Economies of Scale, Cows, Cats and Dogs

Twenty years ago, I was sent by my company to do an MBA.  It was a qualification that every young and inspiring manager wanted to do.  I was fortunate to be selected.

Looking back, there are a few tools and techniques I remember being taught.  One was the infamous Boston Consulting Group Matrix.  The BCG matrix relates to marketing. The BCG model is a well-known portfolio management tool used in product life cycle theory.  It is often used by big companies to prioritize which products within company product mix get more funding and attention.

It struck me that this tool is probably one of the things that has done most to encourage the other myth that I learnt on the course: Economies of Scale.

It has taken me the past 20 years to both challenge and prove these institutionalised models to be wrong.  not just wrong, but actually very damaging.

So firs, the BCG matrix.  The theory is that you should prioritise your investments into stars and further invest in your cash cows.  You should divest questionable parts of your portfolio and kill-off any dogs you have.

I live in the country, and killing off dogs is definitely not the answer.  Although we don’t have one, I think my neighbours would be very upset with me if I went on a dog-killing spree.

And therein lies the problem with the Matrix.  It has encouraged what one of my City friends calls “rolling up” or aggregation.  It creates industry consolidation and actually destroys innovation.  A good example is Toyota – and this article which is well worth reading.

The matrix also creates right brained caetextic thinking (see previous entry “Why do some organisations drive us totally bonkers?” ) as Fat Cats sit on top of Cash Cows and ultimately caused the corruption that turned into the financial crisis.  I saw this picture of fat cats this week and laughed:

At the same time, the cash cows were herded into larger and larger fields with more and more cows to create the financial equivalent of modern “economies of scale” farming techniques in the US milk production industry.  The industrialisation of cash-cows and the murder of dogs.

It might have made some bankers and investors a lot of money – but has it left the planet a richer place?

We have a similar struggle with Broadband in the UK.  The government, by all accounts, has given into the “economies of scale” argument that BT has produced a plan to protect the cows and kill the dogs (local schemes).  Cash cows don’t innovate.  Only Dogs and Question Marks make Stars.  BCG didn’t understand the true value of dogs.

And this economies of scale argument is probably the myth that is at the centre of the whole melt-down of both the financial framework AND the way in which the UK government has been mismanaged in the past 10 years.

No clearer was this brought out for me than when I attended the Vanguard Leaders Summit a few weeks ago.  If we continue to believe in the myth of economies of scale and encourage the industrialisation of cows and the murdering of dogs, we are surely doomed.  Images of witches being burnt at the stake in the middle ages come to mind.

John Seddon of Vanguard says it is Economies of Flow, not Economies of Scale that actually deliver true growth and sustainable, effective organisations.   So rather than cows and dogs, perhaps a better model is a fish in water?

But if we have to choose between cows and dogs, then I’m for the dogs.  And in the case of broadband and media, it is the dogs I support.  New, local organisations that don’t want to scale.  New social enterprise structures to do local things that are not necessarily highly profitable.  Voluntary organisations that are creating new energy in societies that have been sucked dry by global industrialisation.  They are changing the world for the better far quicker than the industrialised cash cow machines.  They will become the more interesting investments in the future and some will become stars.

I would rather kill the cows off and have a dog as a companion.  For starters, you can’t keep a cow in your sitting room!

Diagram from: