There’s a fairly straightforward optimization process that occurs in product development that I don’t often see talked about in the abstract that goes something like this:
It seems like bigger firms should be able to produce higher quality goods. They can afford longer product development cycles, hire a broader variety of specialized labor, etc. In practice, it’s smaller firms that compete on quality, why is this?
One of the reasons is that the pressure to cut corners increases enormously at scale along more than one dimension. As a product scales, eking out smaller efficiency gains is still worth enough money that that particular efficiency gain can have an entire employee, or team devoted to it. The incentive is to cut costs in all ways that are illegible to the consumer. But the average consumer is changing as a product scales up in popularity. Early adopters and people with more specialized needs are more sensitive to quality. As the product scales to less sensitive buyers, the firm can cut corners that would have resulted in lost sales earlier on in the product cycle, but now isn’t a large enough effect to show up as revenues and profits go up. So this process continues up the curve as the product serves an ever larger and less sensitive market. Fewer things move the needle, and now the firm is milking its cash cow, which brings in a different sort of optimization (bean counters) which continues this process.
Now, some firms, rather than allow their lunch to get eaten, do engage in market segmentation to capture more value. The most obvious is when a brand has a sub brand that is a luxury line, like basically all car makers. The luxury line will take advantage of some of the advantages of scale from the more commoditized product lines but do things like manufacture key components in, say, germany instead of china. But with the same management running the whole show, it’s hard for a large firm to insulate the market segmentation from exactly the same forces already described.
All of this is to answer the abstract question of why large firms don’t generate the sort of culture that can do innovation, even when they seemingly throw a lot of money and time at it. The incentives flow down from the top. The ‘top’ of firms are answerable to the wrong set of metrics/incentives. This is 100% true of most of academia as well as private R&D.
So to answer the original question, I see micro examples of failing to invest in the right things everywhere. Large firms could be hotbeds of experimentation in large scale project coordination, but in practice individuals within an org are forced to conform to internal APIs to maintain legibility to management which explains why something like Slack didn’t emerge as an internal tool at any big company.
There’s a fairly straightforward optimization process that occurs in product development that I don’t often see talked about in the abstract that goes something like this:
It seems like bigger firms should be able to produce higher quality goods. They can afford longer product development cycles, hire a broader variety of specialized labor, etc. In practice, it’s smaller firms that compete on quality, why is this?
One of the reasons is that the pressure to cut corners increases enormously at scale along more than one dimension. As a product scales, eking out smaller efficiency gains is still worth enough money that that particular efficiency gain can have an entire employee, or team devoted to it. The incentive is to cut costs in all ways that are illegible to the consumer. But the average consumer is changing as a product scales up in popularity. Early adopters and people with more specialized needs are more sensitive to quality. As the product scales to less sensitive buyers, the firm can cut corners that would have resulted in lost sales earlier on in the product cycle, but now isn’t a large enough effect to show up as revenues and profits go up. So this process continues up the curve as the product serves an ever larger and less sensitive market. Fewer things move the needle, and now the firm is milking its cash cow, which brings in a different sort of optimization (bean counters) which continues this process.
Now, some firms, rather than allow their lunch to get eaten, do engage in market segmentation to capture more value. The most obvious is when a brand has a sub brand that is a luxury line, like basically all car makers. The luxury line will take advantage of some of the advantages of scale from the more commoditized product lines but do things like manufacture key components in, say, germany instead of china. But with the same management running the whole show, it’s hard for a large firm to insulate the market segmentation from exactly the same forces already described.
All of this is to answer the abstract question of why large firms don’t generate the sort of culture that can do innovation, even when they seemingly throw a lot of money and time at it. The incentives flow down from the top. The ‘top’ of firms are answerable to the wrong set of metrics/incentives. This is 100% true of most of academia as well as private R&D.
So to answer the original question, I see micro examples of failing to invest in the right things everywhere. Large firms could be hotbeds of experimentation in large scale project coordination, but in practice individuals within an org are forced to conform to internal APIs to maintain legibility to management which explains why something like Slack didn’t emerge as an internal tool at any big company.