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What shape works best for a sector?

I’ve long been interested in the relationship between scale, structure and results – both in commercial fields and in public services. Below is a simple picture which shows alternative ways a field can be organised. 

In the top left hand corner is a big monopoly; the top right, a world of lots of small organisations; bottom left, a few competing giants; bottom right, a mix of competing big organisations and a penumbra of small ones.

So which do you think is best? For food retail? Schools? Primary healthcare? Internet platforms? Banking? Political parties? International alliances?

There’s no certain answer to these questions. But it tends to be a matter of history, rather than logic, which gives us the answers: social security run as a single monopoly; schools run as lots of small units; banks or accountancy as a group of (fairly) indistinguishable big organisations.

The best pattern

To the extent that we can generalise, the best pattern in many industries seems to be the bottom right hand one – a few big players with sufficient capital to bring about radical innovations, but a strong enough penumbra of competition from smaller organisations to keep them on their toes, and replace them every now and then.

I suspect that this combination might be a better way of organising at least some aspects of schooling and healthcare. The European Union is an interesting example of roughly this shape: a small number of big countries, and a larger number of medium and small countries.

You could say that this creates a constant imbalance – but the small countries seem to keep the big countries in check, and having five relatively large powers, rather than an over-dominant one, has tended to be an advantage, offering scope for shifting coalitions (an advantage that may now be waning as Germany becomes ever more powerful). NAFTA, by contrast, has one hugely dominant power, as does East Asia.

Economies of scale

Unfortunately, there isn’t much evidence around to guide us. When I worked in government, I commissioned a detailed study of economies of scale in many public services in the UK. This showed that although the very small and the very big were inefficient, there was very little pattern overall. You could be highly efficient at small, medium and large scale.

These findings ran counter to decades of government reviews, and innumerable consultancy reports, which nearly always promised economies of scale from aggregating public services into larger units. These still come out pretty regularly, usually with a lot of assertion and very little evidence. 

Of course, sometimes aggregation does deliver – my sense is that the recent merger of the Scottish police forces could be a good example.

But let’s not assume that big is better, or that small is beautiful. Usually the combination of big and small works better.

 

Photo Credit: Shape Sorter by Ella's Dad via Flickr CC

Author

Geoff Mulgan

Geoff Mulgan

Geoff Mulgan

Chief Executive Officer

Geoff Mulgan has been Chief Executive of Nesta since 2011. Nesta is the UK's innovation foundation and runs a wide range of activities in investment, practical innovation and research.

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