Over a decade ago, a whirlwind of "small is beautiful" philosophy swept the world. Organizations sought expertise and flexibility rather than size. But recently there has been a mad rush in Taiwan for "scale."
Banks have expanded their scale by means of forming financial holding companies so that they can ascend to the ranks of the top 100 -- or at least the top 500 -- largest banks in the world. A number of universities have formed alliances to rival institutions like the University of California. Suddenly, size seems to have become a panacea for increasing productivity and competitiveness.
The uses of scale have a theoretical basis in so-called eco-nomies of scale. In an absolute sense, certain value activities -- such as research and development, or marketing -- depend on an organization that has achieved a certain minimum size for support. In a relative sense, following an expansion of scale, costs can be lowered by sharing and coordinating resources.
However, under many circumstances, increases in scale also bring a variety of difficulties and costs. Being bigger may increase the complexity of communication or coordination. To solve problems of this sort, one has no option but to increase the layers of organizational hierarchy, hold more meetings, incorporate more opinions and reconcile more adversarial relationships. The increased costs incurred and the time wasted may far exceed the benefits obtained.
However, there are serious problems regarding whether the resources of different industries or organizations can be coordinated and used as desired. When the personnel, know-how and equipment of the original organizations are put together, there will be some redundancy that must be eliminated. Some companies are also limited by their original function, organizational culture, or physical separation. They can't necessarily integrate smoothly and achieve "synergy."
For example, combining banks, securities companies and insurance companies in a single holding company can lead to difficulties. Under these circumstances, one can't just consider the benefits of size and ignore the drawbacks. To do so would be exceedingly dangerous.
This is certainly not an absolute refutation of the importance of scale and the benefits it can bring. Otherwise, we wouldn't have seen endless mergers and acquisitions in the international arena in recent years -- Exxon and Mobil, Travelers Group and Citicorp and the recent case of Hewlett-Packard and Compaq.
Behind these mergers and acquisitions, however, are important implications -- the capabilities or resources of the companies involved are mutually reinforcing and marketable. In their organization and management, the companies are striving to break free of previous frameworks and create new ones to maintain flexibility and agility in their operations. Without these associated conditions, seeking to expand in size may be counterproductive.
Moreover, improvements in technology and networking knowledge have dramatically lowered the minimum-scale limitations in many operations. This trend is apparent even in steel refineries and car assembly plants and even more obvious in knowledge-based industries like IC design. Thus, changes in industry structure have already resulted from different demands for scale. For example, open strategic alliances and center-satellite-plant systems allow certain operations to break free of the limitations of size and preserve the benefits of autonomy and flexibility.
In Taiwan, don't we boast that our economic vitality and unique competitiveness spring from small and medium-sized industries? Why are we now taking "scale" as a panacea for increasing our competitiveness?
Hsu Shi-chun is Far Eastern Group chair professor of management at Yuan Ze University.