Why are the Fortune 500 in decline? Rocket science gives the answer

Why are cities so vibrantly creative and long lasting, but corporations are so short-lived? “Nobody moves to New York to save money on their gas bill. Why, then, do we put up with the indignities of the city? Why do we accept the failing schools and overpriced apartments, the bedbugs and the traffic?”

The New York Times reports in an article by Jonah Lehrer that a couple of physicists (West and Bettencourt) have concluded that cities are valuable because they facilitate human interactions, as people crammed into a few square miles exchange ideas and start collaborations. “If you ask people why they move to the city, they always give the same reasons,” West says. “They’ve come to get a job or follow their friends or to be at the center of a scene. That’s why we pay the high rent. Cities are all about the people, not the infrastructure.”

The sad case of the Fortune 500

If big cities are so vibrant and long-lasting, why are big corporations so short-lived? The life expectancy of a firm in the Fortune 500 is now less than 15 years and continuing to decline.

The physicists discovered that corporate productivity, unlike urban productivity, was inversely related to size. “As the number of employees grows, the amount of profit per employee shrinks. Efficiencies of scale are outweighed by the burdens of bureaucracy. When a company starts out, it’s all about the new idea,” West says. “And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end.”

“The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility. Since the company now has to support an expensive staff — overhead costs increase with size — even a minor disturbance can lead to significant losses. As West puts it, Companies are killed by their need to keep on getting bigger.”

To learn how management is being radically reinvented to escape the trap of hierarchical bureaucracy and declining productivity, go here.

Comments

[PaulSloane]

Great article. A city is chaotic living organism. A corporation is a system waiting to become obsolete.

[Steve Denning]

Paul,

Thanks. Would you like to help me "accelerate the obsolescence of the Fortune 500"? http://bit.ly/hdWwIy

Steve