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TBM 251: Scale vs. Efficiency
I received great feedback on my last post on tradeoffs and polarities. In that post, we explored tradeoffs like quality vs. speed at different levels of skill and experience. Someone suggested I tackle scale and efficiency. Ok!
Scale and Efficiency
A common—probably because it is common—perception of the relationship between scale and efficiency is that as companies scale, they become less efficient. Bureaucracy increases; culture erodes; coordination costs multiply; operational complexity increases; risk aversion dampens innovation; motivation and the "0 to 1 spirit" drops. If you've worked at a company long enough to see this happen, it can be discouraging.
However, the relationship between operational efficiency and investor returns isn't always direct. Less efficient (aka "slow-moving" or "lumbering") companies can reward investors when they own a market, there are barriers to entry, they've diversified, they're good stocks in a downturn, and they have access to low-cost capital.
And then you have the fact that some companies get more efficient as they scale—or at least their efficiency nets out higher than their competitors. Either through luck or skill (or both), they enjoy economies of scale, leverage network effects, own their market, and attract top talent.
Efficiency can—and probably does, to an extent—drop with scale
With some companies, it drops less, and outcomes net out higher
In some cases, it doesn't matter. Less efficient companies make enough money to keep some groups of people very happy.
Most people understand implicitly or explicitly these ideas.
Normal Growing Pains vs. Core Efficiency
The next layer is the difference between "normal growing pains" and core efficiency.
Imagine two cities: Prospera and Hasten.
Prospera is experiencing normal growing pains but with strong core efficiency. Yes, it has a housing shortage. Yes, it has traffic, packed public transportation, and less-than-perfectly-stable utilities. The culture is shifting—the small-town charm slowly evolves as the population becomes more diverse. And they have struggled with the effects of macroeconomic and geo-political events outside their control. But the urban planning team and local government are doing their job with:
Proactive urban planning
Effective resource allocation
Public feedback channels
(Aside, check out Weird City: Sense of Place and Creative Resistance in Austin, Texas, for a fascinating analysis of Austin's "Keep Austin Weird" movement.)
Hasten is experiencing normal growing pains but with low core efficiency. On the surface, things are the same: housing crises, infrastructure strain, and cultural shifts. But their trajectory has been different over the years and decades. Hasten failed to bounce back from a handful of macroeconomic shocks truly. The community became fractured and fragmented, split into camps and cliques. Both Hasten and Prospera struggled with congestion, but somehow Hasten has zero green spaces. Crime is a bit higher, driving people to leave Hasten for Prospera.
Lack of perfect efficiency is not negative; in many cases, it's a sign of growth and opportunity. A company operating with perfect efficiency is not expanding, is not experimenting, and is not pushing its boundaries. Prospera's growing pains indicate evolution.
Core efficiency withstands growing pains. It includes:
Strong cultural foundation
Capital allocation, regardless of the situation
High decision quality and velocity
If you've been in enough rapidly scaling companies, you build a spidey sense for the difference between normal growing pains and core efficiency, but it takes practice. This skill isn't easy! It can be tempting to solve every growing pain immediately instead of focusing on core efficiency and letting time heal the acute shocks.
Now the plot thickens even further…
Prioritization is, in effect, deliberately allowing certain inefficiencies to exist to make room to focus on higher-priority areas of inefficiency. I meet teams who constantly complain about an inability to prioritize, but when met with the pain of actual prioritization, they push back.
A company knows that its go-to-market motion is inefficient but decides instead to focus on ensuring the product hits the mark with a certain segment of customers.
A restaurant uses high-quality ingredients and sacrifices margins to build its brand and increase customer loyalty, increasing profits over the long haul.
A startup eyeing acquisition puts customer acquisition above all else. Chaos reigns, but the goal is to lure in an acquirer.
A company prioritizes speed over everything because it knows its market will be winner-take-all. They ship buggy products, hire rapidly, and burn out the team. It may work…or not.
You can see here why core efficiency matters. These strategies can be very risky, so you want to up the odds that they work out. Traps and false dichotomies abound. I've lost count of people who have told me they are "strategically taking on debt," and that gamble has failed (or not, they left the company, so maybe it worked).
There's another form of strategic inefficiency…
As mentioned earlier, good things often emerge from "inefficient" environments. Teams that are "highly predictable, always hit their deadlines, and always meet their commitments" probably aren't trying anything difficult. There's perhaps less of an upside.
Similarly, if you work hard to foster an environment of perfect efficiency, you will probably scare away the people you want and need to grow. Imagine a company with no problems to solve, no surprises, and a FAQ for any question you might have. That might appeal to some people but not others.
Combining these points, we see that scale and efficiency are a dance. A polarity, almost. You can take very short-sighted views of efficiency or very long-horizon views of efficiency. Efficiency, or the lack thereof, is a signal of opportunity. Core efficiency is the long game. Growing pains are a given.
Questions to Consider
I will finish with some questions to ponder.
When is strategic inefficiency worth the gamble?
What is a good example of a company that won by becoming less efficient SLOWER than its competitors?
What sources of efficiency and inefficiency did Figma prioritize? And how did that relate to the Adobe deal?
When a company has nailed pricing and packaging, what forms of inefficiency have they addressed to create economies of scale?
What are some examples of "normal growing pains" in your environment? How does your company's core efficiency leave you more (or less) capable of handling those normal growing pains?
If you've been at your job for a while, what problems were you experiencing 3-5 years ago that are non-problems? Do things generally work themselves out?
How has the macroeconomic climate surfaced opportunities to improve your company's core efficiency?
How important is organizational culture in navigating the tradeoffs between scale and efficiency? Can a strong culture mitigate some of the challenges?
What clues do you look for that show that someone taking on strategic inefficiency might be going in the wrong direction?
Where are you at in your career? Where can you be strategically inefficient?