volume, and as it increases the price per unit goes down. When things are cheaper they will be adopted by more people. 

We didn't discuss the dynamics of the economies of large much further, but here are two examples of dynamics that lower prices per unit:

Maximizing capacity, leveraging the infrastructure you have invested in: When you have the machine or the people in place, you need them to run at max. capacity - not sit idle. There is a start-up cost, and the more units you produce, that start-up cost is spread across more units, lowering the cost per unit.

Buying bigger volumes: When you buy bigger volumes from your supplier, you can get a bigger discount. That's a mix of power play (you mean more to that supplier, so they don't want you to go away, they want to keep you happy), and a mix of you buying a bigger bulk, meaning that they lower their overall costs from advertising and sales and transports.

The journalist then asked: I understand why economies of large scale makes it cheaper, and I understand why making something cheaper per unit is a benefit. The cheaper the wind turbines, the more we can set up. How are the economies of small a benefit? Where is the economic benefit in tangibility for example?

The reason why that is complicated to answer is that economies of large, disregards the whole - the system it's a part of. It looks at an operation in isolation, assuming that all things go to plan. Volume up, cost per unit down.

Economies of small is a systemic theory and practice, meaning that economic benefits are not as easy to measure in a cause-effect relation. It takes into consideration the unpredictability of the world and the long-term perspective. That makes them difficult to see, but that doesn't mean they are not there.

2. Success or ruin in business

In the show, we had an answer which was okay. For the Danes, you can listen in on October 21st. We will share a link. 

But now, after thinking about it, here is what we should have answered, making an example out of the economies of small, Tangibility:  

Tangibility reflects the value of the task and its context being concrete for the decision maker. 

We can give you an example. The bigger the organization, the further away the decision maker is from the task and the context, and the further away the decision maker is from the task and context, the more difficult it is to evaluate whether something is a low hanging fruit versus a high hanging fruit. On paper, far away, almost everything looks like a low hanging fruit. Nothing is impossible for the man who does not have to do it himself, as A. H. Weiler once wrote. In real life, there are very few low hanging fruits. The ability to distinguish one from the other is important, and your chance of doing that increases with a high level of tangibility. That is difficult to put into a universal equation like that of economies of large, but anyone who has ever done any work in a business knows the value of hiring the right persons, choosing the projects, and making the right priorities. There are no guarantees, but you can give yourself a tangible and simpler or an abstract and more complex foundation to make those decisions on. And in the end, that's not a matter of a lower price per unit in the short run, it's a matter of survival versus ruin in the long run. 

In relation to the green transition, there is a strong tie between tangibility and experimentation.

Having quality in one’s experimentation has not become less important in the 21st century — quite the opposite. The accelerating ecological crisis requires us to step into profoundly unknown territory in search of answers. Whether it involves technological innovation, social innovation, innovation in supply chain design, or innovation in how your business might scale your impact the best way (and here is a link to our crash course on how to do that differently).

Good experimentation requires a high degree of tangibility. The closer the decision-maker is to reality, the more directly the feedback is received — and the more nuanced and detailed that feedback becomes. Naturally, the time perspective also has a significant influence on the quality of one’s experimentation. It is, of course, an advantage to be able to respond to feedback in due time. That shows the link between tangibility, and the other economies of small flexibility (we will unpack that more in a future email).

In this context, having quality in one’s experimentation is a major advantage. Without it, one risks making such large and irreversible bets that they could spell the end of a company — or at least cause yet another delay in meaningful climate action — if the first attempt does not succeed.