In today’s knowledge economy, we tend to predict how a business is doing by measuring key components like sales, finance, and HR. However, this analysis would only be accurate if the corporate world is a closed system, which was the case years ago. Historically, we designed companies like machines. We constructed the organizational chart to divide large chunks of work and separate them from each other into finance, sales, operations, and so forth. We devised workflows that process inputs into outputs: raw materials into products; prospects into customers; and complaints into resolutions.
This kind of company – the divided company – needed separate functions. In turn, decision makers did not always have a sense of the larger environment they were working in. Over time, they became masters at handling tasks, but lost touch with the bigger picture. They were disconnected from customers and the overall purpose of the organization. Even worse, inelastic policies and procedures were needed so people could function efficiently without impeding on each other’s work.
In this case, the problem was scale. As the number of employees grew, the profit per employee shrank. Efficiencies of scale were offset by an increase in bureaucracy, which led to siloed and disconnected divisions and overhead costs that grew as the company expanded.
Eventually, the company reached a point where the cost of controlling such a business exceeded the benefits of new growth. The company became so focused on its internal structures and organizational chart that it lost touch with its customers.