Why Large Businesses Are Inherently Inefficient

The primary efforts within the management structure of large companies is to deal with the enormous problems of trying to organize and manage large numbers of employees. This requires a hierarchical management structure, well defined job descriptions associated with uniform pay scales at all levels, detailed employee manuals, etc., and where the road to promotion can create a highly politicized environment.

Most of the workers in such organizations “do” what their managers tell them to do without any thought as to whether there might be a better way of doing things. The managers whose goal is to move up the hierarchical structure, function in ways they feel will best enhance their careers. Workers or managers who act contrary to these “unwritten rules” are rarely rewarded and mostly discouraged in pursuing any such actions.

These structural realities mean that very few people in a large organization are focused on finding the best way to do the job of creating the highest quality product in the most efficient manner possible. Many people are far more focused on what’s best for them. The consequences are obvious to anyone like myself who has spent a business lifetime visiting and working with clients and customers in large corporations. The easily observable inefficiencies are quite staggering.

Large businesses have ready access to an abundance of money through their own cash flows and from loans readily available from the financial system. This promotes a simple logic. All problems can best be solved by throwing money at them. This, together with the importance that accrues to a manager’s profile when their departments expand, means that hiring more employees is an automatic response to all such problems. Most large companies thereby end up over-employing, explaining why when market conditions deteriorate they can make the draconian layoffs that we regularly observe. What disappears once money is so easily available, is any deep thought as to alternative means to resolve problems that would be far less costly.

It is a simple reality that to function at all, large companies have had to accept surprisingly low ceilings on levels of internal productivity and efficiency. Up until now these have been more than offset by “economies of size”. Increasingly this is no longer true.