What can companies learn from cities?

What can companies learn from cities?

Scaling – in its most elemental form – refers to how a system responds when its size changes.  What happens to a city or a company if its size is doubled?  Or to a building, an airplane, an economy or an animal if its size is doubled?  If the population of a city is doubled, does the resulting city have approximately twice as many roads or twice as much crime?  Do the profits of a company double if its sales double?  And does an animal require half as much food if its weight is halved?  These are all interesting questions that Geoffrey West, a British theoretical physicist and a former professor at the University of Cambridge, is asking himself in his new book “Scale” (May 2018). 

Cells are constrained to operate systematically slower in larger organisms
When growing bigger, most companies are slowing down.  However, timing and speed is important for survival.  Think about cells in any organism: they set the pace of all physiological processes.  Cells are constrained to operate systematically slower in larger organisms relative to smaller ones.  So the pace of life systematically decreases with increasing size.  So indefinitely scaling up an animal, a tree or a building would ruin the system.  In order to build larger structures or evolve larger organisms beyond the limits set by the scaling laws, innovation must occur that either change the material composition of the system or its structural design.  Or both. 

Take these simple examples to illustrate both type of innovations: using steel in place of wood for bridges or buildings and using arches or domes in their construction rather than just horizontal beams and vertical pillars.  The evolution of bridges is a nice example of how innovations in both materials and design were stimulated by the desire to meet new challenges: in this case, to traverse wider and wider rivers and valleys in a safe way. 

In contrast to cities, companies become less efficient as they grow
Geoffey West explains his Scaling Theory by referring also to cities.  His studies have found that just like living organisms, cities scale sublinearly by a factor .85, meaning that that they enjoy a 15% benefit in economy of scale as they double in size – from higher wages and amplified innovation.  In contrast to cities, companies become less efficient as they grow.  The average lifespan of a company listed on the stock exchange is less than 10 years, after which most companies go bankrupt, merge or are acquired.  So what can companies learn from cities?  Why does a city increase the productivity per capita as it grows, while a company decreases profit per employee as it grows?  Part of the explanation is this: cities do not have a top-down structure.  And ok, there is a mayor and there are city councillors, but they don’t run the city like the administration of a company.  In fact, a city consists of more minds from more places and with more perspectives.  All these minds interact in the same place and it’s this interaction that leads to entrepreneurship, innovation and sustained growth.  

Invite more crazy people
While growing, a city continuously becomes more multidimensional.  A company, by contrast, becomes more undimensional, narrowing its tolerance for extremes and building a large administrative system to control costs, keep focus and deliver short-term results.  In a sense, a company continually narrows its room for diversity.  As opposed to cities.  

Take any street from any metropolis in the world and you will see crazy people.  Cities accommodate people from all walks of life.  Visit most companies and you don’t see crazy people. They are fired.  So people often stay within the bounderies of their job description.  And that situation makes companies vulnerable because it kills creativity and innovation.  So invite much more crazy people, mavericks, naysayers and people with odd ideas to your team.  

 

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