

When Big Companies Are a Good Idea - kmavm
http://www.yosefk.com/blog/graham-coase-when-big-companies-are-a-good-idea.html

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justincormack
The problem with Coase as I see it is it is a case of fitting a model to the
facts, so has no predictive power at all, even if it is the correct
explanation. Some of the factors are changing, as technology cuts information
and transaction costs and makes markets cheaper, for example. So how much does
that mean firms will shrink or grow?

~~~
sounds
Here are a few questions I wish yosefk.com would address:

1\. Why do small companies exist? This is vice versa to his question, "Why do
large firms exist?" -- if large companies have the advantage in eliminating
transaction costs, small companies should be eliminated in favor of medium and
large companies. (I'm taking into account Coase's "decreasing returns to the
entrepreneur function.")

2\. Is it possible small companies are more efficient at solving some problems
-- and large companies others? For example, a large company should be better
at, oh, say, contracting with the Department of Transportation for major
freeway construction projects. I guess what I'm saying is: there may be an
"endgame" where small companies dominate large companies (or the other way
around) -- but in the here and now there's plenty of room for both. Evidenced
by the fact that both types are still around, with no apparent trend
eliminating either.

3\. Are there any good reasons stated in the article or the Coase theorem that
_ _don't_ _ involve intellectual property, for big companies to exist? (I can
think of a few, but I want to hear what others have to say.) Intellectual
property is so polarizing, and I'd prefer to think about Coase Theorem in
different terms than it's phrased by yosefk.com.

I actually think the Coase Theorem does have the ability to predict economic
outcomes, but remember that econ isn't usually about perfect predictions
anyway. Econ is usually about identifying a better way to eliminate
inefficiencies -- a knob to tweak, or a strategy, etc.

------
davidw
Good article - more people should be aware of Coase's work. However, I would
surmise that PG was talking about "you" in the sense of "a hacker someone like
myself", not about people in general, many of whom should not go try and
create companies.

~~~
lightcatcher
PG may have been talking to "a hacker someone like myself", but arbitrarily
defining "you" is a bit of a fallacy in my opinion. If "you" can mean that,
then why can't "you" refer just to the subset of people that could start
successful companies?

Sorry for the semantics argument, but I don't really think PG (or anyone) can
use "you" to refer anyone but whoever reads their work.

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tlear
I think my previous company did not get the memo about us all being on the
same team. You never knew who were gona stick a knife in your back. My
personal theory some people do better playing the game at a big corp, some do
better trying to run their own thing. Neither is inherently superior.
Different games for different personalities.

~~~
GFischer
I see the same at my current company. I think it's because it operates on a
market with a huge barrier of entry.

My guess is that the more regulated and inefficient the company, the more you
see sociopaths and the like in them.

------
dotBen
<http://en.wikipedia.org/wiki/Theory_of_the_firm>

------
seltzered_
I worked at a semiconductor mixed-signal startup - rife with control-loop
theory, analog design, digital design/firmware, and lots of application
support/software. They do exist. It's just very hard for them to last without
eventually getting acquired by an established bigCo. But the same kind of
rings true for a decent chunk of startups in the software space.

That said, most semiconductor startups do partnerships with bigger companies
for second-sourcing or foundry help.

The transaction cost problem is true whether you're a startup or a big
company. If anything it's better to be a highly-partnered startup than a
startup-division at a big company as you may be able to avoid lots of the
bureaucratic headaches the large company is accustomed to, helping to keep
employees more motivated.

------
teyc
pg was specifically addressing the issue of management that is out of touch,
while Coase was explaining the role of the firm. There is no reason why these
reasons couldn't co-exist.

The main driver behind running a startup and working in a big company is a
tension between two factors: control and leverage. As the chief of a small
startup, a young person exerts a great deal of control over their destiny.
However, they are short of resources. Even $20k from yc only goes so far. In
contrast, at a bigger company, one has to constantly fight for resources.
However, when they are available, and applied judiciously, the money can go a
very long way. There is also the added benefit of working with some very
brilliant technical people who may have no ounce of business-sense in their
bones.

On the far end of the scale, when one has advanced further up the rank, there
is a great deal of firepower at your disposal. It is actually the same with
startups. No startup can forever stay at 2 employees. In the end, there has to
be sensible management in place.

------
dylangs1030
This isn't exactly criticism, but curiosity. I would like yosefk.com to
address the following:

1\. Is the revenue generated by a company proportionate to its size? Or do
smaller companies make more? Or larger companies? Comparisons would be like
WePay vs. Microsoft (or, in the same sector), WePay vs. PayPal.

2\. Are the problems he notes in a hypothetical industry dominated by small
companies outsourcing exclusive to hardware manufacturing, or to all aspects
of the manufacturing process?

------
bobwaycott
tl;dr -- Big companies are a good idea because they offer employment and suit
the author's nature nicely because he possesses a strong "aversion to
business."

Starting the article with pg's question--"Why be a manager when you could be a
founder or early employee at a startup?"--then going on a different tangent
altogether to answer "Why do large firms exist?" never left me satisfied with
the author's claim he "could fill a book explaining why" to be a manager when
you could be a founder or early employee at a startup. Claiming the question
of why large firms exist to be the question implied by pg's original was a
logical misstep.

pg's question appears--to me, so obviously I could be wrong--to dispute the
wisdom of working at "companies where the only way to advance is to go into
management." I'd have expected a "response" of this length to somehow defend
either A) going to work for companies organized this way, 2) removing
companies from the discussion altogether and defending the hierarchies &
organizational principles behind management & its being the default rungs in
the advancement ladder, or D) answer why being a manager is to be preferred vs
the founder or early startup employee role.

The attempts to explain _how_ markets work to the advantage of large firms--
with random mentions of economic theory peppered about--does little to explain
_why_ they exist this way at all. It's merely a narrative of what exists now.
A better--and more thorough and compelling--article would have tackled the big
question of why our markets operate in such a way as to be of greater
advantage to large firms who secure resources through contractual negotiations
that evince preferential treatment to larger vs smaller buyers. If everyone
interested in producing a product were able to achieve the same price-per-
piece when buying two pieces as buying two million pieces, this shallow
argument of why large firms exists--and are a good idea--would fall flat. The
transaction costs the author uses as defense of the big company are artificial
--an economic barrier placed atop the market that prohibits entry of
competition by securing preferential treatment for one's own company.

Moreover, the article never gets back to the question it begins with-- _why
work where going into management is the only way to advance?_ This is what I
waited till the end of the article to find out. Quite disappointing. I'm still
wondering. I've recently started working at a company where the only way to
"advance" is to be in management. Before this, I was at a small company where
I felt locked in as a programmer--where my ability to build reliable software
was, of course, a benefit to the company they relied on, but where in 3 years
I was never once asked to "advance" in a meaningful way that didn't mean
becoming a "manager". I was pretty disappointed. Even in small startups, the
business-as-usual notions of managers over programmers, designers, and other
productive talent prevails. This company was better than others, but was
eventually undone--a rift between the managers ultimately led them to shut
down the entire company and lay everyone off. Now, having moved on to a larger
company where I'm now "managing", I find myself wondering why this is any
better of a lock-in than my previous post--meetings, emails, phone calls,
reports, productivity ... all of this shit just bores me, gets in the way of
getting a task done, and offers so little value to both my team's work & the
company's bottom line. And of course here, as in so many other companies,
advancement is tied to remuneration and other perks. But why should I put up
with this shit instead of moving on? I work very hard to keep carving out time
& tasks on which I can program directly, but it's tough.

The article touches on a couple key points that (I think) it erroneously
attributes to being good points for big companies--namely, trust and
cooperation. Moving from a small company to a larger company--and obviously,
this can be anecdotal (but I don't think it can be so easily dismissed as
such)--trust and cooperation are not abounding. Larger companies divide
employees into distinct departments that, rather than operate in the company's
best interests, operate in their manager's interest and draw up all kinds of
political districts through which it seems impossible to build trust and a
cooperative spirit among coworkers. There are departments who attempt to
control parts of the business for which they have absolutely no skill,
training, experience, or even basic understanding. Offering to work with them
to help them meet their goals goes nowhere. Large firms do not equal a sudden
conversion of competition to cooperation or mistrust to trust--which the
author, to his credit, acknowledges. But neither do they truly "frame things
right". Where questioning why to become a manager vs a founder or early
employee, pg is questioning exactly what is fundamentally flawed--working in a
place where advancement equals management (and, implied I think, where
management is the only way to have a voice in the operations, visions,
practices, and future of the company itself). Lack of trust and cooperation is
a fundamental flaw of the market itself, which big companies both exacerbate
and use in their favor. To be fair, there are undoubtedly certain companies
which successfully create a culture of trust and cooperation among their
employees--and these are companies likely to be admired and studied as
examples for others. However, trust and cooperation must be both created and
nurtured. Why can't the market do this, too? And are big companies at all at
fault for the lack of trust and cooperation in the marketplace? Why would a
large firm seek to increase overhead through hiring if they could establish
trust and cooperation among partners in the marketplace?

I think the answer to the question requires a careful consideration of
management itself--its goals and benefits, its responsibilities and rewards.
This article adds little to that discussion. Furthermore, answering the
question should entail a discussion of advancement itself. If we pull
promotion to management out of the equation (which we should), what are we
left with? What now qualifies as "advancement"? Is it just economic
advancement? Is there advancement to positions of greater responsibility,
impact, input, etc., that does not equal being turned into a manager? If a
company (big or small) is hiring the right people for the right jobs, does
anyone really need to be a manager? Should a manager's (or other "senior"
person who is in a position to dictate what is to be done) idea of what to do
next outweigh the input provided by a talented, experienced person who is
actually going to do the productive work? Managers excel at creating a lot of
fake work for employees and otherwise wasting everyone's time. This is, in my
experience, overwhelmingly apparent and exacerbated in large firms--perhaps
because small firms stay away from creating a culture of managers.

As it is, answering the question of "Why do large firms exist?" or the
author's own premise of "When Big Companies are a Good Idea" needs far more
than a marginally informative retelling of how large firms behave in the
market today.

~~~
sounds
I'm going to throw out my opinion here (for discussion), but I should preface
it by thanking you, I learned a lot from your post.

It seems large companies have a few distinct advantages:

1\. They can operate divisions at a loss (e.g. Microsoft Entertainment and the
XBox 1). They can "ride out" a down economy. This would be like having an
angel with really deep pockets.

2\. Stronger negotiating position in all cases: employees, clients, and
vendors. Again, the investor network can compensate here for startups.

3\. Kind of an outcome of #1 and #2: brand and leadership longevity. Sometimes
you really can know more after having operated a business for decades.

My opinion is that all those advantages could create barriers to entry... but
the big co's have enough problems of their own to let small co's innovate past
them.

IMO this is good for both the large and the small, and especially good for the
market: the established players can bring huge resources to bear on optimizing
"solved" problems. The startups bring the right mix for getting ahead of the
curve.

~~~
bobwaycott
These are excellent points that get us closer to considering the question of
when big companies are a good idea--especially #1. The ability to operate
divisions at a loss and ride out a down economy is certainly an advantage had
over the small firm who one might expect to be much harder hit when its core
competency is hard pressed by external forces. So, one might be justified in
saying a big company is a good idea when market forces bear negatively on
participants, allowing the large firm to weather the storm less disastrously
than a small firm. Of course, one can counter this proposition by arguing the
large firm thus exhibits an unnaturally advantageous existence, not only
bypassing but perhaps also eroding, perverting, retarding, and preventing
evolution of the market in directions for which it is unprepared and in which
it would lose its currently stronger standing. And yes, a similarly framed
argument can be made _for_ the large firm in the context of the evolution of
markets--the larger, stronger company is the more fit, as evidenced by its
ability to ride out market changes, retooling and repositioning itself for
future success when the chaos dies down. However, I think it more likely this
is only true as a result of its unfair advantage in having been large enough
to not be naturally weakened & removed by the market as smaller firms are--
because it is not removed from the market as a result of large concentrations
of capital not possessed by smaller firms who are potentially better suited to
adapt to changing conditions more rapidly but are forced out due to markets
operating in line with extant large-firm bias (even when the market itself
could benefit from the loss of the large firms).

#2 is, for me, quite close to the line of thinking offered in the OP, and of
course the one I take issue with--it is more a statement of the way the market
works now than a solid reason for why a big company is a good idea. I find
this is a result of market players operating in such a manner as to give
preferential treatment to a large company for reasons that don't actually
equate to a larger company possessing this stronger negotiating position _a
priori_. Rather, leveraging an existing preference that is itself an
artificial construct (historically built by large firms) atop the market
offers little in defense of why the large firm exists or is a good idea. In
essence, the large firm enjoys a stronger negotiating position in the market
because players in the market prefer to negotiate with a large firm because
they believe it is in their best interest to do so because the large firm
wields vastly larger capital with which it entices the players to negotiate
with it over smaller players. This is circular and, in my view, ought then be
discarded in attempts to explicate why this is a good idea.

#3 is a bit harder to pin down. I'm not convinced there is an inherent
goodness in brand longevity as far as markets are concerned--or where
employees, vendors, clients, or anyone else matters. I also find the material
history of humanity and the markets replete with more examples of why
leadership longevity is a bad thing than the reverse. There are certainly far
more examples of long-term leaders ultimately driving their companies--large
or small, it doesn't really matter--into relative oblivion or disarray or
irrelevance than long-term leaders consistently innovating ahead of the
markets, responding to changing conditions and rapidly correcting course so as
to move forward. Leadership longevity often results in market players who have
a vested interest in maintaining their position in the market through either
coercion, prevention, or weathering out blips. It also can create companies
who fail to change with the market because they believe _they_ have it right
and the _market_ has it wrong. Perhaps in some cases this can be true ... but
the perspective is always funny to me when people discuss "correcting" the
market or some similar type of action. Correcting the market has always struck
me as code for "get the market back in line with the operational goals of the
large firms who have been benefitting the most." When the market moves against
them, they seek correction and realignment. When the market moves toward them,
they seek protection and cultivation.

Anyway, your points are far more interesting avenues to thoughtfully consider
when big companies are a good idea. Not yet to the "Why do large firms exist?"
question from the article yet, but at least getting closer to what I thought
the author was going to do. And, we're still far from the question the author
started the article with in the first place, of course.

