Why Cities Live and Companies Die

When cities grow larger, productivity per person increases. When companies grow larger, productivity per person decreases. Cities can last thousands of years and survive plagues and nuclear blasts. Large companies have an average lifespan of fifteen years, and the lifespan is dropping.

It is blindingly obvious, except almost nobody noticed until a couple of years ago: Companies have short lifespans. Cities live thousands of years; Cities can survive plagues and nuclear bombs. Companies croak when there is a slight downturn in the economy.; People want to live in large cities, but they want to work in small companies.

Why? What is the difference, and does it matter? If we understand why cities are so resilient, can we use that knowledge to build better companies? Companies that are more resilient and better places to work?

It turns out we can. Physicist Geoffrey West has studied cities and found a very simple mathematical relationship between city size and productivity: When a city doubles in size, each person in the city becomes about 15-20% more productive.

The astonishing thing is that everything that has to do with the city infrastructure follows the same power law. According to West it holds for wages, supercreative people per capita, and patents per capita. (On the flip side, the power law also holds for crime per capita, and flu per capita.)

The productivity increase in cities is in stark contrast to what happens in companies. According to an article in the CYBAEA Journal, when a company grows, productivity per employee drops.

For comparison, I have plotted the power rules governing city and company productivity:

When cities grow larger, productivity per person increases by about 15% each time the city population doubles. In a company, productivity per person drops when the company grows. The fundamental difference: Cities are networks, most companies are hierarchies. 

What this graph shows is that a city is much better organized than the average company. But why?

Cities are networks. They are to a large extent self-organizing. Nobody tells you where to live, where to shop, which friends to spend time with, or where to work, or whom to vote for. You figure all that out for yourself, based on the knowledge you have about the city.

Companies are very different: You are told where to sit, what to work on, whom to work with, when to take a break, and who your boss is. You have comparatively little latitude to exercise your own judgement.

What companies are missing is the power of self-organization. Here is another way to look at it:

Donella Meadows's System Intervention Scale

Company leaders usually focus on the low end of the Meadows scale: They set targets like "increase sales by 20%", or "reduce costs by 10%". They make budgets and set project deadlines, which is saying they allocate money and time buffers. Sometimes they make a reorganization, which means they mostly mess around with stock and flow structures.

Cities leave most of that to its inhabitants. City planners are concerned with overall system structure, but they mostly let people make their own decisions, and that is what makes cities resilient, productive, and powerful.

Value streams in functional hierarchies vs. value streams in networks. From my book Tempo!.

Why are companies so much more vulnerable to damage than cities? There are several reasons, but most have to do with the way companies split in order to manage growth. Companies divide into functional departments. This causes problems when information or physical material is moved from one department to another. Hand-offs are difficult to manage, and you can have many value streams that interfere with each other. this problem becomes worse the more cost effective an organization is, because increasing cost effectiveness means reducing the capability to absorb variation in the value streams.

Add to that, that if a single node in a functional organization is damaged in some way, it may affect all value streams running through that organization.

For example, if the IT department suffers from work overload, you can't do anything but wait until they get to your request. I have worked at companies with waiting times of 9-18 months for simple requests like setting up a server.

On the other hand, in a city, if you can't get the service you want when you want it, you go someplace else. If the grocery shop closest to where I live closes, I won't starve. I just shop my food somewhere else.

According to the book Creative Destruction by Richard Foster, the lifespan of large companies is shrinking steadily. In 1938 the lifespan was about 75 years. In 2010 it was about 15 years.

It is when you link the productivity figures with company Return On Invested Capital and life expectancy numbers that the results get really scary. According to the 2010 Shift Index by Deloitte, ROIC has dropped from 6.5% in 1965 to 1.3% in 2010.

Steve Denning has pointed out that a study by Richard Foster, using data collected by McKinsey, shows that the life expectancy of companies have been shrinking steadily. In 1938 the life expectancy of an S&P Fortune 500 company was about 75 years. In 2010 it had shrunk to about 15 years.

The amazing thing is that we do have plenty of blueprints for building companies that are as resilient as cities, but with rare exceptions, we don't. There are signs that things are looking up though. We may have a phase shift, a rapid transition from the old hierarchies to network based organizations pretty soon.