Small versus large scale

Small versus large scale

Recently, we were guests on a Danish nationwide radio show that investigates how business and the green transition overlap and conflict.

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. As you scale your volume, the price per unit decreases. When things are cheaper, more people will adopt them.

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, the more that start-up cost is spread across, 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 you buying a bigger bulk, which lowers their overall costs for advertising, sales, and transport.

The journalist then asked: "I understand why economies of scale make 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 it is complicated to answer is that economies of scale disregard the whole—the system it's a part of. It looks at an operation in isolation, assuming everything goes to plan. Also, assuming that if it can push costs onto others, such as pushing the cost of pollution onto the state, it will do so. That's how the math of "volume up, cost per unit down" works.

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

 2. Success or ruin in business

Here is an answer to the question of what makes tangibility one of the economies of small:

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

The bigger the organization, the more bureaucracy. The bigger the organization, the farther the decision maker is from the task and context, making it more difficult for them to make good decisions, such as evaluating whether something is low-hanging fruit or 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 fruit. The ability to distinguish one from the other is essential, and your chance of doing that increases with a high level of tangibility. That isn't easy to put into a universal equation like that of economies of scale, but anyone who has ever done any work in a business knows the value of hiring the right people, choosing the right projects, and setting the right priorities. There are no guarantees, but you can give yourself a tangible, simpler foundation or an abstract, more complex one 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 success 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— the more nuanced and detailed it becomes.

Naturally, the time perspective also significantly influences the quality of one's experimentation. It is, of course, an advantage to respond to feedback promptly. That shows the link between tangibility and one of 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, irreversible bets that could spell the end of a company—or at least cause yet another delay in meaningful climate action—if the first attempt fails.