The thing that shocked me the most was how inefficient large firms can be. Sure, there is government waste, but it is commensurate with size and clarity of mission. In one sense, I already knew that large firms could be inefficient — the failure of Kodak and Blockbuster are examples — but it is another thing to live through it.
I have a much deeper appreciation that slow optimization is a better model of human behavior than full optimization, and indeed, I’ve often used evolutionary models rather than optimization models in my work. People do respond to incentives, and they respond faster to stronger incentives, but along the way there are lots of mistakes and bad choices and hysteresis.
I like to say that anyone who is scared of a giant firm has never worked for one. Learning that lesson is one of the reasons that economics programs should require internships in business. Having experience in business would lead you to be less committed to theories of optimization and more likely to regard the market as what I call The Great Miscalculator. That latter essay is a powerful indictment of the entire paradigm policy analysis that permeates academic economics.
I really liked The Great Miscalculator. Though everything in it has been mentioned at some point on the blog, the article puts the pieces together and is a lot more powerful and convincing.
People don’t (or at least shouldn’t) fear giant companies because they can out-compete others (though they certainly can in some ways, by having more capital to invest). The true threat that big firms pose, and which we really fear, is their ability to gain unfair advantages by lobbying legislators. And that can’t be debunked so long as it is true.
As my graduate advisor Dr. Gene Woolsey used to say, ” Large companies make money in spite of the way they operate not because of the way they operate.”
He also required that your thesis be about solving a real problem for a real company.
This blogger has some questions about another large company.
http://dirtamericana.com/2019/04/starbucks-corporate-across-street/
Control systems theory shines some light here. We like to say the market disciplines corporations, but it really doesn’t have many options – do nothing, adjust share prices, adjust interest rates, change management, or dissolve the company. That’s not enough to achieve fine-grained control of thousands of people. The vast majority of the company’s routine decisions will not have any noticeable reaction from the market, and so are undisciplined.
I’ve also noticed that growing companies are much less disciplined than mature companies. As long as revenue is growing strongly there isn’t much threat of a serious challenge to management, which means that nobody will stop them from hiring a Chief Fantasy Football Officer with a $30 million budget if that’s what they feel like doing.
In one sense, I already knew that large firms could be inefficient — the failure of Kodak and Blockbuster are examples
This is just wrong. Kodak and Blockbuster were leaders in industries that essentially died. Both did see what was coming and tried to reinvent themselves, but failed to shift industries and become completely different kinds of companies. Kodak actually was a pioneer in digital cameras and sensors. But their fundamental problem was twofold. First of all, they were much more a chemical company (chemical coated film stock, photo paper, and processing chemicals) than a camera company. And second, for many decades, they had developed a reputation as down-market camera company that sold only inexpensive, basic consumer-grade cameras as a means for selling film and prints. At the dawn of the digital era, they were simply not a serious competitor to real camera companies like Canon, Nikon, Leica, etc. So when Kodak developed some one of the first (highly regarded!) digital SLR lines, they had to do it by adapting Canon and Nikon 35mm camera bodies (and leveraging their lens systems), since Kodak had nothing of its own to work with.
And Blockbuster could see that streaming video was coming eventually and did offer its own streaming service. But they had no little or no expertise in software nor in making deals for content or developing their own (tapes and DVDs could be purchased and offered for rental without any agreement with publishers due to ‘first sale’ laws). Like Kodak, Blockbuster did try to become a completely different kind of company, but ultimately failed.
In neither case was ‘inefficiency’ the explanation for the demise of these companies. The actual reason was that technological change put both companies in extremely disadvantageous positions which they A) recognized and B) tried unsuccessfully to escape.
I’d also suggest that Yahoo (where McAfee was chief economist) might offer better examples of corporate inefficiency. After all, Yahoo failed despite being a well-positioned pioneer in a rapidly-growing industry. In 2004, Yahoo had a larger market cap than Apple, Google, and Amazon. What happened?