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July 3, 2009

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Free Book Idea: Too Big to Succeed

Tim and I had a fun Google Chat back in March about a concept for a book called “Too Big to Succeed.” The window for a book on this theme to become a blockbuster is almost closed, so I figure it’s time to stop hoarding the idea and make it a blog post.

The phrase “too big to succeed” has already infected the cultural lexicon this year. A quick sweep of Google shows it being applied to the banking industry, the auto industry, Twitter, big Pharma, China, and Washington, among other things.

It’s a good phrase, springing up (as best as I can tell) in response to an even-more-popular recent construct: “too big to fail.”

The concept of an entity or industry being “too big to succeed” deserves an extended riff. Do industries just have to congeal into tiny networks of giant institutions over time? And if so, does that tendency pretty much force the massive flameouts and market inefficiencies we’ve seen all over the economy recently?

I don’t think this does have to happen, and therein lies the thesis of the book.

I think the era where every industry has to become an oligopoly is nearing an end. I don’t think the shift towards mass institutions was a natural, inexorable network characteristic. If we look at the tape, I think we’ll see that the oligopoly era was a network distortion produced by our industrial-age regulatory framework. And it’s time to leave these things to a quiet rest.

In industry after industry, I think we’ve got an opportunity to shift our policies towards supporting nimble, durable markets that mimic real networks: diverse collections of nodes with a few particularly well-connected hubs. Let’s look at a few examples:

The news industry

Over the past century, the news business went right past oligopoly into monopoly and got stuck there. Today, most of the journalism produced in every American city is an accidental byproduct of a giant, dying media conglomerate. As with all these other oligopolistic industries, the news titans are clamoring for a bailout, asking the government to prop them up and regulate away their competition.

But we can imagine a system of better, more sustainable journalism built on a robust network of independent newsrooms threaded throughout every neighborhood. Networks of editors could package this work for diverse sets of overlapping communities. In places like the Bay Area and Seattle, we’re seeing the beginnings of this new model, but to thrive, it will require at least as much regulatory support as the big dogs got when they were buying their presses back in the day.

The medical industry

This was what got Tim and I started. Today, most health care is provided by big, unwieldy hospitals. They tend to cluster in these giant office parks, often far away from the inner city, where they’re needed most. You walk in and have to navigate a maze of rooms, bouncing back and forth between receptionists and nurses and physician’s assistants and doctors.

But the vast majority of medical care people need on a daily basis doesn’t require a hospital to provide. As Tim said in our chat (punctuation mine), “There should be as many clinics as there are coffee shops, pharmacies, or copy stores. Universities do this (at least Penn does). We have a student health center; they have walk-in and appt hours, you pay a fee and it’s free. They see you and administer standard care, run tests, give physicals and vaccines and such, and then refer you to the hospital or a specialist if it’s more serious. You HAVE to go to the clinic if you’re in Philly and it’s not an emergency. And in part b/c it’s a tailored operation, geared towards younger people, it’s tremendously efficient.”

The food industry

I just saw Food, Inc., yesterday, which might be what got me off on this riff again. If you read Fast Food Nation or The Omnivore’s Dilemma, you know that Eric Schlosser and Michael Pollan both identify monoculture (i.e. oligopoly and monopoly) as the primary villain in our awful global food situation. The last century saw food production shift from the local farmer to the multinational factory conglomerate. That shift is ruining our health, our environment, international diplomacy, and perhaps worst of all, our food. Meanwhile, the unbelievably obese food lobby has taken control of our government, writing intrusive laws to ensure its survival even as it crumbles under its own weight.

The movie industry

At this point, Hollywood basically exists to churn out quarterly blockbusters that each aim to repeat the formula for one blunt, universal emotion: love (“The Proposal”!), fear (“Saw XI”!), excitement (“Transformers!”), humor (“17 Again”!), etc. Nuance is lost, and art suffers. Like the food titans, the news kingpins, the health care lobbyists and others before them, the movie moguls are descending on Washington to seek protection as the twin forces of distribution implosion and supply explosion shred their profits.

But when my nephew is cooking up mindboggling special effects on his laptop, who needs Hollywood? The industry’s product is unsustainable. You can’t flog the formula forever. Let a universe of independent artists flourish, and overhaul the laws to help them make their magic.

Etc.

We can lay this pattern onto the energy industry, the publishing industry, banking (of course), transportation, post-secondary education, you name it. If I were editing this book, I’d make that the first third, in fact: spend the preface and first chapter making the overall argument, then spend a few chapters exploring how it plays out in all these different industries. Follow up this part with a chapter laying out the history — how this screwed-up oligopoly system took root in the first place. Trace it back to the industrial age and beyond.

The middle third of the book (I’m taking this straight from the gChat) could be about the rules of a new, more natural network system. The role of big companies in this ecosystem, what differentiates successful lean businesses from unsustainable niche businesses, how a network of microbusinesses can collaborate and compete effectively.

The last third might address how society generally would benefit, and how it would have to evolve to support this. This is where you explore the policy piece — how our laws have to change. It’s also where you talk about the Richard Florida stuff — our evolving understanding of how properly organized urban environments should function — and how this shift facilitates that.

Of course, as I said, I think the moment for this book is almost gone. From last September to this past January, we had a brief interlude of just transcendent possibility. Monumental shifts in our society seemed graspable. People talked about spending a trillion dollars over just a few years to fundamentally remake our economy, and we actually passed a stimulus package that got closer than anybody imagined.

But we’re seeing that ambition melt quickly. We’re on the verge of historic health reform legislation, sure, but now we’re choking on a price tag of $1 trillion over 10 years, regardless of how much it saves us over the long term. Our chance to achieve forceful climate change legislation is dimming by the day. And our September lust to reform the banking industry has molded over into a desire to, er, re-form the banking industry, in much the same shape as it was in 2001 or so.

There was a window where a big, Gladwellian book selling this notion of industrial transformation — not as some sort of hippie anti-corporatism but as a breakthrough business idea — might have made some traction. But I think that window’s almost shut. So this book is, for now, a blog post.

Or maybe the next Snarkmarket collaboration?

mthompson-sig.gif
Posted July 3, 2009 at 7:32 | Comments (14) | Permasnark
File under: Business, Cities, Snarkpolicy, Society/Culture

Comments

I was thinking about our chat just the other day! Seriously! I was reading this Wired article ("Beyond Detroit") by Charles C. Mann, that proposes revitalizing the American auto industry by scrapping the c. 1900 idea of a vertically integrated Big Three in favor of a bunch of startups. Here's a good quote:

"The Rouge [plant in Dearborn] was an embodiment of the vertical integration that has defined the US car industry since the days of Henry Ford. Initially, the complex was Ford's attempt to solve a manufacturing problem; in the days before networked communication, coordinating precisely with small suppliers was impossible, which meant he couldn't ensure that all the parts for his cars would be ready at the right time and in the proper condition. Ford's answer: total control. By trusting as little as possible to outside entities, he was able to guarantee that his factories got what they needed when they needed it...

"How does a traditionally top-down manufacturer become an open-ended promoter of innovation? Clues can be found in 'Managing in an Age of Modularity,' a classic 1997 Harvard Business Review paper by economists Carliss Baldwin and Kim Clark. They studied how personal-computer manufacturers divided their products into subsystems, establishing standards that allow parts to be readily swapped out and replaced. By giving outside innovators the freedom to tinker with individual modules—hardware, operating systems, software, peripherals—PC makers spurred the development of far more sophisticated devices and allowed customers to individualize and customize their purchases. In other words, modularity encouraged multiple innovations from multiple sources and made them easy to incorporate."

God, great images in that piece, too. There's one with a flow chart showing all sorts of pieces from different manufacturers to make a car. Imagine if you could Newegg your hatchback!

Of course, you can't build an RV like you build a PC, b/c of regulations - and it's a good thing, too, b/c a car can kill somebody, including the person driving it.

But this suggests principles - modularity brings clear benefits BECAUSE we've solved the network problem. Some industries have huge barriers to startups because of the capital requirements AND because of regulatory hurdles. (You can probably put together a startup that makes fuel injectors, but not one that assembles and sells and maintains cars.)

And the network problem can still cause, uh, problems if we can't establish well-defined standards that everyone can work with. Computer guys, crazy jerks that they certainly can be, are actually AMAZING at setting and following standards - particularly standards that are about coordinating information. Other industries aren't.

I don't think totally big or totally small are ALWAYS the solution. But there are questions you should ask in any situation where you clearly have a failure of market outcomes. Let's take the health care industry. A lot of interests, perhaps quite justifiably wary of a single player coming to dominate the market, want to tout the benefits of a highly-competitive, diversified system. Well, is there actual competition? (No - in some states, single insurers dominate the markets.) Is there consumer choice? (Nope - the decision is made by the employer, not the end-user.) Are there standards of information sharing that the diff entities can use to create benefits? (No.) ... Then what benefits, exactly, are we getting out of persisting in this weird oligopoly?

Love the idea (and my wife loves the green paisleys and purple). A true gladwellian effort would include classic almost-too-good-to-be-true personal anecdotes of people striking out to do what these big companies can't do well. This sounds difficult, so I'm out.

A chapter on how the fat institutions also simply can't downsize into the right position might be helpful. What's the phrase "if you're not growing, you're dying?" Perhaps you could stand that one on its end too.

Finally, what about the government? I'm no L but why are we cool with its ability to deliver. I think we need to cut up the city/state model too. Municipalities could be much more logically divided.

Good ideas - very much in line with http://conversative.net/blog/2009/02/24/world-20-too-small-to-fail

You should also read some of the very good work done by leading theorists in organizational theory: http://en.wikipedia.org/wiki/Herbert_Simon and especially http://www.yale.edu/sociology/faculty/pages/perrow

Don't hesitate to let me know if you want some me to help with other stuff related to web 4.6!

;D nmw

Matt writes: "I don't think the shift towards mass institutions was a natural, inexorable network characteristic. If we look at the tape, I think we'll see that the oligopoly era was a network distortion produced by our industrial-age regulatory framework."

I think there’s much to like and even more to ponder in your thesis, Matt, but off the top of my head the point you make above offers an overly simple foundation for it.

An industrial-age/regulatory distortion? That suggests that earlier periods were free of oligopolitic institutions, which isn’t true. What about the Catholic church? The British (or Dutch) East India Company? The tight grip on exploration exercised by monarchs? Roman hegemony, in everything from laws to roads to taxes?

I suppose it takes capitalism to introduce a genuine oligopoly (is that right?) but the point here is that bigness and exclusivity don’t seem to me an artifact of the modern age, of regulatory regimes, or anything else. In fact, I think it’s easier to argue those qualities have been the norm in history, at least since the nation state.

Could that cultural dynamic be coming to an end, undermined by shifting patterns in our age of distributed power and control? I find myself hoping so, although I am willing to bet there will be about as much lost as gained in that phase transition – and that we don’t yet suspect what that will be.

Thinking clearly about that aspect would be a big contribution.

Well, I think even if the logic of big industry is larger than the near past, the industrial age is worth singling out because 1) it's close to our present, 2) we seem to be witnessing either its end or a pretty severe crisis, 3) we have credible alternatives, and 4) the logic of the industrial age may have been mistakenly taken to be ahistorical economic fact.

This does not mean, I do not think, that all monopolies or oligopolies are coming to an end. Barring extraordinary circumstances, the state will probably continue to be the sole possessor of the legitimate use of force. State-sponsored health care and education may still make sense. But in the purely economic sphere, economies of scale may exist on a kind of Laffer curve, where getting bigger no longer helps you, but may in fact hurt you - where you can generate the same revenue and value by being smartly networked as you can by being big.

'Cause, you know, maybe the Catholic Church DID get too big to succeed. Those little Republics and nation-states were just pesky start-ups at first - a Venice here, a Switzerland there - and before you know it, you've got whole Empires built along a completely different model.

Worth looking at "Hallucinating Sovereignty," too.

AWESOME theme/meme. Two things to start:

1. Yeah, Howard and Tim, I think a big part of this investigation would be trying to see the past as clearly as possile. We remember the big institutions well because they were, uh, so big -- the Catholic Church gets a place in the history books, but Robin of Shrewsbury's basket-weaving shop doesn't. But there were 10,000 shops like that. So what /really/ characterized life in the 15th century? Big life-dominating institutions, or a network of small businesses, artisans, etc.? The answer might be "neither" or "both" or "that's the wrong question" but I don't trust our "historical instinct" -- I want to track down some real info.

2. We've also got to bring Coase into this. He's the one who offered up the logic for big-ness, saying it's a function of communication and transaction costs. Snarkmarket Inc., the multinational conglomerate, exists because it was too time-consuming for Matt, Tim and I to negotiate and re-negotiate every time we wanted to write a blog post. So we bring it all under one roof and things proceed much more smoothly and, of course, profitably. Or something like that.

But I am /sure/ that there have been many mega-updates to Coase's work since 1937. So it would be a useful service to track that work down, make sense of it, even talk to the economists behind it. I wouldn't be surprised if there's a whole community of organizational economists who are like: "Oh yeah, bigness makes no economic sense any more. We've known that since 1992. We're waiting for everybody else to catch up. Here's the equation."

Bonus third item:

3. Our economic intuition. We've been trained to operate in oligopolistic markets. We generally know how to compare/contrast 4-5 big brands (and perhaps establish loyalty to one of them). This is true for dish soap and for daily news. A different kind of market -- "diverse collections of nodes with a few particularly well-connected hubs" -- demands different kinds of intuition, different kinds of skills.

My case study here is web media, where, it turns out, so much of our intuition about how media works turns out to be unhelpful or incorrect. A great cover image doesn't matter that much in web media; a huge set of interlinked, SEO'd pages does. The oligopoly was life on the magazine rack; in this new market, it's life through the search box.

Likewise, being a consumer of web media is very different from being a consumer of a magazine on a rack, in lots of ways that are pretty obvious & I won't enumerate here.

It's just a small example, but the point is, these markets are /different/, and they require different skills from both producers & consumers. (And from people who blur the boundary between those roles!)

Reminds me of Wendell Berry's Commandment #4:

"In making things always bigger and more centralized, we make them both more vulnerable in themselves and more dangerous to everything else. Learn, therefore, to prefer small-scale elegance and generosity to large-scale greed, crudity, and glamour."

http://spider.georgetowncollege.edu/htallant/border/bs10/grubbs.htm

Well, I guess we can agree that Wendell Berry understands "small-scale elegance and generosity" very well -- what with his wife doing all his typing etc for him :)

I'm thinking about this now in reference to my new "geography of new media" post - it's amazing how well that can give explanatory force to a lot of these critiques.

Big midwestern industries (cars, agriculture, etc.) -> coastal critiques (make it smaller, more local). In particular with cars, NYC would say "why do we need cars at all?" California says, "keep making cars, but make them like we make computers."

Likewise, midwestern/west coast challenges to traditional media (TV, print). And New York/heartland challenges to Hollywood.

interesting premise and similar what is covered in the Innovator's Solution (or Innovator's Prescription for healthcare)by Clayton M. Christensen, but you imply that a solution will be more distributed, provided by networks, individuals etc.

I would argue that this is far from assured. Just to throw out two counter examples: The recent Microsoft and Intel near monopolies that overtook the IBM near-monopoly for computers, and Amazon's near monopoly that overtook Barnes&Noble and Borders and (together with iTunes) CD stores. These are not small companies or any less dominant.

I'm not saying that movie studios, newspaper companies and other oligopolies aren't doomed to fail - I think they are. Just don't be surprised when other oligopolies arise to take their place and generate a similar list of complaints. How long until we see Google and Amazon imploding like Yahoo and GM?

Posted by: charles on July 8, 2009 at 02:52 PM

Thanks for the interesting ideas.

You should definitely read Douglas Rushkoff's "Life Inc" which was published recently. It tackles many of these ideas, and reaches similar conclusions, but does so from a different perspective:

http://lifeincorporated.net/

The thesis here appears to be that large companies were just a function of an 'industrial-age regulatory framework', which looks to ignore economies of scale.

However many industries have large economies of scale, and the internet world is continuing to spawn companies that are taking advantage of this with companies such as ebay, amazon, google, facebook, myspace, salesforce.com to name just a few.

The following factors towards economies of scale have not disappeared:
- brand recognition
- ability to create a consistent experience (eg I get a similar experience from Amazon whatever I'm buying from them)
- bargaining power with suppliers (very important in my own industry - travel)
- simplicity (less need to navigate multiple brands and product offerings - importance not to be underrated!)
- capital costs to build complex technology - eg, the barrier to create an office suite or operating system from scratch is huge, and the costs to write a Facebook or MySpace are far from negligible

In addition to new internet-era economies of scale:
- user-generated content (more and better reviews at amazon than at most other retail sites)
- uptime/dependability - despite gmail's recent outages it's uptime is still very high - difficult to achieve as a small player - and you know it's going to be around tomorrow

Certain sites are also prone to network effects such as auctions, classifieds, social networks which is giving us the huge players in each of those industries.

Obviously disruption/innovation happens, technology changes and old companies are replaced with new, and some industries have don't benefit from economies of scale, but that has also always been the case.

Posted by: Mark on July 10, 2009 at 02:49 AM

You might want to take a look at Organizational Theory by Kevin Carson, which explores the theme that it was the regulatory framework that caused oligopoly in some detail. It's a big book, but worth the read.

Posted by: Danny O'Brien on July 12, 2009 at 08:25 PM

Microbusiness sounds great, but someone's got to manage the overall infrastructure, no? The planet-wide connectivity that makes all this stuff possible is going to be owned by someone. Governments, corporations, whatever.

Posted by: Ken on July 14, 2009 at 07:13 PM
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