When Corporations Became Too Big

Scale solves problems.

Then scale creates new ones.

The 20th-century corporation expanded because internal coordination was cheaper than market contracting.

But as firms grew, internal complexity began to rise.

Hierarchy reduces transaction costs — up to a point.

Beyond that point, hierarchy introduces its own costs.

These are known as diseconomies of scale.

The Coordination Inversion

As firms grow:

• Communication paths multiply
• Approval chains lengthen
• Incentives fragment
• Information becomes distorted

The same mechanism that once reduced transaction costs begins to generate them internally.

Internal transaction costs begin to rival — and sometimes exceed — external ones.

This is the coordination inversion.

Bureaucracy and Decision Latency

Large organizations require:

• Reporting layers
• Formal review processes
• Budget committees
• Strategic planning cycles

Each layer adds stability.

Each layer also adds delay.

Decision latency increases.

Opportunities narrow.

Adaptation slows.

The very architecture that once ensured control begins to inhibit responsiveness.

The Agency Problem Expands

As ownership dispersed and management professionalized, a structural gap widened:

Owners seek long-term returns. Managers respond to measurable incentives.

This creates classic agency tension.

But at scale, this tension compounds:

• Managers optimize divisions
• Divisions optimize metrics
• Metrics drift from value creation

The organization becomes metric-driven rather than mission-driven.

Internal measurement systems — necessary for coordination — begin to shape behavior in unintended ways.

Capital Allocation Becomes Political

In smaller firms, capital allocation is direct.

In large corporations, capital allocation becomes a negotiation between:

• Divisions
• Executives
• Finance committees
• External shareholders

Resource flows can become political rather than entrepreneurial.

Projects are approved not solely on opportunity, but on internal alignment.

Scale introduces governance overhead.

Financialization and Focus

By the late 20th century, public markets amplified short-term measurement pressure.

Quarterly reporting cycles formalized evaluation.

Shareholder primacy strengthened capital discipline — but also narrowed time horizons.

Large corporations increasingly optimized for:

• Earnings stability
• Margin predictability
• Share buybacks
• Cost reduction

This was not irrational.

It was structurally incentivized.

But it further reinforced internal rigidity.

When External Markets Become Cheaper Again

The diseconomies of scale become decisive when:

• Communication costs fall
• Contracting costs fall
• Monitoring improves
• Trust infrastructure strengthens

At that point, external coordination may again become cheaper than internal hierarchy.

Firms then:

• Spin out divisions
• Outsource functions
• Adopt platform models
• Externalize non-core activities

The boundary of the firm contracts.

Not Collapse — Rebalancing

Large corporations encountered limits inherent to scale.

They encountered structural limits.

Scale solved one generation of coordination problems.

New technologies altered the cost structure again.

The question is not whether scale disappears.

It is whether the optimal boundary of the firm shifts.

And history suggests that it does.