The Dis-economies of Scale

In this article about big-pharm from The Atlantic (via Instapundit), we have a great explanation of how large organizations are handicapped in pursuing new opportunities (S-RULE 3.4). It is interesting how closely this article follows the problems of size that we discuss in Sun Tzu's strategy, a perfect case study of the dis-economies of scale.

One of the most fundamental problems in European economy for the last twenty years has been that large companies have been systematically favored by government regulation while new enterprises have been stiffled by it. This disease has now spread to American economy. Sarbanes-Oxley, stock accounting regulation passed in the wake of Enron, makes it virtually impossible for small company to go public. It killed our once vibrant IPO market (down from 386 new public offerings a year to less than ten and soon zero), transforming it to a mergers and acquisition market. Instead of starting their own vibrant careers creating value, these new, exciting companies are fed to large companies where their value is largely destroyed as the diseconomies of scale kick in.

As the article above notes, a market smaller than a billion dollars is not worth it for big-pharma, but it is exactly these kinds of "niches" that once to created the Apples, Microsofts, Yahoos, and Googles and would be creating a new generation of bio-tech firms today if government regulation hadn't stopped it. As we have seen in the financial markets, these large organization built like topsy from acquisitions and financial deals are not more stable but more fragile. And when they fail, the government rushes to the rescue with tax dollars because these firms are too big to fail.

A better policy would be simply breaking up companies when they grew too large. Going back to banks that operate only within state borders would be a first step.