Economic Gravity?

When Does Friction Trump Scale in the Corporate Life Cycle?

This month's column raised the issue of size limits on an organization's ability to compete In today's global economy. The specific case in point was Walmart and whether it had become just too big to pursue its business model. Given the nature of some unusually thoughtful responses, there was no consensus on the question of whether Walmart has reached its full potential. Comments raised even more interesting questions surrounding the dynamic of relationships between the benefits of scale and the problems of friction in very large organizations.

Several respondents commented on dangers to the Walmart business model. Benn Manning commented that "The real dangers for Walmart aren't competitors or new business models but are instead itself and how it delivers on its value proposition, potential regulation from federal and state governments, and negative publicity driven by special interest groups." Shadreck Saili added, "Is a company this large manageable?…'Yes' for as long as its policies align with policies of the environments it operates in … 'No' if complacency levels begin to rise to unprecedented levels."

Others cited evidence that Walmart's model has some practical limitations. Evidence of possible friction was presented by Clark Phippen, who cited symptoms that suggest that Walmart is becoming "arthritic."(1) Employees, he wrote, consider themselves ''just a minimum wage earner happy to have the job …; and (2) wastage … (that) seems to abound in the cavernous stores…." Cheri Thomas cited saturation of its markets, especially in the United States, as a concern, adding that "Walmart's fixation on low prices has led it to prey upon other stakeholders.'' She added, ''How long can this be sustained without effective push-back?"

Others noted the benefits of scale in fostering success for the foreseeable future. Robert Duque suggested that the organization will learn from its subsidiaries, such as Sam's Club, which is developing "a more information-driven model by gaining a better understanding of product and customer relationships." Dean Vella cited Walmart's innovation in supply chain management and sustainability as ways in which it is reducing the friction associated with size. Ajit noted the benefits of scale: "Their low costs are a core strength and therefore their commensurate risks (are) lower." And Steve Fotenberry said that "As much as some people like to complain about Walmart … The 'family' atmosphere for the workers continues to exist, and the value to customers has not changed."

These comments suggest that the tradeoff between scale and friction is complex. For example, what effect does a company's origins, its beliefs, and how these are reflected in management behaviors (reflected in Walmart's emphasis on "family") reduce friction? How does scale bind an organization to a low-price, low-cost strategy, eliminating management choice going forward? And do such strategies have much longer lives than those associated with other forms of differentiation among offerings to customers? When does friction trump scale in the corporate life cycle? Under what conditions? What do you think?

Source :- Harward Business School