23 July 2013

Why Growth Makes Cities Thrive and Corporations Stagnate (and what that suggests about turning corporations into tools)

As cities become larger, they create more wealth and innovation. As corporations become larger, they are less creative, less able to create wealth. That difference could suggest a very different model of the corporation, helping to highlight a potential transformation in business that would make employees more entrepreneurial.

 First, a theory about why cities thrive and companies stagnate as they become larger.

Connections in a network grow exponentially. Put in terms of a city or corporation, the number of potential relationships between people rapidly goes up as the number of people increase.

The 22nd person to join a group, for instance, just adds one more person to the group. However, he also adds another 21 possible relationships. This 22nd person could form a friendship, start a conversation, start a business, or even start a family with one of the others in the group.

In a city, the relationship of the 22nd person to the other 21 is not regulated, not defined, not  prescribed. And this is a reason – perhaps THE reason – why cities become more dynamic as they get larger.

In a typical corporation, the relationship of the 22nd person to the other 21 is regulated, is usually defined in a process. While a new employee might start a conversation or even a family with one of the other 21, they will assuredly not start a business within the corporation. That level of innovation is not expected of employees. And while a new citizen of a city could start a business or make an investment that could make her richer than the mayor, no new employee is likely to ever make more than the CEO. And this matter of prescribed roles rather than dynamic relationships is a reason – perhaps THE reason – why corporations become more stagnant as they get larger.

The corporation defines our world in the same way that the church defined the medieval world. And while the corporation is more advanced than the church in so many ways, it still lags it in another.

While the church was once able to dictate actions, beliefs, and require attendance, it is now just a tool that the individual may or may not choose to use. People in the West are free to meet in homes with a couple of people or meet in cathedrals with hundreds. They are free to believe what they want – whether it is exactly prescribed by their minister or in defiance of it. In the modern world, people use the church as a tool that enables them to experience fellowship, peace, joy, insight, a renewal of purpose … or just make their mother happy. Whether you go to church every Sunday or only twice a year is up to you.  The church is a tool.
Contrast that with the corporation. The corporation can dictate how much time you spend each week. It requires an adherence to a central vision, prescribes processes around that vision, and gives you a role within that larger context and purpose. The corporation is not a tool for individuals to use. For most everyone but the CEO, the individual is, instead, a tool for the corporation. In this way, the corporation lags the church in evolution.

Of course it’s not true that all corporations are like this.

Amway and Shaklee are tools that people can use or not. The person who “recruits” you has no power over you to define your hours or the process you use. And if you go on to do great things, that person can benefit, giving someone the incentive to hire someone better than one’s self (not a normal incentive inside of corporations). Amway grew through the recession, its sales now in excess of $11 billion.

Ricardo Semler did something fascinating with his company, Semco. In his first 20 years as CEO, revenues at Semco rose from $4 million a year to $212 million. One of the more notable things that Semler did was to sponsor new business initiatives that employees undertook and the company sponsored. Even more striking, at one point Semler had people working side by side under very different arrangements: some were renting the facility and equipment, paying a flat fee, some were working as hourly employees, some were profit-sharing, and some were involved in joint ventures with Semco. Semco was a tool that employees could use as they saw fit. And because any arrangement that employees proposed or accepted were also acceptable to Semco, the arrangements that lasted were mutually beneficial.

One way to think about what it means to make a corporation more entrepreneurial is to ask what happens when the 22nd person joins the other 21. Is that person free to create something new or is she expected to fill a prescribed role? Is there room for innovation in the relationship? Because if the new relationship just has to be managed, it means that as you become larger the cost of managing the exponentially growing number of relationships within your corporation will just rise. But if you are more like a city, a place where relationships have potential you can’t prescribe ahead of time, you’ll actually see an increase in innovation and wealth as you become larger. To do that, however, probably means accepting that you are just a tool for people. That is still a shift that most companies haven’t made.

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